ESG and firm performance “The Impact of Aggregate ESG and Individual Environmental, Social, and Governance Scores on Firm Performance”

Abstract

This study examines the correlation between ESG performance and firm value with special em-phasis on the difference between overall ESG measures and ESG pillars. The analysis is conducted on a panel dataset of 186 S&P 500 firms between 2014 and 2024 and assumes the utilisation of fixed effects regression models in order to address heterogeneity of firms. The empirical model is furthered to incorporate firm-level financial variables, time variations, and crisis-specific vari-ables to give a more detailed picture of the ESG-firm value relationship. The results show that the aggregate ESG performance positively and statistically significantly in-fluences firm value, as indicated by the Q of Tobin, but the impact is economically small. The disaggregation of ESG shows that the social (S) pillar is the main determinant of firm value, and the environmental (E) and governance (G) dimensions do not have statistically significant im-pacts. Also, the extended control variables are included, which indicates that profitability (ROA) has a positive and significant effect on the firm value, and leverage has a negative and significant effect. The statistical significance of firm growth is not found, and further suggests that growth does not always yield immediate valuation increases. Further examination with crisis conditions added shows that the COVID-19 period positively and statistically significantly affected firm value, which is indicative of broader market dynamics in this period. Nevertheless, there is no statistical significance between the growth and the crisis, which implies that the association between growth and firm value is maintained under various economic environments. These results indicate that external shocks have an effect on the overall firm valuation, but they do not have a significant impact on the role of firm-specific growth dy-namics. Altogether, the findings emphasize that ESG cannot be viewed as a uniform concept since the value is not equally relevant across dimensions. The strong emphasis of the social pillar highlights the relevance of stakeholder participation, corporate image, and trust in determining the market valuation. This research has added to the literature by providing a more detailed and holistic view of the firm value determinants by combining ESG measures with firm-level financial and crisis-related factors. The results have significant implications for investors, corporate managers and policymakers, by highlighting that sustainable practices, in addition to the financial basics, are paramount in the performance of firms.