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When Does ESG Become Valuable? The Impact of ESG Ratings on Profitability and Market Value of Companies

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  • Katharina Kastens

    (Faculty of Business and Economics, Mendel University in Brno, Czech Republic)

Abstract

This study examines the impact of ESG (environmental, social, and governance) performance on corporate profitability and market value. Using a dataset of microeconomic panel data of 7,353 ESG-rated companies worldwide combined with macroeconomic data, fixed-effect regression models reveal that high ESG performance negatively impacts profitability, as measured by return on assets (ROA), but increases market value. This negative impact on profitability is particularly pronounced for companies with higher market value, indicating that companies may sacrifice short-term profitability to achieve higher market valuations. Conversely, the positive impact on market value appears to be particularly significant for companies with below-average traditional performance metrics. These findings contribute to a broader understanding of the dual impact and the trade-off between costs and benefits of ESG and suggest that while ESG engagement may reduce immediate financial returns, it enhances long-term market position and value.

Suggested Citation

  • Katharina Kastens, 2025. "When Does ESG Become Valuable? The Impact of ESG Ratings on Profitability and Market Value of Companies," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 75(2), pages 128-169, June.
    • Handle: RePEc:fau:fauart:v:75:y:2025:i:2:p:128-169
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    File URL: https://journal.fsv.cuni.cz/mag/article/show/id/1549
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    More about this item

    Keywords

    ESG; ESG performance; financial performance; panel data; profitability;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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