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ESG and
Relationship between ESG corporate
and corporate financial financial
performance
performance in the energy sector:
empirical evidence from
European companies Received 21 January 2023
Revised 14 April 2023
2 May 2023
Georgia Makridou 25 May 2023
13 June 2023
ESCP Business School, London, UK Accepted 4 July 2023

Michalis Doumpos
School of Production Engineering and Management,
Technical University of Crete, Chania, Greece, and
Christos Lemonakis
Department of Management Science and Technology,
Hellenic Mediterranean University, Agios Nikolaos, Greece

Abstract
Purpose – Considering environmental, social and governance (ESG) factors is vital in climate change
mitigation. Energy companies must incorporate ESG into their business plans, although it unquestionably affects
their corporate financial performance (CFP). This paper aims to investigate the effect of ESG on energy companies’
profitability through return on assets by analysing the combined score and individual dimensions of ESG.
Design/methodology/approach – The study examined a panel data sample of 911 firm-year
observations for 85 European energy-sector companies during 1995–2020. Two distinct modelling specifications
were applied to explore the impact of ESG components on the CFP of EU energy companies. The financial data
and ESG scores were obtained from the Thomson Reuters Eikon database in July 2021.
Findings – The empirical findings revealed that energy companies’ profitability is marginally and
negatively affected by their ESG performance. Whereas independent evaluation of the ESG subcomponents
indicated that environmental responsibility has a significant negative effect. In contrast, corporate social and
governance responsibilities are positively but not significantly associated with the company’s CFP.
Originality/value – This study fills a research gap in the ESG–CFP literature in the European energy
sector, a pioneer in sustainable development. To the best of the authors’ knowledge, this study’s originality lies
in its analysis of ESG factors’ role in profitability by considering different EU countries and energy sectors.
Keywords ESG, Corporate financial performance, Energy sector, Panel regression model,
Correlation analysis, Environmental responsibility, Social responsibility, Governance responsibility
Paper type Research paper

1. Introduction
Climate change, biodiversity loss and pollution are becoming more of a concern in the face of
global warming, shifting the world to sustainable practise and green technology investments
(Giannopoulos et al., 2022; Ozparlak, 2022). Recently, sustainability has been encouraged by International Journal of Energy
Sector Management
© Emerald Publishing Limited
1750-6220
This article is supported by a grant from ESCP Business School. DOI 10.1108/IJESM-01-2023-0012
IJESM the European Green Agreement via green finance, making environmental, social and
governance (ESG) practices attracting and increasing interest among businesses. Some
businesses use ESG to gain a competitive edge, whereas others view it as a standard practice;
however, adopting sustainability is an evolving process. Sustainability is anticipated to have
an enormous impact on the global scene and will be essential for businesses, as it is expected
to increase their credibility by ensuring reliable resource allocation and management.
As the human future will likely rely on sustainability, companies are urged to include
ESG in their corporate strategy. In addition, they must answer whether ESG performance
can translate into positive corporate financial performance (CFP). Does ESG necessitate
sacrificing profits or putting success on hold? The association between sustainability and
the financial performance (FP) of corporations is of increasing interest to practitioners and
stakeholders. Recently, numerous publications have been produced without any clear
consensus (Cerciello et al., 2022).
Since energy accounts for two-thirds of total greenhouse gases, it is central to climate
change mitigation. As a result, energy companies are urged to combat climate change, as its
effects on the environment and society are significant. European Union (EU)-based energy
companies set the standard for sustainability (Johansson et al., 2021), as the energy sector is
a key player in the economy’s functionality. By adopting an appropriate ESG model, energy
companies can minimise environmental harm while maximising their productivity.
Due to the innovative sustainability-driven practices and the increasing interest of
stakeholders and researchers, the energy sector is examined in this study (Constantinescu,
2021). Furthermore, the existing gap in the literature, primarily attributable to the
contradictory results and limited research on the energy sector, necessitates additional
research in that sector. In particular, the EU energy sector is a suitable setting for examining
the impact of ESG on CFP because of its prominent position in the global energy market and
the numerous policies implemented to promote sustainability. The EU has been a global
leader in addressing challenges such as climate change and energy security, developing
innovative legislative measures to reduce emissions, promote renewable energy and
enhance energy efficiency. The EU has been an early adopter of global climate policy and
has ratified the Paris Agreement with its Nationally Determined Contributions of reducing
greenhouse gas (GHG) emissions by at least 40% by 2030 compared to 1990. Compared to
other regions, the EU’s energy mix comprises a diverse portfolio of fossil fuels, nuclear
power and renewables. Even though fossil fuels still account for most of the EU’s energy
mix, the EU is steadily transitioning towards more renewable energy. Indeed, EU has made
significant progress over the past years in completing the internal market for electricity and
gas, promoting energy efficiency action, deploying renewable energy, reducing GHG
emissions and establishing a more robust carbon price signal. These European policies
indirectly push European energy companies to improve their ESG performance, particularly
in the environmental dimension.
The EU energy market is distinguished by its organisational structure, market structure,
regulatory framework and ownership structure (Capece et al., 2013). Firstly, many
independent companies have entered the EU energy market at various supply chain stages
due to the sector’s liberalisation. Secondly, EU directives have made it easier for new firms
to enter all phases of energy production. Thirdly, the privatisation of numerous national and
regional energy companies has begun in many member states. Fourthly, the EU established
shared institutions and regulatory mechanisms for its member states. These four
particularities of the EU energy market, with the EU’s incentives for climate change action
and the shift to a green economy, shape an energy market that combines a standard
structure with the diverse characteristics of EU member states. These factors affect the EU ESG and
energy firms’ adoption of ESG practices and their FP. corporate
Moreover, the EU energy sector’s physical resilience has been strong, contrary to its
financial resilience, which has been under severe stress because of the Covid-19 crisis. The
financial
EU member states are keen on fostering ESG due to their political stability, physical and performance
social infrastructure and the rich body of policies promoting sustainability. EU has passed
the world’s strictest mandatory ESG reporting regime. The Corporate Sustainability
Reporting Directive will initially apply to a group of large EU companies beginning in 2024
and then gradually apply to smaller companies over the next four years. While ESG
considerations affect companies across all sectors, energy companies have been at the
forefront of many ESG developments. Indeed, it is a value-adding analysis to find the
financial value and effects of the ESG practices of the companies that belong to
environmentally sensitive industries, especially those in the energy and power generation
industry. Hence, research in the EU, specifically in the energy sector that includes some of
its largest emitters, is of utmost importance.
Therefore, this study examines how ESG affected the profitability of European energy
companies between 2002 and 2020. This study’s panel regression model uses the return on
assets (ROA) as the dependent variable. ROA, an accounting measure of profitability, has
been used extensively in the literature on the ESG–CFP nexus (Giannopoulos et al., 2022).
Multi-dimensional ESG scores (environment, social and corporate governance) and financial
data were gathered from the Eikon database. The results of the regression analysis revealed
that only environmental responsibility has a significant, albeit negative, impact on the
profitability of energy companies.
Prior research on ESG–CFP association primarily focused on a single ESG dimension.
However, because ESG issues are interrelated, considering a single subcomponent of ESG
may be misleading (Alareeni and Hamdan, 2020; Ozparlak, 2022). Furthermore, even for
studies that dissect ESG into its three components, the results are contradictory regarding
whether ESG and its dimensions affect FP positively, negatively or neutrally (Giannopoulos
et al., 2022). This study makes five contributions to the ESG literature. Firstly, it looks at a
composite score for ESG and sub-scores, including accounting-based financial measures for
the EU energy industry. Studies like this one that explore the ESG subcomponents while
examining the association between ESG and CFP can contribute to a better understanding
of that relationship (Rahi et al., 2022). Secondly, this study sheds light on the role of ESG
factors on energy firms’ profitability by considering different EU countries and economic
sectors. Thirdly, it contributes to the literature by empirically examining the ESG–CFP
nexus in the European energy sector, a pioneer in sustainable development. Furthermore,
our study combines and incorporates into the analysis all those variables usually used in the
ESG–CF nexus while also controlling for the different activities of energy firms (e.g. their
involvement in renewable energy), thus, enabling the derivation of conclusions on the
differences across various sub-sectors in energy. According to our knowledge, a limited
number of studies in the energy field consider renewables as a control variable. Fourthly, the
paper examines a period spanning more than two decades, during which numerous energy
companies introduced social, ethical and environmental policy programmes and the stock
market was volatile. Contrary to the study of Behl et al. (2022) and many others in the field,
this research examines an extensive data set regarding the period, the number of energy
firms and the variables. The extensive period plays a fundamental role in determining the
relationship between ESG factors and FP. It takes time, especially for environmental
regulations, to influence economic performance. Thus, the comprehensive data set used in
this analysis provides robust results exploring improvements and developments in ESG
IJESM disclosure practices by the examined firms over time. Lastly, this study contributes to the
literature by addressing a longstanding question on the impact of ESG on profitability in the
energy industry, where results on that association are mixed and contradictory.
The remaining sections of this paper are structured as follows. Section 1 introduces the
research topic. Section 2 reviews the ESG–CFP literature, highlighting prior findings and
gaps. Section 3 described the data set and methodology. Section 4 presents the analysis of
the results. The last section, Section 5, provides conclusions and recommendations for future
research.

2. Literature Review
ESG practices have received significant consideration from managers, investors and
policymakers since they provide additional information regarding financial indicators,
constituting a valuable asset in decision-making. Scholars have often questioned whether
ESG practices are a competitive advantage or primarily a financial burden. Since the early
1970s, numerous studies have examined how sustainability influences FP (Giannopoulos
et al., 2022). The ESG–CFP association is more complex than a simple cause-and-effect
relationship, as numerous factors must be considered to comprehend the effect of one
variable on the other. This association has been investigated across several parameters,
including the overall and sub-component ESG scores (Alareeni and Hamdan, 2020; Ademi
and Klungseth, 2022).
The literature on the ESG–CFP nexus has produced contradictory and ambiguous
findings (Garcia and Orsato, 2020; Alareeni and Hamdan, 2020; Bansal et al., 2021; Ziqiong,
2022; Ozparlak, 2022). Using companies listed on the Chinese Stock Exchange from 2015 to
2019, Ruan and Liu (2021) discovered that ESG practises negatively impact the performance
of companies that are particularly insensitive to environmental factors. Giannopoulos et al.
(2022) investigated whether ESG and its dimensions affect a firm’s FP positively, negatively
or neutrally. The possible associations between sustainability and CFP are four:
(1) positive;
(2) negative;
(3) neutral; and
(4) U-forms (Adamkaite et al., 2022).

The majority of studies concluded that sustainability could increase firm value, which
translates into better FP (Wang and Sarkis, 2017). For example, Friede et al. (2015) reported
that 90% of the 2,200 papers showed that sustainability positively impacted FP. Also, Saha
et al. (2020) reviewed 114 papers published between 1958 and 2016 and reported a direct
effect of ESG on CFP theories such as the resource-based view (RBV) and stakeholder theory
have been used to explain the positive impact of ESG on a firm’s performance. According to
the RBV, sustainability practices give a competitive advantage to firms, boosting their
reputation and improving their loyalty. In the literature, it is widely acknowledged that a
company’s reputation is a crucial factor in improving its FP (Nirino et al., 2021). Based on the
stakeholder theory, a firm tries to maximise its profit in the long term by creating value by
meeting the demands of all stakeholders and, thus, converting sustainability into profits.
Other research works on ESG discovered that ESG harms a company’s performance
(Ruan and Liu, 2021). Some scholars found contradictory results on the ESG–CFP nexus
(Ademi and Klungseth, 2022). For example, some concluded that ESG and CFP had a U-
shaped association (Franco et al., 2020). Others found no relationship between the two (La
Torre et al., 2021). Ozparlak (2022) examined the impact of ESG on the FP of 103 companies
in the S&P 500 index between 2015 and 2021 using accounting and market-based metrics. ESG and
He found that ESG does not affect the FP of the companies. However, environmental corporate
responsibility affects the firms’ market values but not ROA, return on equity (ROE) and financial
market values of assets.
The energy sector has been asked to reduce its carbon footprint and contribute to a performance
sustainable future due to its large environmental footprint. As a result, since 2015, there has
been an increase in the amount of research on ESG in the energy industry (Ranjan and Das,
2015; Soni et al., 2017). Between 2019 and 2020, sustainable investments in enterprises have
more than doubled (Zumente and Lace, 2021). However, sustainability may incur financial
costs and have a negative impact on a company’s CFP in the short term (Bocken and
Geradts, 2020). Atan et al. (2018) found that ESG had no significant impact on the FP of
Malaysian firms. Contrarily, Dalal and Thaker (2019) and Buallay (2019) found that ESG
performances affect CFP significantly and positively.
ESG’s impact on a company’s FP is gaining global attention (Alsayegh et al., 2020;
Ozparlak, 2022). However, few studies (Lloyd, 2018; Constantinescu, 2021; Adamkaite et al.,
2022) have examined the ESG–CFP nexus in the energy sector. Furthermore, only a few of
them examined more than one country or region. For instance, Zhao et al. (2018) discovered
that the Chinese energy power market’s FP might be enhanced by high ESG performance.
Alhawaj et al. (2022) found that ESG has a substantial impact on operational performance
but a negligible impact on FP when measured by metrics such as ROE and Tobin’s Q.
Furthermore, there has not been much research on sustainability in the energy industry in
terms of time and geography (Agudelo et al., 2020), with most of the studies concentrating
on the fossil fuel industry and very few on renewables. Indeed, much research in the energy
industry has discovered a neutral link between the two. For example, Adamkaite et al. (2022)
studied nine Lithuanian energy companies from 2017 to 2020 and concluded that
sustainability has no impact on the CFP. Constantinescu et al. (2021) used data from 67
energy companies operating in sectors such as oil and gas, oil- and gas-related equipment
and services, multiline utilities, renewable energy and uranium sectors over 2015–2018 to
explore the impact of ESG factors on firm value. They found that the ESG and its
components are significantly connected with the firm’s market value, which supports both a
positive and a negative association between the combined and individual ESG factors
disclosure and the firm’s value measured by market value. Therefore, additional research is
still required, especially in the renewable energy sector (Patari et al., 2014). Thus, by
examining the ESG–CFP nexus in the EU energy sector and considering the impact of
renewables, this study seeks to advance knowledge in that specific field.

2.1 Environmental responsibility

Globally, businesses invest in environmentally friendly practices to reduce their
environmental impact and increase profitability (Albuquerque et al., 2019). Correspondingly,
a substantial amount of research has been conducted on the association between
environmental performance (EP) and CFP. Nonetheless, the results remain contradictory.
Some researchers discovered a positive link between the two (Endrikat et al., 2014; Ranjan
and Das, 2015). Others, however, discovered that environmental practices have a negative
impact on FP (Rahi et al., 2022). Arslan-Ayaydin and Thewissen (2014) found that
environmental responsibility neither improves a firm’s FP on the stock market nor provides
significantly positive returns in times of high uncertainty. They also concluded that
reducing environmental concerns improves the corporate profitability of energy companies.
IJESM 2.2 Social responsibility
Prior research on the relationship between corporate social responsibility (CSR) and CFP
yielded contradictory findings (Rahi et al., 2022). Numerous studies have concluded that CSR
activities contribute to positive returns and better accounting performance (Blasi et al.,
2018). By investing in CSR, businesses can cultivate a good reputation and, thus, attract
more investors (Okafor et al., 2021; Shahzad et al., 2022). For instance, Okpa et al. (2019)
concluded that social responsibility is vital to the CFP of the examined companies. Magrizos
et al. (2021) found that CSR positively influences the CFP of small and medium enterprises.
CSR represents a sustained competitive advantage that generates resources for the business
and has the potential to be profitable. Nonetheless, several studies have found a non-existent
or negative relationship between social responsibility and FP (Peng and Yang, 2014; Akben
Selcuk and Kiymaz, 2017; Alareeni and Hamdan, 2020).

2.3 Corporate governance

A vast amount of research has been conducted on CG, especially after the 2008–2009
economic crisis due to the important contribution of CG to the companies’ FP (Alareeni and
Hamdan, 2020). Examining the association between CG and various CFP indicators yielded
varying results. Numerous researchers have reported a positive correlation between the two.
For example, Rahi et al. (2022) concluded that governance practices affect positively the
performance of the Nordic financial industry institutions. This can be explained by the fact
that strong governance ensures higher profitability from firms’ use of their assets. However,
other studies reported a negative effect of CG on CFP (Conca et al., 2020). Despite
contradictory findings, good CG practices positively impact CFP.

3. Empirical setting
3.1 Data
This research aimed to explore whether ESG factors affect the FP of the EU energy
companies and, if so, then how they affect it. The method deemed appropriate for the study
was panel data analysis, which permits the examination of dynamic relationships in time
and space. Annual data for EU energy companies from 2002 to 2020 listed in the Thomson
Reuters Eikon database in July 2021 made up the study data set. A total of 12,168
observations made up the initial size of the study sample. The final size of the sample was
decreased to 911 firm-year observations since only 85 of those firms provided a full set of
ESG scores for the analysis period.
As indicated in Table 1, the sample comprises businesses from a variety of energy-
related industries. Most companies (73 companies with 830 firm-year observations) are
engaged in oil- and gas-related industries, while nine companies operate in the renewable
energy sector (56 observations).

3.2 Variables
The data set used in the analysis consists of all EU energy firms for which ESG and
financial data were available in the Eikon database without any sampling process being
used. Considering the multidimensional nature of ESG and the effect of one component that
may erase the adverse effects of another, we considered the three separate scores of ESG
sub-components and the overall ESG score. This categorisation helps to identify the effect of
each ESG component on CFP. The Eikon database was queried to obtain the scores of the
overall ESG and its subcomponents.
Typically, the ESG score, a composite index comprising the three ESG components
(environmental, social and governance), represents a company’s sustainability performance.
Sector No. of firms No. of observations
ESG and
corporate
Coal 3 25 financial
Integrated oil and gas 12 145
Oil and gas drilling 5 25 performance
Oil and gas exploration and production 12 123
Oil and gas refining and marketing 14 175
Oil and gas transportation services 10 108
Oil-related services and equipment 20 254
Renewable energy equipment and services 8 53
Renewable fuels 1 3 Table 1.
Composition of the
Source: Created by the authors sample by sector

The environmental disclosure score evaluates a company’s environmental footprint (e.g.

CO2 emissions, waste management, etc.). The social disclosure score includes topics such as
equality, human rights and working conditions, whereas the governance disclosure score
includes shareholder rights and corruption, among other topics.
The Refinitiv Eikon platform provides ESG scores ranging from 0% to 100%, which
are computed based on data concerning various environmental, social and corporate
governance factors. When examining the relationship between sustainability and a
company’s FP, ESG scores have been used extensively in the literature (Alareeni and
Hamdan, 2020; Constantinescu, 2021).
Figure 1 depicts the evolution of the ESG score and its sub-components for the analysed
companies during the period of the analysis. It is obvious that the ESG performance of firms
improved after 2006, primarily due to enhancements in the environmental and social
dimensions. In contrast, there has been a modest improvement in governance.
ROA was used to assess the company’s FP. An accounting measure such as ROA is more
reliable than market-based measures and it applies to all companies, even non-listed ones.
ROA was, therefore, used as the dependent variable for the analysis.
Additional financial data were treated as control variables in accordance with the
pertinent literature to proxy the company’s FP (Alareeni and Hamdan, 2020). These
include leverage (LEV), current ratio (CR), market value-to-book value ratio (MBV) and

Figure 1.
Trend of the ESG
scores during the
analysis period
IJESM the size of the company (SIZE). A rich body of academic research in the field has
pointed out the fundamental role of those variables in investigating the relationship
between sustainability disclosure and a firm’s FP (Nirino et al., 2021; Constantinescu,
2021; Zahid et al., 2022). Calculated as the ratio of total debt to total assets, LEV
indicates a company’s reliance on debt to finance its assets. In addition, the size of a
company as determined by the natural logarithm of total assets has a significant impact
on its performance. On the one hand, large companies are more resilient to external
shocks (e.g. an economic crisis) and have more means to implement the large-scale
investments that are often needed in the energy sector. On the other hand, however,
smaller companies are more flexible, and they can adjust faster through innovation.
Therefore, the existing literature provides mixed evidence on the role of a company’s
size on its FP. The CR was used to gauge the company’s liquidity, which impacts its
ability to maintain sustainable practices. The MBV, calculated as market value to total
equity, is used to evaluate the growth of a company on the market.
Although the variable selection was based on the grounds of the existing literature and
data availability, we refrained from using the same set of variables that were frequently
used in relevant studies. By taking into account a diverse set of variables that have been
claimed to be important in the analysis of the ESG-–CFP nexus, we hoped to add to the body
of current work.
Table 2 presents the descriptive statistics for the chosen variables (mean, median and
standard deviation).
Table 3 shows the correlations among all variables. A preliminary analysis indicates that
the ESG disclosure score positively correlates with the individual ESG dimensions (E, S and
G) and the firm’s size (SIZE). Furthermore, the results do not establish a strong correlation
among all the explanatory variables, which shows that the variables do not suffer from
multicollinearity concerns in our regression models. In particular, results indicate no
significant correlation between ROA and the examined variables, suggesting that ROA is an
appropriate financial measure for examining the ESG–CFP nexus.
Table 4 also indicates that there is no multicollinearity problem as the values for variance
inflation factor for all independent variables are less than 10.
Table 5 reports the average values of ESG, individual scores and ROA for firms
operating in renewables and other fields in the energy sector. Though the scores may be
diverse across the firms operating in renewables or the other examined sectors, the
governance component is the most important compared to ESG and its environmental and

Variable Mean Median SD

Environmental score 48.49 52.67 27.80

Social score 51.93 52.17 25.99
Governance score 52.17 51.95 24.22
ESG score 50.74 52.15 21.90
ROA 5.26 4.80 7.27
CR 1.70 1.35 1.27
MBV 5.51 1.53 12.18
LEV 0.27 0.24 0.18
Size (assets in million US$) 40,959.17 5,539.67 98,120.13
Table 2. Size (in assets) 22.45 22.44 2.09
Descriptive statistics
of the variables Source: Created by the authors
Variable ESG E S G ROA CR MBV LEV SIZE
ESG and
corporate
E 0.903 financial
S 0.910 0.775
G 0.635 0.380 0.380 performance
ROA
0.129
0.131
0.122
0.055
CR
0.242
0.240
0.213
0.129 0.039
MBV
0.241
0.258
0.226
0.091
0.038 0.029
LEV
0.004 0.025 0.054
0.130
0.289
0.229 0.012
SIZE 0.570 0.562 0.455 0.381 0.082
0.161
0.441
0.145
RENEW
0.013 0.052 0.040
0.134
0.070 0.058 0.088
0.018
0.219 Table 3.
Correlations among
Source: Created by the authors variables

Variable Variance inflation factor

E 3.09
S 2.65
G 1.24
RENEW 1.10
LEV 1.14
CR 1.15
MBV 1.14
Table 4.
SIZE 1.39 The values
for variance
Source: Created by the authors inflation factor

Variable E S G ESG ROA

Table 5.
Renewables 51.56 53.39 40.41 48.25 3.33 Averages by
Others 46.76 49.94 51.40 49.21 5.48
the business field of
p-value* 0.08 0.19 0.00 0.67 0.04
the companies
Note: * t-test p-value (renewables
Source: Created by the authors production vs others)

social components. This shows that EU firms mainly focused on governance, followed by
sustainability’s environmental and social dimensions across all sectors. For firms involved
in renewables, the S-scores are higher compared to the other companies. However, the
differences are not statistically significant. Firms involved with renewables also have higher
performance in the environment pillar of ESG, with the difference from other companies
being significant at the 10% level. On the other hand, the governance performance of firms
involved with renewables is significantly lower compared to other companies. Overall, the
difference in the global ESG score between the two groups of companies is marginal,
whereas in terms of profitability, firms in renewables production are less profitable with the
difference being significant at the 5% level.
In Table 6, the averages of ESG, E, S and G scores and the ROA are given for three
periods:
IJESM (1) before the global financial crisis;
(2) during the crisis period; and
(3) after the crisis.

The recession includes the European debt crisis characterised by high government structural
deficits and accelerating debt levels. As observed, the environmental and governance scores
were higher during the economic crisis, with the social scores being the highest in the after-
crisis period. However, the mean of ESG scores was almost the same between the crisis and
after the crisis period. The importance of sustainability in the EU energy firms is evident even
during the economic crisis. After the crisis, and while the FP of energy firms was even worst,
the EU energy firms kept investing in sustainability and mostly in CSR, followed by the
governance and environmental dimensions of sustainability across all sectors.

3.3 Estimation model

The base model is expressed as follows:
ROAit ¼ a þ b1 ESGi;t
1 þ b2 LEVi;t
1 þ b3 CRi;t
1 þ b4 MBVi;t
1 þ b5 SIZEi;t
1
þ b6 RENEW þ Years þ Countries þ «it
In addition to the ESG score and the financial variables described earlier, the model
incorporates country and year-fixed effects, as well as a dummy variable indicating whether
a company engages in renewable energy-related activities (RENEW). Given the nature of the
operation of such companies, they are expected to have a better environment footprint and
performance. This is indeed verified for the companies in the sample, as companies in
RENEW ¼ 1 have an average environmental score of 51.6 versus 46.8 for the other
companies ( p-value 0.077 according to the Mann-Whitney non-parametric test). Moreover, it
was observed that the mean social score for the RENEW ¼ 1 group was also higher (53.4
versus 49.9 for the other companies), although the difference is not significant at the 10%
level. On the other hand, companies involved in RENEW, have a lower governance score
(40.4 vs 51.4 for the other companies), with the difference being significant at the 1% level. In
terms of the overall ESG score no significant differences were observed (48.3 mean ESG score
for RENEW ¼ 1 vs 49.2 for the other companies). Given the different characteristics of
companies in the renewables sector, the incorporation of the corresponding dummy variable
in the regression model enables the analysis of the effect that this specific sector has on the
FP of the companies, beyond the ESG score. It should further be noted that for the average
ROA of the firms in the sample that operate in renewables is significantly lower than
companies in other energy sub-sectors (mean ROA 3.3% versus 5.5%; significant difference
at the 5% level).

Period E S G ESG ROA

Pre-crisis (up to 2007) 32.24 39.72 50.51 39.90 9.59

Table 6. Crisis (2008–2012) 52.00 50.01 50.78 50.81 6.36
After the crisis (2013–2020) 49.14 53.33 50.07 50.87 3.57
Averages of ESG, E,
p-value* 0.00 0.00 0.91 0.00 0.00
S, G and ROA by
time (pre-crisis, crisis Note: *ANOVA p-value
and after the crisis) Source: Created by the authors
All independent financial variables and the ESG score are lagged by one year compared to ESG and
the ROA-dependent variable. In that way, we ensure that the potential impact-by-time lags corporate
between ESG and financial metrics were captured.
The above base model is further extended by incorporating the individual ESG
financial
dimensions (E, S and G), first introducing each one separately in the analysis to examine performance
their individual effects on CFP, and then introducing all three ESG pillars (E, S and G) in the
regression model to examine their combined impact. These additional specifications provide
further insights into the role of ESG factors on the FP of the companies.
The estimation of the regression models is conducted within a framework of random
effects with robust standard errors. The choice of this estimation procedure was based on
appropriate statistical tests (e.g. the Hausman test) to examine the suitability of different
estimation techniques (i.e. O.L.S., fixed effects and random effects).

4. Results and discussion

The results of the regression analysis are summarised in Table 7, where Model (1) is the
base model presented in sub-section 3.3. Models (2–4) incorporate the E/S/G dimensions
separately to explore the effect of each pillar of ESG (environment, social and corporate
governance) on firms’ value measured by ROA, whereas Model (5) considers all dimensions.
As expected, LEV has a persistent negative effect, whereas the MBV has a strong
positive effect. The negative relationship between financial LEV and FP was also observed
by Naseem et al. (2020) while examining the impact of ESG on firm performance of 1,021
Asian firms over the period 2006–2016. The company’s size positively affects profitability,
although this finding is not consistently significant. This observation is consistent with the
theory of economies of scale, meaning that larger companies are more competitive than
smaller ones; the size enables them to strengthen their market position via economies of
scale position in market through economies of scale (Chakroun and Amar, 2021). This is
particularly true for the energy sector, which is capital intensive requiring large capital
expenditures. The positive association between firm size and ROA may be also explained by
the extensive experience and a high number of professionals dealing with sustainability in
large firms (Derbali, 2021).

Variable (1) (2) (3) (4) (5)

ESGt
1
0.035 (0.149)

Et
1
0.044** (0.026)
0.053** (0.025)
St
1
0.015 (0.386) 0.012 (0.544)
Gt
1 0.001 (0.991) 0.009 (0.658)
RENEW
2.295** (0.035)
2.389** (0.044)
2.182** (0.046)
2.099* (0.054)
2.426* (0.052)
LEVt
1
8.727*** (0.006)
8.704*** (0.006)
8.683*** (0.006)
8.733*** (0.005)
8.612*** (0.006)
CRt
1 0.078 (0.813) 0.064 (0.845) 0.098 (0.768) 0.104 (0.756) 0.057 (0.865)
MBVt
1 0.097** (0.043) 0.099** (0.038) 0.096** (0.042) 0.094** (0.042) 0.097** (0.040)
SIZEt
1 0.858* (0.090) 0.968** (0.045) 0.721 (0.130) 0.617 (0.169) 0.883* (0.080)
Constant
17.987 (0.162)
20.865 (0.104)
15.687 (0.229)
14.076 (0.230)
19.892 (0.117)
N 795 795 795 795 795
Within R2 0.231 0.238 0.231 0.232 0.241
2
Between R 0.256 0.256 0.243 0.231 0.247
Overall R2 0.245 0.247 0.242 0.241 0.248
Table 7.
Notes: p-values in parentheses, *p < 0.1; **p < 0.05 and ***p < 0.01 Regression analysis
Source: Created by the authors results
IJESM Regarding the overall ESG score, its contribution to Model (1) is negative but insignificant.
ESG’s negative impact might be explained by the increased expenses associated with ESG
investments. According to Gillan et al. (2021), corporations prefer to splurge on ESG to
enhance their reputation at the expense of their shareholders. Nevertheless, ESG investments
have a negative impact on the company’s value. Diverse research on the ESG–CFP nexus
involving a variety of industries and countries have yielded similar results (Garcia and Orsato,
2020; Barauskaite and Streimikiene, 2021; Lo and Liao, 2021; DasGupta, 2021; Cerciello et al.,
2022). McWilliams and Siegel (2000), for instance, indicated that ESG hinders CFP, but
Buallay et al. (2020) observed that sustainability damaged the performance of 882 firms from
developed and developing countries over an 11-year period. Similarly, DasGupta (2021)
concluded that the ESG practices implemented in 27 countries during 2010–2019 decreased
their profitability. In addition, Rahi et al. (2022) found that sustainability harms the FP of the
Turkish and Nordic listed companies measured by return on invested capital and equity. The
negative effect may be attributed to the requirement for long-term investment in sustainability
measures, which has a negative effect on FP (Bodhanwala and Bodhanwala, 2018).
Giannopoulos et al. (2022) found that ESG practices affect the FP through the ROA of the
Norwegian listed companies negatively. Zahid et al. (2022) also concluded that ESG has a
negative but insignificant impact on FP measured by ROA explained by the fact that ESG
practices increase costs to shareholders, limiting investment opportunities and, thus,
adversely affecting the firm’s FP. This finding is consistent with our results and supports the
trade-off view and the traditional neoclassical approach.
Looking at the further results on the components of the ESG score, it is clear that only the
environmental dimension (E) is relevant for the profitability of the EU energy companies. In
particular, E has a statistically significant negative effect at the 5% level. Several studies
have reported comparable findings for energy firms. For example, Constantinescu (2021)
found a similar relationship between the environmental component and the market value of
energy firms while exploring the impact of ESG components on the performance of 61 energy
companies within the EU. The observation in regard to the impact of environmental practices
on profitability is also found in the studies by Li et al. (2019) and Alareeni and Hamdan
(2020). Liu (2020), using sensitive industries such as utilities, explained that negative
relationships result from a general lack of trust shown by the customers in these industries.
The investment in environmental practices of heavy-pollution industries, such as energy
and power generation industries, not only involves the surrounding environmental protection
but also includes the improvement of the emission reduction performance of their equipment
and the transformation investment. With the improvement of relevant environmental laws and
regulations and the strengthening of law enforcement, breach of energy companies in this area
will also affect their FP. Firms in industries with high pollution levels increase research
and development investments in energy-saving and emission-reduction activities. More
environmental protection practices increase depreciating costs of related assets, and increase
operation risk, waste disposal costs and other environment-related costs, which impose
financial burdens on a business operation (Kai, 2015; Verbeeten et al., 2016; Qureshi et al., 2021).
Numerous studies have reported that spending money on environmental practices, adopting
environment regulations and implementing environmental management systems such as ISO
14001, increases expenditure, lowers profitability, decreases labour productivity, diminishes
competitive advantage and negatively impacts market value (Schaltegger and Synnestvedt,
2002; Filbeck and Gorman, 2004; Lioui and Sharma, 2012; Miroshnychenko et al., 2017; Li et al.,
2019; Ma et al., 2020). Furthermore, more environmental information disclosure may increase
disposal cost of environmental assets, related costs of environmental monitoring, assessment
and budget and environmental administration charges, and then increase firms’ operating
costs. When the environmental management of a certain firm improves, it becomes harder to ESG and
further reduce pollution, requiring more resources and technology to achieve it, and, thus, corporate
resulting in more costs which might negatively affect a firm’s FP. The cost of investments in
such improvements might exceed the financial benefits for the firm, resulting in a negative FP
financial
(Khanna and Anton, 2002). performance
Intriguingly, the dummy variable added in the analysis for renewable energy companies
likewise has a consistently strong negative effect (significant at the 10% level or higher),
indicating that companies from this industry are characterised by weaker profitability. This
holds true, even in model (5), which controls for the EP of the companies. Numerous
renewable energy solutions attract investors by elevating the share of renewables in spatial
distributions, improving businesses’ bottom lines. Much of the prior research on this topic
has focused on government approval, especially in China. Subsidies from the government
have been proven to significantly impact the economic success of wind energy companies,
for example. According to additional research (Zhang et al., 2015), subsidies’ effectiveness in
improving alternative energy producers’ performance in newly established areas varies
depending on the energy source used. A subsidy for wind energy, for instance, increases the
company’s profitability more than a subsidy for solar energy. Many studies have reached
the same conclusion regarding the efficacy of government subsidies for the solar industry in
comparison to new areas of establishments (Xiong and Yang, 2016; Xu et al., 2020).
As for the other models (3–5) tested, a negligible association was observed between the
social and governance factors with the FP and profitability of the companies. The observed
weak results for those factors are consistent with the finding of Yoon et al. (2018), who
observed that ESG factors have a smaller impact on the value of firms in environmentally
sensitive industries, such as the energy industry, than they do on the value of firms in non-
sensitive industries. Han et al. (2016) used the three ESG scores and the ROE, market-to-
book ratio and stock return to examine the relationship between CSR and FP. They found
that the environmental and governance responsibilities present a negative and a positive
relationship with FP, respectively. On the other hand, they found no statistically significant
relationship between social responsibility and profitability.
Additional results are provided in the Appendix (Table A1) for three different periods
(pre-crisis, crisis and after). As observed, the overall ESG (Model 1) affects the EU energy
firms’ profitability significantly before the crisis and mainly after the crisis. Moreover, its
impact is negative only after the crisis. This was also observed earlier for the results
presented for the whole period. Considering all dimensions of ESG (Model 5), the
environmental dimension negatively affects profitability over the three examined periods
and significantly only before the crisis. The impact of the governance dimension is
insignificant across the periods. The results show that environmentally friendly and socially
responsible energy firms enhance their FP only before the European debt crisis. Moreover,
social responsibility is the only sustainability dimension with a strong positive relationship
with ROA during the economic recession. In contrast, the impact of the individual
dimensions of ESG is negligible on the energy firms’ profitability after the crisis. Firm size
influences ROA in the periods before and after the crisis, whereas renewables impact the
firms’ profitability until 2008.
We conducted a comparative analysis as the final step to examine the reliability of the
research findings. Specifically, a model that takes into account the variables of ROA, LEV,
CR and the SIZE was carried out. These variables are often used in the literature on the
ESG–CFP nexus. The results using these frequently used variables are similar to those
found in this research, as indicated in Table A2 (Appendix), demonstrating the validity of
the study’s conclusions.
IJESM 5. Conclusions
Adopting sustainable practices enables businesses to gain a competitive advantage over
their rivals in the industry by boosting productivity and reducing risk exposure. The energy
industry, like all businesses, is expected to adopt sustainability practices to enhance its
credibility and attract stakeholders’ interest while contributing to climate change mitigation.
Through its ability to influence global markets, the European energy industry can play a
critical role in the transition to a sustainable future. However, whether embracing ESG
practices would increase, decrease or have no effect on profitability is still debatable. The
existing literature presents competing explanations of the ESG–FP relationship, as some
researchers argue that superior ESG performance positively impacts a company’s FP. In
contrast, others argue that trade-offs exist or that there is no relationship between these two.
Thus, this paper build on prior research to dispel the current debate’s confusion and
inconsistency. Consequently, this study aimed to shed light on this by determining how ESG
impacts FP, focusing on environmentally sensitive industries such as energy companies.
Investigating the ESG–CFP nexus can offer insight into whether sustainability investments
can boost energy companies’ FP. The ESG performance scores and their components were
used for this study when investigating the ESG–CFP nexus with the ROA indicator serving
as a proxy for CFP.
The empirical findings revealed a negative but insignificant association between the
ESG score and the firms’ CFP, indicating that energy companies could not save their
operational costs from ESG expenditures. This observation is explicable from the trade-off
perspective and agency theory. One possible explanation for the negative correlation is that
sustainability practices necessitate a long-term investment, which adversely affects
profitability. Despite the weak relationship between ESG and CFP, it is essential to
emphasise that sustainability offers various benefits that may take time to manifest in a
company’s profitability. A negative association has also been observed between the
environmental dimension of ESG and energy firms’ profitability, with that association being
significant. The factor characterising renewable energy companies also has a significantly
negative influence. On the other hand, the social and governance dimensions have a positive
but negligible effect on CFP. The positive impact of governance responsibility on
profitability is not surprising given that strong corporate governance leads to greater asset
utilisation profitability that enables companies to increase their FP (ROA). This finding is
consistent with that of Rahi et al. (2022), who investigated the impact of ESG on the FP of
Nordic public firms and concluded that strong governance responsibility leads to higher
profitability. The study’s findings also align with Saygili et al. (2022), who concluded that
companies’ FP is negatively affected by environmental practices, whereas social and
governance responsibilities have a positive impact on it. As observed, profitable firms in the
energy sector have sufficient corporate social and governance responsibilities, present
growth on the market, are large-sized and have lower debt.
ESG principles are one of the fastest-growing trends gaining increasing attention among
investors, policymakers, ESG analysts and managers over the last few years. This study
contributes to the ongoing debate on the ESG–CFP nexus and validates recent developments
in the literature, which suggest that ESG factors have contradictory effects on CFP. In
particular, this study adds value and importance to the ESG literature and sustainable
business practice for energy companies in the EU. Thus, this study is a valuable decision-
making resource that could benefit researchers, company stakeholders and decision makers.
Understanding the effect of sustainability on firms’ profitability is beneficial for taking
the appropriate decision-making initiatives and actions. The findings have theoretical and
practical implications for investors, managers, ESG researchers, shareholders, decision
makers and government and industry regulatory authorities. The results show that energy ESG and
companies should be more cautious regarding ESG by viewing associated actions not just as corporate
expenditures but also as long-term investments for environmental sustainability.
From a practical point of view, understanding the impact of ESG principles on FP may
financial
assist energy company management in navigating between ESG and FP objectives to performance
facilitate transformation and undertake efforts to promote sustainability in the energy
business. The results can guide investors while considering sustainable investments, as in
the short run, investments in energy companies may not result in value creation. They can
also guide fund managers further regarding energy stock investments as a part of long-term
portfolio strategy.
This study demonstrates that, from a managerial standpoint, business managers and
other stakeholders should prioritise the environmental responsibility of energy companies
and focus on identifying the right trade-off between improving the environmental footprint
of their companies and maintaining strong financial results. The findings can aid energy
companies in figuring out the effect of ESG disclosures on profitability and developing their
business strategy accordingly. For example, managers of energy companies can use these
findings to investigate why a high score in ESG disclosures does not increase firm value,
thereby gaining a better understanding of whether to prioritise the overall ESG score or
the score of each element. This article will enable investors to pay more attention to the
company’s EP when making investment decisions. Another immediate managerial
implication of the findings suggests that corporate managerial bodies should establish and
put into practice the essential ESG strategies in accordance with the needs, keeping in mind
that ESG operations are also sustainable investments in the future of the environment and
society. When building their portfolios, fund managers can use the research findings to
make investments in ESG-focused funds. The results can direct them further in terms of
investing in energy stocks as part of a long-term portfolio strategy, as doing so can be overly
hazardous and possibly unprofitable in the stock market in the short term.
In addition, the findings could be used to draft new legislation and amendments to
enhance the effectiveness of ESG elements in enhancing profitability. The study’s results
benefit policymakers and government regulatory authorities, offering them a strategic
roadmap to develop new regulations and amendments regarding the effectiveness of ESG
elements in enhancing profitability while facilitating a just transition and sustainable
development. To increase the long-term profitability of energy companies, they must place
environmental practices at the heart of sustainability policies. This study’s findings will also
be helpful for academicians to evaluate the causality and impact of CSP–CFP relationship in
higher energy-consuming and greater waste-polluting industries.
There are a few limitations to this study that could inspire additional investigation. Due
to the limited availability of ESG data for EU companies in major databases such as Eikon,
the sample size is relatively small. Therefore, additional research is required to strengthen
ESG reporting in the EU Future research should expand the reach to include regions outside
the EU In addition, while this study examined the COVID-19 situation, encompassing data
from 2019 to 2020, it does not focus just on this time frame. This may reduce the validity of
the ESG–CFP nexus results during an unexpected global crisis. A further drawback of our
study is that other variables (e.g. business climate, etc.) may influence the analysed
relationships. Another limitation of the study is the failure to analyse the locations of energy
companies which can significantly influence the relationship between ESG and FP.
Future research could combine quantitative and qualitative methods to understand better
how ESG can be incorporated into business strategies. ESG assessment is essential,
particularly in the energy sector, as ESG disclosure and corporate financial reporting are
IJESM becoming mandatory. Therefore, additional research into the ESG–CFP link is required,
mainly focusing on the investigation of long-term effects. The study focuses on listed
European companies. Therefore, the results cannot be generalised to all types of companies.
Among our recommendations for future research are the addition of energy companies
operating outside the EU to the data set, the extension of the study period to cover more recent
data, and the implementation of alternative estimation methodologies. Investigating how other
factors affect the relationship between ESG and CFP might be important. Moreover, given the
recent turmoil in the global energy markets due to the COVID-19 pandemic and the geopolitical
events in Europe, it would be interesting to examine how energy firms with different ESG
characteristics have been affected by the volatility in the markets. Finally, ESG scores from
sources other than Thomson Reuters can be incorporated into future research to explore the
discrepancies that are commonly observed between different rating agencies (Berg et al., 2022).

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 Appendix

Before crisis (2002–2007) During crisis (2008–2012)

Variable (1) (2) (3) (4) (5) (6) (7) (8)

ESG 0.105* (0.061) 0.036 (0.310)

E 0.004 (0.922)
0.080* (0.097)
0.006 (0.827)
S 0.099** (0.027) 0.106** (0.048) 0.040* (0.052)
G 0.071 (0.229) 0.080 (0.265)
RENEW 4.814* (0.078)
13.408*** (0.000) 4.247 (0.165)
10.975*** (0.000) 6.630** (0.012)
0.731 (0.768)
2.625** (0.049)
0.134 (0.958)
CR
0.070 (0.954)
0.085 (0.942)
0.103 (0.927)
0.159 (0.899)
0.285 (0.806) 0.523 (0.211) 0.573 (0.159) 0.514 (0.211)
MBV 0.222* (0.058) 0.224* (0.056) 0.231* (0.055) 0.211** (0.041) 0.220** (0.028) 0.070* (0.060) 0.076** (0.042) 0.072* (0.051)
SIZE
1.621** (0.049)
0.921 (0.205)
1.488** (0.035)
1.419* (0.092)
1.523* (0.091)
0.070 (0.881) 0.305 (0.550)
0.133 (0.758)
LEV
14.052 (0.230)
14.403 (0.195)
14.766 (0.200)
12.597 (0.234)
12.786(0.216)
5.714 (0.258)
5.883 (0.233)
6.125 (0.218)
Constant 32.293* (0.054) 22.565 (0.178) 28.233* (0.059) 28.975* (0.075) 25.763 (0.136) 0.000 (.) 0.000 (.) 7.859 (0.409)
N 105 105 105 105 105 224 224 224
Within R2 0.433 0.407 0.438 0.440 0.472 0.255 0.255 0.260
Between R2 0.334 0.341 0.326 0.331 0.307 0.345 0.338 0.347
Overall R2 0.288 0.302 0.290 0.289 0.282 0.252 0.243 0.255

Notes: p-values in parentheses, *p < 0.1; **p < 0.05 and ***p < 0.01
Source: Created by the authors
(continued)

after the crisis)

corporate

(pre-crisis, crisis and

results by time
Table A1.
financial

Regression analysis
performance
ESG and
 IJESM

Table A1.
During crisis (2008–2012) After crisis (2013–2020)
Variable (9) (10) (11) (12) (13) (14) (15)

ESG
0.057** (0.043)

E
0.039 (0.294)
0.044* (0.071) 0.037 (0.344)
S 0.062** (0.042)
0.032 (0.150)
0.010 (0.789)
G 0.018 (0.446) 0.016 (0.479)
0.013 (0.516)
0.006 (0.755)
RENEW
0.659 (0.798) 1.151 (0.712)
1.377 (0.392)
1.317 (0.420)
1.122 (0.490)
0.685 (0.662)
1.328 (0.419)
CR 0.551 (0.200) 0.534 (0.214)
0.364 (0.423)
0.371 (0.417)
0.318 (0.488)
0.298 (0.530)
0.375 (0.413)
MBV 0.073** (0.045) 0.078** (0.037) 0.049 (0.774) 0.045 (0.788) 0.047 (0.779) 0.049 (0.773) 0.046 (0.787)
SIZE 0.139 (0.682)
0.016 (0.974) 1.318** (0.026) 1.264** (0.029) 1.178** (0.042) 1.057* (0.059) 1.311** (0.026)
LEV
5.246 (0.327)
5.178 (0.326)
6.565** (0.043)
6.371** (0.047)
6.401** (0.048)
6.286* (0.052)
6.438** (0.047)
Constant 2.908 (0.732) 4.760 (0.647)
20.419 (0.116) 0.000 (.)
18.797 (0.151)
17.184 (0.187) 0.000 (.)
N 224 224 466 466 466 466 466
Within R2 0.256 0.269 0.055 0.058 0.058 0.059 0.057
Between R2 0.338 0.343 0.340 0.325 0.311 0.288 0.335
Overall R2 0.247 0.260 0.218 0.218 0.210 0.205 0.219
Variable (1) (2) (3) (4) (5)
ESG and
corporate

0.026 (
0.237)
ESGt
1
Et
1
0.038** (
0.037)
0.049** (
0.036)
financial
St
1
0.01 (
0.52) 0.016 (
0.421) performance
Gt
1 0.002 (
0.927) 0.01 (
0.627)
LEVt
1
8.076*** (
0.003)
8.052*** (
0.004)
8.067*** (
0.004)
8.099*** (
0.003)
7.958*** (
0.003)
CRt
1 0.101 (
0.771) 0.091 (
0.792) 0.12 (
0.732) 0.125 (
0.721) 0.083 (
0.813)
SIZEt
1 0.608 (
0.158) 0.733* (
0.073) 0.501 (
0.219) 0.424 (
0.275) 0.642 (
0.132)
Constant
12.964 (
0.276)
15.942 (
0.187)
11.211 (
0.357)
10.074 (
0.363)
15.032 (
0.205)
N 795 795 795 795 795
Within R2 0.208 0.214 0.209 0.21 0.217
Between 0.271 0.276 0.26 0.249 0.264 Table A2.
R2 Regression analysis
Overall R2 0.237 0.239 0.235 0.234 0.24
results considering
Notes: p-values in parentheses, *p < 0.1; **p < 0.05 and ***p < 0.01 the repeatedly used
Source: Created by the authors variables

Corresponding author
Georgia Makridou can be contacted at: gmakridou@escp.eu

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