THE IMPACT OF ESG SCORES ON EUROPEAN PUBLICLY LISTED COMPANIES´FINANCIAL PERFORMANCE

This study aims to examine the relationship between ESG (Environmental, Social, and Governance) scores and firm´s financial performance. The growing importance given to this topic, emerges from the need for companies and stakeholders to understand how ESG activities affect financial results because of the increased focus on sustainability and the stricter regulatory frameworks. In order to test this relationship, it was used a dataset with sustainability and financial information, retrieved from Thomson Reuters database, of European publicly listed companies, between 2017 and 2023, corresponding to 9426 observations, which cover 2014 companies across 25 European countries. Thus, this study employed Ordinary Least Squares (OLS) regression, fixed effects panel data regression, and dynamic panel data models to test how ESG practices impact firm´s financial performance, measured by Return on Assets (ROA). According to the results from the OLS model, there is a positive and statistically significant relationship between overall ESG and individual pillars score with ROA, suggesting that companies with higher ESG scores tend to have better financial outcomes. However, when controlling for firm-specific unobserved factors through the fixed effects model, their statistical significance disappears, except for the governance pillar, which showed a negative impact on ROA. To address potential endogeneity and reverse causality, it was introduced a dynamic panel data model with lagged variables, showing that higher ESG scores in previous periods could lead to short-term decreases in ROA. The findings suggest that ESG investments may lead to lower short-term financial performance, due to the initial costs associated with ESG initiatives. The study's limitations include its relatively short time frame, geographical focus on Europe, and potential differences in ESG rating methodologies. Future research should focus on expanding the time frame to better assess the long-term impacts of ESG score on financial outcomes.