The relationship between the ESG scores and firm performance in Europe: the moderating role of R&D investment and board characteristics

Abstract

This study analyzes the relationship between environmental, social and governance (ESG) scores and firm performance. It also analyses the effect of R&D investments (research and development), board size and female representation on board on the relationship between environmental pillar score and firm performance. Hence, this paper aims to answer the following research questions: How does ESG pillar scores affect firm performance? How does R&D investment affect firm performance and how does it impact the relationship between environmental pillar score and firm performance? How do board size and female on board serve as moderators for the relationship between environmental pillar scores on company performance in European firms? In order to answer these questions, this paper analyzes a sample collected from the Thomson–Eikon database from 2013 until 2019. The sample included 673 public and private firms in Europe region. The finding of this study shows that the social pillar score positively influences a firm's profitability and market value. However, it reveals a negative impact of the governance score on firm performance and of the environmental score on market value. Regarding R&D investment, the study suggests a negative impact on European firms' performance, although it does not significantly moderate the relationship between environmental performance and firm performance. Additionally, the study highlights a negative moderating effect of board size on the relationship between environmental performance and firm profitability. However, the presence of female representation on the board contributes positively to this relationship between environmental score and firm's market value.