How ESG affects a firm's stock performance

Abstract

In recent years, companies and investors emphasize more and more in the importance of sustainability and particularly in ESG investments. Therefore, the aim of this thesis is to bring additional evidence to determine if ESG ratings have a significant impact on a firm’s stock-financial performance. The research focuses on European companies listed in STOXX 600 index. The sample used contained 539 companies in four years period, 2019-2022 which translates in 2156 firm-year observations. To test this hypothesis the research is conducted using multiple linear regression analysis with independent variables being the rates of the decomposed pillars of ESG and YEAR while dependent variables being ROA, ROE, P/E and TSR financial ratios as stock performance indicators. Data extracted from Refinitiv and the relevant financial statements of each firm. Results rejected this hypothesis as they claimed that the is not a significant relationship between ESG and stock performance. However, this study still contributes to a better understanding of this area as it is supported by existing literature and provides valuable insights for future research. Finally, this thesis is a quantitative research study with a focus on objectivity that contributes to broadening the scope of the literature review by exploring the existence of a correlation between ESG and stock returns in Europe, while on influence of Covid-19 pandemic, a period of high market volatility, and also by using a combination of dependent variables/performance indicators that have not been used before all together.