The effect of ESG practices on firms' financial performance

In this study, we examine the effect of Environmental, Social, and Governance (ESG) practices on firms' financial performances. Using a sample of approximately 7000 firms across 41 countries from 2002 to 2019, we test whether ESG performance affects the firms' financial success. The financial performance is measured by four dependent variables: Return on Assets (ROA), Return on Equity (ROE), Earnings per Share (EPS), and Market-to-Book Ratio (MTBV). We compile the ESG data from Refinitiv Eikon and financial data from Datastream. The fixed-effects regression models are run for different samples, including 1) full sample, 2) by industry, 3) by development level, and 4) by time period. For the full sample, we report that ESG combined score positively and significantly affects firm financial performance. The environmental pillar score affects EPS and MTBV significantly positive, and social pillar score has positive and significant effect on ROA, ROE and MTBV. We do not report a significant effect of governance pillar score on the financial performance. However, the outcomes vary across different sub-samples, meaning that the relationship between ESG practices and financial performance depends on the sample that we use.