The Heterogenous Impact of ESG Ratings on Firm Performance across different EU Sectors

Abstract

This study analyses the relationship between ESG (Environmental, Social and Governance) scores and firm profitability and value. By decomposing the sample at the sector level, the paper hopes to answer the following question: To what extent does the relationship between ESG and firm performance differ across sectors? The paper carries out fixed-effects analysis on a panel dataset of 4500 firm-year observations in Europe from the year 2011-2022 in order to answer this question. Two additional explanatory mechanism are also provided to explain this difference: The degree of privatization and innovation within a sector. Significant associations are found between ESG and firm profitability for the Social pillar, and ESG and firm value for multiple pillars. Distinct heterogeneity is seen in this relationship for firms in the Consumer Goods sector.