The Impact of ESG performance on the Financial Performance of European Area Companies: An empirical examination

Achieving climate neutrality dictated by international agreements such as the Paris Agreement, the United Nations Agenda 2030 and the European Green Deal, requires the conscription of all parts of society. The business world and especially large enterprises have a leading role in this effort. One way for businesses to contribute to this effort is by implementing ESG for their operations. The interest of companies in the ESG framework has become more and more intense in recent years, as they recognize that in addition to improving their reputation, ESG criteria add value and make them more effective. Especially for large European companies, there is a legal obligation, by the Non-Financial Reporting Directive (NFRD - Directive 2014/95/EU), to disclose non-financial information on how they deal with social and environmental issues. There is a lot of discussion in the literature about how and to what extent good performance on ESGs affects their profitability, valuation, capital efficiency and risk. The purpose of this paper is to examine empirically whether a relationship between good ESG performance and the good financial condition of companies can be documented. Assuming that the tone is given from the top, we select as a sample the top-50 European companies in terms of ESG performance (STOXX Europe ESG Leaders 50 Index), covering a wide range of sectors, namely Automobile, Consumer Products, Energy, Financial Services, Manufacturing etc. For this sample, first we review their reporting to see which ESG framework they use to monitor their performance. Next, we examine whether there is a pattern of their better financial performance compared to other large European corporations. Our results, show that such a connection seem to exist at least for some specific parameters, while for others such a claim cannot be supported.