Relationship between ESG and corporate financial performance in the energy sector: empirical evidence from European companies

Abstract

Purpose Considering environmental, social and governance (ESG) factors is vital in climate change mitigation. Energy companies must incorporate ESG into their business plans, although it unquestionably affects their corporate financial performance (CFP). This paper aims to investigate the effect of ESG on energy companies’ profitability through return on assets by analysing the combined score and individual dimensions of ESG. Design/methodology/approach The study examined a panel data sample of 911 firm-year observations for 85 European energy-sector companies during 1995–2020. Two distinct modelling specifications were applied to explore the impact of ESG components on the CFP of EU energy companies. The financial data and ESG scores were obtained from the Thomson Reuters Eikon database in July 2021. Findings The empirical findings revealed that energy companies’ profitability is marginally and negatively affected by their ESG performance. Whereas independent evaluation of the ESG subcomponents indicated that environmental responsibility has a significant negative effect. In contrast, corporate social and governance responsibilities are positively but not significantly associated with the company’s CFP. Originality/value This study fills a research gap in the ESG–CFP literature in the European energy sector, a pioneer in sustainable development. To the best of the authors’ knowledge, this study’s originality lies in its analysis of ESG factors’ role in profitability by considering different EU countries and energy sectors.