Unraveling the nexus between firm ESG performance and financial profitability: a case study of the French, German, and UK markets

Abstract

This dissertation examines the intricate relationship between a firm's Environmental, Social, and Governance (ESG) performance and its financial profitability across the primary European markets—UK, France, and Germany. Guided by various economic theories, it explores how ESG practices impact Corporate Financial Performance (CFP) measured by Return on Assets (ROA) and investigates the COVID-19 pandemic's potential moderating effect on this relationship. The theoretical framework encompasses diverse economic theories, including the Resource-Based Theory emphasizing differentiation and trust-building, Stakeholder Theory emphasizing shareholder value through meeting stakeholder needs, and Legitimacy Theory advocating for managing societal expectations. Conflicting theories, like the Overinvestment Theory and Cost-of-Capital Reduction Theory, pose challenges regarding the direct link between CSR activities and financial performance. Utilizing a sample of 300 listed firms from 2018 to 2022 in the UK, France, and Germany, the study employs panel-data analysis to assess ESG performance's impact on CFP. Data sourced from Thomson Reuters Refinitiv ESG database is used, analyzing ROA, ROE, SMR, and TQ as indicators, alongside control variables. Empirical analysis reveals a nuanced relationship, indicating a weak positive correlation between ESG performance and ROA but a moderate negative impact on financial profitability. The study also finds COVID-19 amplified the negative ESG-CFP relationship, affecting market heterogeneity across the examined European markets. Acknowledging limitations in endogeneity and sample representativeness, the study recommends advanced econometric techniques, expanded datasets, and sector-specific analyses for future research, aiming to comprehensively understand the complexities of integrating ESG initiatives with financial performance. Overall, this dissertation contributes to understanding the multifaceted relationship between ESG performance and financial profitability, emphasizing the need for nuanced strategies in diverse market contexts.