Environmental, social and governance scores in Europe: what drives financial performance for larger firms?

Abstract

This paper aims to investigate the association between firms’ financial performance and their sustainability performance, as measured by Tobin's Q, with a focus on the individual ESG pillars. Our study analyzes constituents of the Stoxx Europe 600 index. We employ different econometric approaches and perform a comprehensive analysis of the post-2015 agreement concerning climate change. Results suggest a statistically positive relationship between firms’ ESG and financial performance, although of greater magnitude for the social component. Overall, our findings highlight the superior relevance of social performance in yielding shareholder value for the largest European firms.