The Influence of the EU Emissions Trading System on the ESG Performance of European Firms: The case of Oil and Gas Industry

Abstract

This study investigates the influence of the European Union Emissions Trading System (EU ETS) on the Environmental, Social and Governance (ESG) performance of European oil and gas firms, with a particular focus on the mediating role of green innovation. Using panel data from the LSEG Data & Analytics Platform spanning 2005-2023, the analysis employs fixed-effects panel regression and mediation analysis to examine the extent to which carbon pricing, under the EU ETS, affects ESG outcomes, and whether green innovation acts as a mediating channel. The findings indicate that higher carbon prices significantly enhance ESG performance, and this relationship is partially mediated by increased adoption of green innovation practices. Furthermore, the positive ESG impact is more pronounced during more stringent phases of the EU ETS, when carbon prices are higher. These results are consistent with Institutional Theory and support the Porter Hypothesis, which posits that well-designed environmental regulation can stimulate innovation. The findings suggest that carbon markets yield benefits that extend beyond emissions reduction, contributing to broader transformations in corporate sustainability. The study highlights the need for improved transparency in ESG reporting and more consistent tracking of green innovation activities, particularly in carbon-intensive sectors such as oil and gas. Overall, it contributes to a deeper understanding of how market-based climate policies drive green transformation and offers valuable insights for both policymakers and scholars concerned with the design and impact of carbon pricing on corporate sustainability.