The Impact of ESG Performance on Firm Profitability, Valuation, and Cost of Debt : A Comparative Study of Developed and Emerging European Markets

Abstract

This paper examines the impact of ESG performance and three key financial outcomes, profitability, firm value, and cost of debt, together with a comparative study of developed and emerging European markets. Employing a large panel of European firms across both developed and emerging markets, the study incorporates both the aggregate ESG score and disaggregated ESG pillar scores as measures of ESG performance for a more nuanced assessment of how different dimensions of sustainability affect financial outcomes. Although the relationship between ESG and financial performance has been widely studied in previous literature, the results tend to be mixed and inconsistent and lack comparability due to being heavily focused on developed or single markets. The existing comparative studies between developed and emerging markets have considerably focused on a global scope, with limited attention given to the European context. Furthermore, while profitability and firm value were extensively studied in prior literature, the cost of debt remains under investigated.

The study employs fixed-effects panel regressions to study the impact of ESG on profitability, firm value, and cost of debt by incorporating a sample of 2098 publicly listed companies for the period of 2015 to 2024, for 10 developed European countries and 5 European emerging countries based on the classification by Morgan Stanley Capital International (MSCI). The main source of ESG scores and key financial indicators for this analysis was from LSEG (London Stock Exchange Group) Workspace.

The results reveal that both overall ESG score and ESG pillar scores indicated significant and positive effects on firm profitability for the overall sample and developed markets, but positive and insignificant effects in emerging markets. The social pillar emerged as the most influential driver out of the three pillars. The ESG relationship with firm value followed the same pattern with a positive and significant effect in the overall sample and developed markets, but no meaningful impact was found in emerging markets. In contrast, the cost of debt showed no significant effect in any of the samples, indicating lenders primarily rely on financial characteristics rather than sustainability measures in credit risk assessment.