Abdullah Iftikhar 

Evaluating the Impact of ESG Performance on 
Corporate Financial Outcomes 

An Empirical Analysis of the European Energy Sector 

 

 

 

 

 

 

  

Vaasa 2025 

School of Accounting and Finance 
Maters Thesis in Finance  

 



2 

UNIVERSITY OF VAASA 

School of Accounting and Finance 

Author: Abdullah Iftikhar 

Title of the thesis:   Evaluating the Impact of ESG Performance on Corporate Financial 
Outcomes: An Empirical Analysis of the European Energy Sector 

Degree: Master of Science in Economics and Business Administration 

Discipline: Master's Degree Programme in Finance 

Supervisor: Vanja Piljak 

Year: 2025 Pages: 109  

 

ABSTRACT: 

This study examines the relationship between ESG disclosure and financial performance in Eu-

ropean energy companies from 2014 to 2023, analyzing 860 firms with 3,691 firm-year observa-

tions. The findings reveal that while ESG disclosure shows no significant relationship with ac-

counting performance (ROA), it has a significant negative correlation with market valuation 

(Tobin's Q). Individual component analysis demonstrates that social disclosure positively affects 

operational efficiency but negatively impacts market value, while environmental and govern-

ance disclosures show consistently negative relationships. Temporal analysis indicates that ESG 

effects on accounting performance fade after one year, but negative market reactions persist, 

suggesting structural investor skepticism toward sustainability investments in energy. These re-

sults highlight an ESG paradox where operational realities and market perceptions diverge. The 

study contributes to stakeholder theory by showing that ESG investments may not yield imme-

diate financial benefits in capital-intensive transitional industries and emphasizes the need for 

sector-specific approaches to sustainability in the energy sector. 

 

 

KEYWORDS: ESG disclosure, financial performance, energy sector, Tobin's Q, ROA,                

 sustainable finance, energy transition 

 

 

  



3 

Contents 

1 Introduction 8 

1.1 Research Background 8 

1.2 Problem Statement 15 

1.3 Research Questions 17 

1.4 Research Objectives 17 

1.5 Significance of Study 18 

1.6 Hypothesis Development 18 

2 Literature Review 20 

2.1 Conceptual Review 20 

2.1.1 ESG 20 

2.1.2 Environmental disclosures 21 

2.1.3 Social disclosures 22 

2.1.4 Governance disclosures 23 

2.1.5 Firm Financial Performance 24 

2.2 Empirical Review 25 

2.2.1 ESG Disclosure and Firm Financial Performance 25 

2.2.2 Environmental disclosure and firm financial performance 28 

2.2.3 Social disclosure and firm financial performance 30 

2.2.4 Governance disclosure and firm financial performance 33 

2.2.5 Temporal Dimensions of ESG Performance and Financial Outcomes 35 

2.3 Theoretical Framework 37 

2.3.1 Stakeholder Theory 37 

2.3.2 Institutional Theory 38 

2.4 Research Framework 41 

2.5 Research Gap 43 

3 Data and Methodology 45 

3.1 Research Approach 45 

3.2 Research Design 46 

3.3 Population 46 



4 

3.4 Sample Size 48 

3.5 Data Collection and Source 49 

3.6 Variable Measurement 49 

3.7 Dependent Variables 50 

3.8 Independent Variables 51 

3.9 Control Variables 52 

3.10 Model Specification 53 

3.10.1 Financial Performance (ROA) 53 

3.10.2 Firm Value (Tobin's Q) 54 

3.10.3 Lagged Effect Models 55 

3.11 Estimation Technique 55 

3.11.1 Panel Model Specification 55 

3.11.2 Estimation Technique 57 

4 Results and Analysis 58 

4.1 Descriptive Statistics 58 

4.2 Correlation Analysis 60 

4.3 Panel Regression Results 62 

4.3.1 Effect of Composite ESG Score on Financial Performance (ROA) 62 

4.3.2 Interpretation of Results 63 

4.3.3 Discussion in Relation to Hypothesis and Literature 64 

4.3.4 Effect of Composite ESG Score on Firm Value (Tobin's Q) 66 

4.3.5 Interpretation of Results 68 

4.3.6 Discussion in Relation to Hypothesis and Literature 69 

4.4 Effects of Individual ESG Components on Financial Performance and Firm Value

 71 

4.4.1 Disaggregated ESG Components and ROA: Fixed Effects Results 72 

4.4.2 Disaggregated ESG Components and Tobin's Q: Random Effects Results 73 

4.4.3 Interpretation of Results 74 

4.4.4 Discussion in Relation to Hypotheses and Literature 75 

4.5 Delayed Effects of ESG Disclosure 77 



5 

4.6 Delayed Effects of ESG Components 80 

5 Conclusion 86 

5.1 Synthesis of Findings 86 

5.1.1 The ESG Paradox in Energy 86 

5.1.2 Sector-Specific ESG Dynamics 87 

5.1.3 Temporal Dimensions of ESG Effects 88 

5.2 Implications 89 

5.2.1 Strategic Implications for Energy Companies 89 

5.2.2 Investment and Market Implications 89 

5.2.3 Policy and Regulatory Implications 90 

5.3 Contributions to Knowledge 91 

5.4 Limitations 91 

5.4.1 Contextual Constraints 91 

5.4.2 Methodological Considerations 92 

5.5 Future Research Directions 92 

5.6 Conclusion 93 

References 95 

  



6 

Figures 

 

Figure 1.  Global Historical Greenhouse Gas Emissions. 9 

Figure 2. Europe's’ Historical Greenhouse Gas Emissions 10 

Figure 3. Country-level data on CO2 gas emission intensity. 11 

Figure 4. ESG and Financial Performance 13 

Figure 5. ESG programs and Shareholders Value 14 

Figure 6. Research Framework 41 

 

 

Tables 

 

Table 1. Overview of the Energy Sector 47 

Table 2. Variables Description, Measurement, and References 50 

Table 3. Descriptive Statistics 58 

Table 4: Correlation Matrix 60 

Table 5. Effect of ESG Disclosure on ROA 63 

Table 6. Effect of ESG Disclosure on Tobin's Q 68 

Table 7. Fixed Effects Panel Regression Results - Effect of ESG Components on ROA 72 

Table 8. Effect of ESG Components on Tobin's Q 73 

Table 9. Effect of Lagged ESG Disclosure on ROA 78 

Table 10. Effect of Lagged ESG Disclosure on Tobin's Q 79 

Table 11. Effect of Lagged ESG Components on ROA 81 

Table 12. Effect of Lagged ESG Components on Tobin's Q 83 

Table 13. Summary of ESG Disclosure Effects 84 

 

 

 

 

 



7 

Abbreviations 

 

ESG Environmental, Social, and Governance 

ROA Return on Assets 

TQ Tobin’s Q 

ENV Environmental Score 

SOC Social Score 

GOV Governance Score 

SIZE Firm Size 

LEV Leverage 

GROWTH Sales Growth 

FE Fixed Effects 

RE Random Effects 

OLS Ordinary Least Squares 

EU European Union 

GHG Greenhouse Gas 

UN United Nations 

SDG Sustainable Development Goals 

EIKON Thomson Reuters Refinitiv Eikon 

CSR Corporate Social Responsibility 

TBL Triple Bottom Line 

VIF Variance Inflation Factor 

GRI Global Reporting Initiative 

TCFD Task Force on Climate-Related Financial Disclosures 

SASB Sustainability Accounting Standards Board 

  



8 

1 Introduction 

The first chapter of this study begins by describing the context under which ESG (Envi-

ronmental, Social, and Governance) factors have emerged, especially compared to the 

energy sector’s performance. This discussion is grounded in several data points that 

demonstrate that ESG is gaining significant importance in corporate strategies and stake-

holder engagements. Through this chapter, a rationale guiding for ESG research is pre-

sented, outlining all the burning questions that need answering in today’s global envi-

ronment around the link between ESG and corporate financial performance. This chap-

ter will then discuss the problem statements, formulate research questions and objec-

tives based on these research problems to further investigate them. Thereafter, the de-

limitation of the research will be outlined, and the importance of the research indicated 

on several grounds.  

 

 

1.1 Research Background 

Climate change, biodiversity loss, and pollution have continued to be a significant prob-

lem worldwide regarding global warming, which has influenced the shift towards the 

investments of sustainable development and green technology. Over the years, the Eu-

ropean Green Agreement represents the strategic resilient framework aimed at guiding 

the European Union towards climate neutrality by 2050, promoting green finance initia-

tives and raising businesses' optimal interest in environmental, social and governance 

(ESG) practices. By integrating environmental objectives with the principles of social eq-

uity and economic policies, the European Green Agreement seeks to position and estab-

lish Europe as a global leader in climate action and green innovation. While certain firms 

utilize Environmental, Social, and Governance (ESG) frameworks to secure a competitive 

advantage others regard them primarily to satisfy the basic operational standards and 

requirements. The transition toward sustainability inherently remains dynamic and evo-

lutionary with its far-reaching global impact. Through improved practices in resource al-

location and management, ESG integration is projected to significantly strength and 



9 

reinforce corporate credibility with long term value creation and operational resilience. 

Given that the long-term prospects of humanity become increasingly dependent and 

contingent upon sustainable practices, the integration and consideration of ESG princi-

ples into core corporate strategy has become progressively imperative for companies.  

 

 

Figure 1.  Global Historical Greenhouse Gas Emissions. 

Source: Climate Watch (2021) 

 

In this context, the pivotal role of energy consumption stands out as a central area of 

concern and opportunity for promoting sustainability.  Globally, the energy sector is re-

sponsible for an estimated 75.6% (37.6 GtCO₂e) of global anthropogenic greenhouse gas 

emissions, thereby reenforcing the dominant contributor of climate change (Climate 

Watch, 2021). As illustrated in Figure 1, the energy sector comprises a multiple range of 

activities, which include transportation, electricity and heat generation, building opera-

tions, manufacturing and construction, fugitive emissions, and other forms of fuel com-

bustion process. Regionally, as shown in Figure 2 indicated that Europe's total green-

house gas emissions amounted to 7.38 gigatonnes (Gt) of CO₂ equivalent in 2021, pre-

dominantly originating from the energy sector, thereby reaffirming its critical role in the 

region's climate impact. 



10 

 

Figure 2. Europe's’ Historical Greenhouse Gas Emissions 

Source: Climate Watch (2021) 

 

While Europe's overall emissions are significant, examining emission intensity reveals 

how individual countries differ in their energy profiles and sustainability challenges. Mul-

tiple European countries have experienced changes in CO₂ emission intensity levels 

throughout 1990 to 2010 and until 2022 as shown in Figure 3 which uses the metric of 

grams of CO₂ equivalent per kilowatt-hour (gCO₂e/kWh). The electricity production in 

countries like Estonia, Poland and Cyprus heavily depends on fossil fuel usage because 

these nations demonstrate high emission intensities. Lower emission intensities charac-

terize Sweden along with Luxembourg and France because these countries move for-

ward with renewable energy together with nuclear power as their main electricity 

sources. The diversity in greenhouse gas emissions illustrates why every nation needs to 

establish specific sustainable energy solutions that match their economic development 

and infrastructure. 

 



11 

  

Figure 3. Country-level data on CO2 gas emission intensity. 

Source: European Environment Agency (2024) 

 

Beyond emission patterns, differences in the adoption and strength of ESG practices 

across European countries provide further insight into their overall sustainability perfor-

mance. The reduction of greenhouse gas emissions requires immediate focus on energy 

production since energy accounts for roughly two-thirds of all emissions. Energy busi-

nesses receive imperative instructions to develop climate change combat strategies 

alongside recognition of how climatic occurrences influence environmental systems and 

human populations. All European energy firms have established a leading position by 

demonstrating sustainability practices (Makridou et al., 2024). Through efficient use of 

ESG frameworks these companies ensure environmental protection together with stable 

operation performance. 

 

The growing stakeholder interest in sustainability-driven practices necessitates further 

examination of the energy sector (Carnevale & Di Tommaso, 2025). Research about the 

energy sector remains insufficient because previous studies generate conflicting results 

even though few studies directly focus on this field. Due to its gaming position in 



12 

worldwide markets and extensive sustainability-oriented policies the European energy 

sector becomes an ideal setting to study ESG effects on performance. Through innova-

tive legislative acts the European Union takes a position as a global leader in addressing 

environmental issues and energy security by reducing greenhouse gas emissions and ad-

vancing renewable energy while improving overall energy efficiency standards.  

 

As part of its Paris Agreement commitment the EU created rigorous Nationally Deter-

mined Contributions that focus on minimizing greenhouse gas emissions at least 40% 

below 1990 levels by 2030. Renewable sources are steadily displacing fossil fuels as the 

primary energy source within European regions although these initial fossil fuel contrib-

utors have not been fully eliminated. Building a solid European energy market alongside 

promoting renewable energy and carbon pricing signals and enhancing energy efficiency 

and electricity and gas markets has shown substantial development throughout the past 

few years. European policies create an environment which drives the improvement of 

ESG performance at energy companies with particular emphasis on environmental initi-

atives. 

 

Through the analysis of Capece et al. (2013) European energy market features its own 

unique organizational elements along with market movement patterns and supervisory 

standards and business entity structure. Independent companies secured entry into the 

European energy market through its liberalization phase at different stages of supply 

chain development. New firms can access all production stages of energy through Euro-

pean directives. Energy companies at both the national and regional levels have under-

gone privatization with increased speed in various member states. Member states have 

created unified institutions with regulatory systems that have developed a unified en-

ergy market. European incentives for climate action alongside its green economy trans-

formation operate to create a market combination of standardized procedures with 

country-specific characteristics among member states. The adoption of ESG methods by 

European energy companies together with their resulting operational success is largely 

affected by these environment-specific elements. 



13 

 

The European energy sector maintains strong physical stability, yet its financial strength 

withstands substantial pressure from both the Covid-19 pandemic and Russia-Ukraine 

war developments. European nations strongly support ESG implementation through 

their established physical and social frameworks alongside their extensive sustainability 

promoting policies. Among global jurisdictions the EU maintains the position of having 

among the most stringent compulsory ESG reporting requirements. 

 

 

Figure 4. ESG and Financial Performance 

Source: McKinsey & Company (Delevingne et al., 2020) 



14 

 

Figure 5. ESG programs and Shareholders Value  

Source: McKinsey & Company (Delevingne et al., 2020) 

 

The relationship between ESG practices and financial performance stands clearer 

through Figures 4 and 5. A McKinsey & Company survey shows top executives and finan-

cial professionals understand how ESG matters affect business success while demon-

strating strong effects on company revenue and market worth. ESG initiatives face grow-

ing financial implications because investors together with consumers and employees and 

stakeholders are increasing their evaluation standards (Figures 4 and 5). When compa-

nies take a proactive stance towards ESG issues they can defeat increasing stakeholder 

expectations by standing apart from competitors, which leads to increased business 

value. The survey results demonstrate that customers are willing to pay a higher price 

for companies with solid ESG practices while linking superior ESG performance to supe-

rior corporate management quality. This data suggests that executives along with inves-

tors will start incorporating ESG metrics into strategic financial operations. The growing 

societal appetite for ESG stands to continue elevating its market value according to cur-

rent market trends. Businesses that delay ESG practice adoption expose themselves to 

substantial untapped business value opportunities. 

 



15 

Research focusing on the financial outcomes of ESG performance stands as an essential 

requirement because energy companies steer ESG discourse. This research examines 

ESG performance relationships with firm performance of European energy companies. 

Return on Assets (ROA) together with Tobin's Q will serve as the principal analysis varia-

bles following the implementation of a panel regression model. ROA functions as a pop-

ular accounting method to evaluate profitability whereas researchers widely use it to 

analyze ESG performance relations with corporate financial performance (CFP) (Gian-

nopoulos et al., 2022). The financial industry employs Tobin's Q to evaluate market asset 

valuation through comparing company worth against asset replacement costs. The de-

tailed evaluation of ESG performance necessitates a separate analysis of its environmen-

tal, social and governance aspects to determine individual financial performance effects. 

Furthermore, ESG adoption creates both challenges and opportunities for businesses 

across the European energy sector. 

 

 

1.2 Problem Statement 

As ESG practices gain attention among managers, investors, and policymakers, they are 

increasingly seen as valuable for providing insights that go beyond traditional financial 

data and help support better strategic decisions. A key question still remains: do ESG 

practices actually help companies gain a competitive edge, or do they simply add more 

financial burden? Researchers began exploring how sustainability impacts company per-

formance as early as the 1970s (Giannopoulos et al., 2022). The connection between 

ESG practices and corporate financial success exists as a complicated matter. Research 

attempts to dissect this relationship by observing ESG scores in total and specific ele-

ments according to Alareeni and Hamdan (2020) and Ademi and Klungseth (2022). The 

unclear outcomes from research studies demonstrate that researchers need to study 

how ESG factors interact with each other. Studies about ESG dimensions traditionally 

limit their analysis to single factors despite environmental social and governance ele-

ments working together to affect results. Research still presents contradictory evidence 

about ESG impact on firm performance by studying its parts one at a time (Giannopoulos 



16 

et al., 2022). The sector's need for comprehensive ESG analysis becomes clear because 

ESG factors interact together in such critical industries as energy sector. Studying both 

ESG composite measures and separate factors helps create a complete understanding of 

corporate performance outcomes. 

 

The energy industry stands as the major source of concern because it generates 75.6% 

of global greenhouse gas emissions which amount to 37.6 GtCO₂e. Energy corporations 

experience significant pressure from regulators together with investors and consumers 

to establish and show their ESG practices while facing growing regulatory scrutiny. The 

European energy sector continues to produce substantial emissions since it released 

7.38 gigatons of CO₂ equivalent in 2021. European energy companies managed to lower 

CO₂ emissions slightly from 5 to 6 Gt since the 1990s while still producing yearly emis-

sions between 5 and 6 Gt. The present scenario demonstrates a strong need to reconcile 

environmental preservation with corporate profits. ESG disclosure has become wide-

spread but its relationship between firm performance and value search remains uncer-

tain, especially when examining the energy sector. The correct comprehension of envi-

ronmental, social and governance aspects that impact ESG factors serves energy compa-

nies well when they operate through the complex relationship between sustainability 

and profitability. The objectives of this study are to: examine the relationship between 

sustainability (ESG) disclosure and corporate financial performance, as measured by Re-

turn on Assets (ROA); assess the link between ESG disclosure and firm value, as meas-

ured by Tobin's Q; evaluate the significance of the three ESG components, Environmental, 

Social, and Governance, in influencing firm value and financial performance. The re-

search results will yield essential knowledge about proper ESG practice implementation 

by energy companies to boost sustainability and financial performance while delivering 

important implications for decision-makers including government officials and business 

managers and financial stakeholders. 

 

 



17 

1.3 Research Questions 

This section presents the primary research questions that investigate the relationship 

between sustainability (ESG) disclosures and various aspects of corporate financial per-

formance and firm value. 

1. To what extent does sustainability (ESG) disclosure influence firm financial per-

formance, specifically as measured by Return on Assets (ROA)? 

2. What is the impact of sustainability (ESG) disclosure on firm value, with particular 

reference to Tobin's Q as a measure? 

3. Are the three components of ESG—Environmental, Social, and Governance—dif-

fer in their significance in influencing firm value and corporate financial perfor-

mance?  

4. Is there a delayed effect of ESG scores and ESG components on corporate finan-

cial outcomes (ROA & Tobin's Q)? 

 

1.4 Research Objectives 

The following objectives are intended to structure the examination of the relationship 

between sustainability (ESG) disclosures, corporate financial performance, and firm 

value. 

1. To assess the relationship between sustainability (ESG) disclosure and firm fi-

nancial performance, with a particular focus on firm profitability, using Return 

on Assets (ROA) as the primary financial performance indicator. 

2. To evaluate the influence of sustainability (ESG) on firm value, employing 

Tobin's Q as the measure of indicator of market valuation relative to asset 

value. 

3. To analyze the relative significance of the Environmental, Social, and Govern-

ance dimensions of ESG toward shaping firm value and corporate financial per-

formance. 

4. To examine whether ESG disclosure and its individual components demonstrate 

lagged effects on financial performance and firm value. 



18 

 

 

1.5 Significance of Study 

This research offers both theoretical information along with real-world applications, fo-

cusing on two main areas: how the energy industry operates and how companies prac-

tice sustainability alongside financial goals.  

 

The present research contributes to existing knowledge about stakeholder theory em-

phasizing stakeholder relationship management as a critical success factor for organiza-

tions (Freeman, 2010). It offers clear evidence on how ESG performance relates to finan-

cial outcomes, showing that strong stakeholder engagement can lead to better financial 

performance. Friede et al. (2015) discovered that firms activate better outcomes through 

their ESG programs. ESG programs operating at high standards allow businesses to de-

velop honest relationships with their stakeholders that strengthen customer loyalty and 

boost morale among employees while attracting organizational investors. With this re-

search, institutional theory receives new insights about how business environment fac-

tors impact ESG applications along with their performance implications. 

 

The study offers practical business insights which corporate managers can use to meas-

ure the real advantages of quality ESG approach implementation. The empirical results 

show how ESG performance creates financial value by linking to ROA and Tobin's Q met-

rics which proves to stakeholders that sustainable practices yield financial results. The 

combination of improved reputation with better financial results leads to sustained busi-

ness operation during long periods. 

 

1.6 Hypothesis Development 

Based on the theoretical background and existing literature, this study proposes the fol-

lowing hypotheses: 

 



19 

H0: There is no relationship between ESG disclosures with firm value and performance. 

H1: There is a positive relationship between ESG disclosures and firm profitability. 

H2: There is a positive relationship between ESG disclosures and firm value. 

H3: There is a positive relationship between environmental disclosures and firm profita-

bility. 

H4: There is a positive relationship between environmental disclosures and market value. 

H5: There is a positive relationship between social disclosures and firm profitability. 

H6: There is a positive relationship between social disclosures and market value. 

H7: There is a positive relationship between governance disclosures and firm profitability. 

H8: There is a positive relationship between governance disclosures and market value. 

 

For each of these relationships, this study also examines whether there are delayed ef-

fects of ESG disclosure on financial outcomes. The detailed theoretical foundations and 

empirical evidence supporting these hypotheses are developed in Chapter 2. 

 



20 

2 Literature Review 

The literature review chapter presents a thorough review of the existing literature on the 

link between ESG disclosures and firm financial performance. Due to growing corporate 

emphasis on sustainability, knowing the impact of these ESG measures on financial per-

formance is particularly significant for academia and business. Drawing from various the-

ories, empirics, and insights specific to the industry, this chapter utilizes existing litera-

ture to present a critical understanding of the role of ESG in firm performance. This de-

scription emphasizes the relevancy of sustainability to modern business practice and 

highlights the role that ESG disclosure practices play in altering corporate financial and 

market performance. 

 

 

2.1 Conceptual Review 

2.1.1 ESG 

Corporate sustainability has become the subject of increasing interest in the past years 

due to the debate around several environmental problems. Concerns amidst global 

warming, climate change, pollution, emissions, and smog are for the first time “pressing 

organizations to attempt protecting the rights of stakeholders in particular society and 

the environment” (Christensen et al. 2021). In reaction to these increasing concerns, the 

United Nations’ Principles for Responsible Investment (PRI) included the concept of En-

vironmental, Social, and Governance (ESG). From an even broader perspective, ESG rep-

resents the composite of a company’s ecological, social, and economic activities – cap-

turing in a nutshell the move towards sustainable business practices that has been ob-

served by scholars and practitioners (Paolone et al., 2022) 

 

 

 



21 

2.1.2 Environmental disclosures 

Environmental disclosures are information on natural environment designed to focus on 

a company’s effects on the natural environment and cover a wide variety of dimensions 

of sustainability (Amel-Zadeh & Serafeim, 2018). These disclosures are increasingly rele-

vant as greater transparency about corporate environmental practices is being re-

quested by stakeholders such as shareholders, consumers, and regulators. Environmen-

tal disclosures are particularly centered on carbon emissions (Alessi et al., 2021). Report-

ing greenhouse gas emissions is important, especially due to the increased societal con-

cern regarding climate change issues and the impact in the environment and communi-

ties across the globe. 

 

Apart from transparency about carbon footprints, stakeholders expect companies to 

provide comprehensive details of planned carbon-cutting measures. An example of this 

would be the Carbon Disclosure Project (CDP), which has created a well-structured and 

widely adopted framework for companies to report their environmental impacts (CDP, 

2020). Companies that take part in initiatives like these not only meet regulatory re-

quirements but also improve their reputation among environmentally aware stakehold-

ers. 

 

Publicizing carbon emissions reports provide for an organization’s transparency in terms 

of its sustainability dedication, and its preparedness to manage climate related- risk, a 

view available to stakeholders (Alessi et al., 2021). 

 

Biodiversity has also gained relevance in environmental disclosure. Accountability from 

companies focuses on the biodiversity and ecosystems affected and means that compa-

nies need to report and answer for their strategies and actions related to the conserva-

tion of natural habitats, stopping deforestation and generating conservation efforts 

(BenDor et al., 2014). They have an interest in learning about the impact of operations 

on local ecosystems and wildlife. They openly engage with biodiversity challenges, by 

revealing their participation in conservation or habitat restoration, or collaborating with 



22 

ecological organizations. This is not just about meeting moral responsibilities, but also 

about building resilience to possible regulatory risks as well as negative publicity risks 

because of environmental damage. 

 

 

2.1.3 Social disclosures 

Social disclosures are most significant in revealing how a company treats its different 

stakeholders, from employees to suppliers, customers and the local community. Disclo-

sure of these informants of the corporation’s social responsibility (CSR), are not just a 

virtue of CSR, but also of trust building and transparency between different stakeholders. 

Perhaps the most important type of social disclosures relates to labor issues. Labor prac-

tices of companies, such as the employee treatment and contribution to diversity and 

inclusion in the workplace and compliance with labor rights, are now something that 

companies are required to shed light on (Singhania & Saini, 2023). Indeed, companies 

with a focus on employee well-being and diversity consistently outperform others in 

terms of performance, innovation, and lower levels of turnover (Edmans, 2011; Singha-

nia and Saini, 2023). Transparency in how companies treat their workforce can have a 

salutary effect to increase worker’s morale and productivity. In addition, publicly sharing 

information about efforts around diversity and inclusion can promote a strong company 

identity, enabling the attraction of talent from a wider talent pool, and leading to a fairer 

working environment as a whole. 

 

Engagement with communities is another key dimension of social disclosures. Organi-

zational disclosure is increasingly important in providing information about companies’ 

support in the community, which might include their charitable nature as well as how 

they affect the local population (Dhaliwal et al., 2012). Not only does direct engagement 

in communities and social issues lead to a positive corporate reputation, it also builds 

customer and stakeholder support (Porter & Kramer, 2011). Such efforts, including local-

ized education programs, job training, and public health initiatives, also help to create 

social capital for the firm. Not only will companies be able to strengthen their bonds to 



23 

local communities, but they will open up greater avenues for better customer loyalty 

and a positive image overall by contributing to community development. In social dis-

closures as well, customer responsibility is one of the highlighted areas. Firms are also 

coming under growing pressure for responsibility to customers, particularly regarding 

product safety, consumer privacy, and ethical marketing practices. But brand transpar-

ency can be facilitated by clear disclosures of such practices which enable brand integrity 

through trust building (Lins et al., 2017).  

 

 

2.1.4 Governance disclosures 

Governance disclosures are essential in setting structures and procedures to conduct 

business ethically and efficiently within a company and they are not only a sign of a firm’s 

ethical responsibility, but they are also a way to build trust with stakeholders and achieve 

long-lasting sustainability (Amiraslani et al., 2023). 

 

 The board structure is a key component of governance disclosures. And so, an important 

aspect of corporate governance to judge the quality of company’s corporate governance, 

has been to have information on board composition, diversity and independence 

(Arayssi et al., 2020). A diverse and independent board is often indicative of good gov-

ernance in that it should reduce managerial opportunism and lead to a more effective 

oversight and decision-making process (Adams and Ferreira, 2009). According to Arayssi 

et al. (2020), different boards can provide insights and experience that enrich discussions 

such as those related to strategic decision making, risk and stakeholders management 

among others. Also, independent directors will tend to be free of conflicts of interest 

that may hinder their ability to act in the interests of shareholders, and in the interests 

of corporate industry and the community. As transparency in this area allows stakehold-

ers to have comfort in the quality of the board in overseeing the company, it also reflects 

an adherence to fairness and ethical behavior. 

 



24 

Executive pay is another substantial part of governance disclosures. Companies face im-

mense pressure to disclose their policies related to executive pay, with a specific em-

phasis on how these compensation packages align with ESG goals (Bolton & Kacperczyk, 

2021). The idea is that performance-based pay tracks company performance against ESG 

metrics can motivate responsible corporate behavior and align decision-making with 

stakeholder interests. This fosters a culture of sustainability at the organization since 

executives are accountable to meet certain ESG goals. In addition, it reassures the public 

that income inequality and excessive pay packages will not be present in these types of 

corporate governance as long as there are transparent disclosures regarding executive 

compensation. Good ethical practices represent another important category of disclo-

sures about governance. This includes measures to deter corruption, fraud and conflicts 

of interest, as well as to guarantee transparency in the process of decision making. 

Strong governance is important for creating trust with stakeholders and enhancing the 

reputation of the firm (Davis &Thompson, 1994). By establishing this type of ethical com-

pany with long-term integrity it is better positioned to face challenges and reduce risk. 

Organizations can help to strengthen internal and external cultures of accountability and 

trust by implementing and disclosing strong ethical frameworks. 

 

 

2.1.5 Firm Financial Performance 

Strong financial performance is a key sign of a broader company’s health and opera-

tional efficiency. It is generally measured by several indicators that provide information 

on the efficiency in the use of resources by a company to create profits. Two common 

performance metrics in this regard are Return on Assets (ROA) and Tobin’s Q. Firstly Re-

turn on Assets (ROA) is a significant indicator to examine as it is referred to essentially 

capture how well a company generates profit from its assets (Giannopoulos et al., 2022). 

It is the percentage of which net income is obtained from total assets. It gives a measure 

of how well investment is being utilized by management to generate profits. A higher 

ROA is better because it means the company is using its assets more efficiently and 

shows the company is successful in turning investments into profits. It is especially 



25 

beneficial to contrast a given company to others in the same industry to give a view on 

operational efficiency and efficiency of asset management. So, it has been reported that 

firms having a higher ROA “tend to be financially more stable and more attractive to 

investors who are interested in consistent returns” (Delen et al., 2013). 

 

On the other hand, Tobin’s Q is a market-based indicator calculating the market value 

of an enterprise to the replacement cost of its assets (Chung & Pruitt, 1994). Market-to-

book is calculated as the market value of a firm’s assets (equity market capitalization + 

debt) over the replacement cost of the assets. Finally, Tobin´s Q larger than one indi-

cates that the market value of the company is above the cost of replacing its underlying 

assets, hinting positive growth potential and confidence in the firm. In contrast, a 

Tobin's Q lower than one may indicate that the market believes that the company's as-

sets are overvalued, or it is not achieving the maximum level of performance (Tobin, 

1969). It is a key metric to consider when making long-term investment decisions and 

determining whether a company is executing correctly to maximize shareholder wealth. 

In this sense both ROA and Tobin’s Q are interesting for the study of Corporate Financial 

Performance, but they aim to analyze different phenomena. ROA measures a firm’s prof-

itability and operational efficiency compared to asset utilization, while Tobin’s Q 

measures market performance and future growth as compared to the replacement cost 

of the assets. These are relevant for investors, managers, and all stakeholders who wish 

to evaluate a company’s financial wellbeing in order to make investment, strategic, and 

other decisions. 

 

 

2.2 Empirical Review 

2.2.1 ESG Disclosure and Firm Financial Performance 

Environmental, Social, and Corporate Governance (ESG) is a leading way to measure cor-

porate behavior and evaluates on a tri-pillar non-financial basis of sustainability and eth-

ics. ESG investing focuses on environmental responsibility, social well-being, and good 



26 

corporate governance in order to improve the performance and investment appeal of a 

firm.  

 

With the popularity of this approach, the pressure on companies to engage in commu-

nication and disclosure of their ESG initiatives also grows. These disclosures are likely to 

represent an attempt of the company to show the support of sustainable behavior that 

would in turn can lead to better performance of the firm (Edmans, 2011). The direct 

benefits of ESG reporting to firms, subsequently in the form of increased financial per-

formance, have been an ongoing debate. 

 

While the emphasis on ESG has been increasing, the relationship between ESG disclo-

sure and firm performance remains unclear. Though it’s common practice to use ESG 

scores of corporate sustainability in investment decisions, in fact, the most well-known 

rating agencies always deliver scores, however many investors continue to doubt about 

the accuracy of these ratings. Evidence shows that investors mistrust the idea that high 

ESG scores lead to better performance for firms. According to (Gibson et al., 2021) the 

performance of the ESG-focused funds had no significant difference from the perfor-

mance of the generally focused funds between 2004 and 2018, which implies that the 

relationship between ESG scores and the financial results is not clear. As a result, some 

people have begun to question whether ESG ratings are reliable and whether they can 

predict long-term financial performance.  

 

From the side of corporations, ESG is more mixed. Though the concept of ESG is becom-

ing more accepted among companies, the degree of commitment remains inconsistent. 

Limited surveys performed in 2021 found that only 48% of companies are all in on ESG 

practices and only 20% of C-suite executives feel their efforts have a global impact on 

ESG goals (Krueger et al., 2020). This lack of confidence demonstrates the inherent diffi-

culties companies are experiencing in trying to infuse ESG into a fundamental business 

strategy. As ESG becomes more relevant, although it offers many benefits, firms must 



27 

face not only the inevitable regulatory environment but also the evolving investor ex-

pectations and different demands of consumers. 

 

Arguably the most important issue with respect to this debate is the relationship be-

tween ESG disclosure and firm profitability and value. On the other hand, proponents 

suggest that ESG disclosures, by increasing transparency and trust between firms and 

stakeholders, can increase the company’s financial performance. Those companies that 

specifically advocate to their ESG activities will be perceived more as drivers of social 

responsibility and innovation, and so they may become favored by a variety of stake-

holders, including consumers, employees and regulators. In addition, companies with 

strong ESG performance are generally better equipped to mitigate risks, eliminate oper-

ational waste, and take advantage of new market opportunities. Given these factors, it 

is possible that ESG disclosure may lead to increase profitability of the company and 

overall firm value (Arif et al., 2021; Barko et al., 2022). 

 

However, critics argued that the expenses of implementing ESG initiatives, especially in 

high-risk environmental industries or in developing regions with weaker regulatory 

structure, can outweigh the benefits. For companies involved in energy-intensive indus-

tries, making the switch to greener practices usually involves big upfront costs — in 

technology, energy efficiency, or supply chain changes. This can be quite significant, es-

pecially for smaller companies with limited resources, where justifying ESG-related ex-

penses in the short term becomes an arduous task. Thus, ESG can be considered for 

some companies as a mere compliance matter instead of an area with strategic upside 

potential to drive growth and create additional market value (Christensen et al. 2021) 

 

In addition, ESG is being perceived more and more as a source of long-term financial 

value by investors. Studies have showed that companies with solid ESG disclosure gen-

erally have higher stock prices, meaning that investors have confidence in their ability to 

sustain financial performance. ESG focused companies are seen as lower risk invest-

ments as they are less affected by changes in regulations, markets and stakeholders 



28 

because they are more prepared to manage these issues. Hence, companies that are not 

transparent regarding their ESG initiatives could be in a weaker position to access capital 

and growth prospects on the long term (Christensen et al. 2021) 

 

Yet, it is important to note that ESG disclosure and financial performance do not corre-

late in all cases. The impacts of ESG practices on the bottom line are influenced by in-

dustry-specific characteristics, geography, and firm size. For example, firms in higher risk 

industries, such as energy or mining, may have a higher cost to implement ESG programs, 

or companies in regions with less regulation may have less incentive to focus on sustain-

ability. These differences show the necessity for a more nuanced understanding of the 

effects of ESG disclosure on various types of firms in different contexts. But, despite the 

perceived difficulties, there is increasing evidence that ESG disclosure can improve rep-

utation, stakeholder relations, and investment in the firm, which can translate into long-

term financial benefits. With the growing global trend towards sustainability, companies 

effectively communicating ESG practices will have better access to capital, lower operat-

ing risks, and a stronger market position. Investors are also starting to favor companies 

that show a commitment to ESG, considering them better positioned to deal with the 

new business environment. Thats why more research is required to understand what 

makes ESG effective and what are the best ways to integrate ESG in the corporate strat-

egy. This can only prepare firms to take advantage of opportunities that the environment 

of sustainable investing can offer. 

 

 

2.2.2 Environmental disclosure and firm financial performance 

In terms of the environmental side of corporate governance, there is an increased focus 

on companies being environmentally responsible that businesses are starting to see the 

need to be more environmentally sensitive. These efforts are not just about compliance; 

they are about being good corporate citizens as well as increasing competitiveness and 

building better relationships with stakeholders. Environmental sustainability can be a 

source of competitive advantage and of improved performance and reputation, in 



29 

addition to being a long-run determinant of firms’ success and profitability (Flammer, 

2013).The relationship between environmental practices and financial performance, 

however, is not straightforward. The financial commitment to realize sustainable invest-

ments is imperative and may not be equally appreciated by all stakeholders (Hartzmark 

& Sussman, 2019). 

 

Despite these difficulties, most of the literature seems to at least favor the hypothesis 

that environmental performance and stakeholders’ expectations are beneficial. Through 

the alignment of this strategy, firms can reduce risk, innovate, and add value, which al-

together contributes as a competitive sustainable advantage over competitors (Goss & 

Roberts, 2011). Plus, it has been observed that environmental performance affects the 

speed of adjustment (SOA) towards the target than social and governance performance 

(Chava, 2014). It reinforces the need for a stakeholder orientation in the formulation of 

corporate strategy, where companies integrate stakeholders’ expectations, in order to 

achieve beneficial environmental and financial results. 

 

ESG’s environmental criteria refers to a firm’s respect for the natural environment and 

how it determines practices for waste management, emissions reductions, efficient en-

ergy utilization, and mitigating climate change. More recently, firms have recognized the 

importance of environmental sustainability as a result of increasing pressure from stake-

holders and, more importantly, as a means to achieve better financial performance. In-

creasingly, there is evidence that environmental responsibility and financial success are 

positively related. For example, proactive environmental firms may actually perform bet-

ter financially given that reducing waste incorporates efficiencies in innovation and other 

business processes (Hart & Ahuja, 1996). 

 

On the contrary, low environmental performance may result in heavy, reputational and 

financial, costs (Karpoff et al., 2005). Firms with weaker environmental performance may 

be subject to legal actions, fines and other possible regulatory consequences that may 

affect their financial position. Also, the reputation risk of unsustainable practices may 



30 

also hamper sales, profitability and share value in the long run. As a growing number of 

businesses understand the importance of sustainability, more and more are moving to-

wards responsible environmental practices along the entirety of their supply chain. 

Among these, green supply chain practices reduce risks and costs as well as enhance 

financial performance (Sharfman & Fernando, 2008). On top of that, corporate social 

responsibility, which includes environmental initiatives, has been found to impact con-

sumer response to firms (Sen & Bhattacharya, 2001). Investors are also paying more at-

tention to ESG factors in their investment decisions, which encourages companies to 

contribute in environmental terms as well.  

 

Worldwide, firms have been adopting green practices to reduce emissions and looking 

for how this can be profitable for them (Albuquerque et al., 2019). Studies have demon-

strated mixed results in the relationship between environmental performance and firm 

financial performance. Contradictorily, while some research finds a positive relationship 

between environmental practices and firm performance (Endrikat et al., 2014), other 

work also suggests that environmental efforts may in fact have a negative effect. In fact, 

Arslan-Ayaydin and Thewissen (2016) found that, “firms that engage in environmental 

responsibility do not outperform the market and do not yield significantly positive re-

turns especially in high uncertainty environments”. They also found no need to lose prof-

itability in some types of activities, like energy, to make space for environmental con-

cerns. 

 

 

2.2.3 Social disclosure and firm financial performance 

The link between social disclosure and economic performance of the firm has been ex-

tensively studied, with reference also to the stakeholder theory (Pedrini and Ferri, 2019 ). 

According to this theory, firms that are proactive in their relationship with stakeholders 

and have a commitment to social responsibility will have superior financial performance. 

The benefits of these outcomes are improved public perception, easier modes of opera-

tion, and a competitive edge from the “goodwill and trust that ethical and responsible 



31 

business practices generate among the stakeholders”. Its social capital can indeed miti-

gate some risks and increase operational efficiency (Pedrini & Ferri, 2019). Yet, this pos-

itive correlation is not without its complexities. Its impact may differ according to firm 

size, industry, regional context and the kind of social initiatives that are implemented (El 

Ghoul et al., 2011). 

 

The empirical research has yielded a variety of insights into the relationship between 

social and financial performance. Maqbool and Bakr (2019), indicate a positive associa-

tion between increased social performance and improved financial performance. Often, 

this is explained by the fact that socially responsible practices develop a better corporate 

reputation and create higher levels of stakeholder satisfaction. For instance, Servaes & 

Tamayo (2013) demonstrated that social performance has a direct positive impact on 

firm performance, especially in consumer-oriented sectors, where corporate reputation 

could directly affect revenues and profitability. In such areas consumers are more likely 

to patronize companies that show strong dedication to social responsibility. 

 

The beneficial impact of social disclosure is not constant across all industries. On the 

other hand, Barnett & Salomon (2012) offer a note of caution, indicating the possibility 

of social programs leading to negative results over the long run. They claim that social 

responsibility activities may create a positive impact on financial performance in the 

short run but when the amount of funds invested in these activities is too high then the 

costs can outweigh the benefits. This is of particular interest in markets where consumer 

demand for social initiatives is not as prevalent, as firms are likely to find it more difficult 

to continue to invest in social responsibility. 

 

Social aspect of ESG performance refers to company’s social relationships with employ-

ees, customers, suppliers, and the society at large (Becchetti et al., 2012). Strong social 

performance includes labour standards, health and safety, engagement with communi-

ties, and customer relations, among others. Companies that have strong commitment to 

social practices typically benefit from greater employee morale, lower turnover, and 



32 

more customer loyalty, which in turn lead to better financial performance. Also, compa-

nies that engage in positive relationships with the community may even have a better 

public image, which translates into higher sales and profits (Malik, 2015). On the other 

hand, ignoring social responsibilities can also cause negative effects like strikes, lawsuits, 

or negative brand image. For example, bad labor practices can yield decreased produc-

tivity and legal problems (Dahan et al., 2023) and inaction to customer and community 

issues can result in lost sales and market share (Werther & Chandler, 2005). 

 

While there is a general consensus that social responsibility can lead to enhanced finan-

cial performance, some researchers suggest that the relationship is not that simple, nor 

necessarily motivated by financial incentives. As McWilliams and Siegel (2000) have in-

dicated, companies could behave in a socially responsible manner even without the 

profit maximizing motive, for reasons such as legislation or stakeholder activism. As ex-

plained by Barnett and Salomon (2006) the relationship between social performance and 

financial performance may be on a U-shaped curve. For firms with social performance 

at a moderate level, the financial returns may not be as clear.  

 

The effects of CSR on financial performance have been much debated with mixed results. 

(Margolis et al., 2009) emphasize that although most of the existing research sustains 

the belief that CSR activities result in superior financial performance some other re-

search has found non-significant or negative results. For example, Blasi et al. (2018) pro-

vide evidence in favour of a general positive relationship between CSR expenditure and 

financial performance as a result of a firm reputation and investment inflows. Likewise, 

Okafor et al. (2021) indicated that companies with robust CSR activities are more likely 

to be able to attract a greater number of investors and are likely to enjoy better financial 

performance. This is congruent with (Orlitzky et al., 2003) findings, indicating that CSR is 

a relevant factor in the financial performance of the companies analyzed.  

 

However, other research has found the opposite. For instance, Peng and Yang, (2014); 

Akben Selcuk and Kiymaz, (2017); and Alareeni and Hamdan, (2020) did not find any 



33 

relevant, or even found some negative, correlation between CSR and financial perfor-

mance, indicating that the financial return on CSR is not always the case. These mixed 

results highlight how the relationship between social programs and financial perfor-

mance is contingent on several factors including industry type, level of CSR involvement, 

and specific market conditions. 

 

 

2.2.4 Governance disclosure and firm financial performance 

Corporate governance is the set of processes and structures by which a corporation is 

directed and controlled. This includes such critical elements as board composition, exec-

utive pay practices and shareholders’ rights. Good corporate governance is important in 

improving decision making, lowering the risk of scandals and building shareholder and 

stakeholder trust. For example, de Villiers and Dimes (2021) found that firms with good 

governance mechanisms often obtain better access to capital markets and lower costs 

of capital. On the contrary, weak governance is associated with mismanagement, finan-

cial irregularities and a big loss of confidence among shareholders, as Velte (2023) points 

out. At the far end of the spectrum, governance failures can lead to scandals that destroy 

shareholder value and tarnish an organization’s reputation for years to come. 

 

Good governance means having stakeholder-oriented governance practices that contrib-

ute to better firm performance. Having ethical codes, encouraging partnerships and 

stakeholder participation, and being transparent can all make corporate governance 

more effective. These practices create trust, lower agency costs, and allow for more ef-

ficient resource allocations in the organization (Gompers et al., 2003). Also, boards that 

are more concerned with diversity and strategic composition will be able to better re-

spond to the heterogeneous needs and expectations of stakeholders, with positive con-

sequences on firm performance (Simionescu et al., 2021). But it is important to note that 

the link between governance and performance is not universal and contingent to differ-

ent organizational, cultural and regulatory settings (La Porta et al., 2002). 

 



34 

There is empirical evidence to support the notion that high governance firms are better 

able to make well-informed investment decisions, have higher operational performance, 

and make strategic decisions that are conducive to creating long-term value for their 

stakeholders. For example, Elamer & Boulhaga (2024) showed that well-governed firms 

are more operationally efficient than their peers. But it is not to be forgotten that the 

link between governance and performance has context specificities, which may depend 

on, among other things, the size of the firm, industry sector, prior legal and regulatory 

environment. For instance, (Aggarwal et al., 2009) argues that the positive effect of gov-

ernance on firm performance is magnified under conditions of strong investor protection.  

 

There is also a well-established relationship between good corporate governance and 

better financial performance. Arora and Sharma (2016) and find a positive impact of cor-

porate governance in general on firm performance in different industries. Financial per-

formance is positively affected by specific governance mechanisms, such as independent 

boards, board quality, and shareholder strength (Stanwick & Stanwick, 1998). In addition, 

the adoption of efficient corporate governance has been related to better financial per-

formance. Corporate governance is also positively related to corporate sustainability per-

formance which can positively affect financial performance as well. Ntim and Soo-

baroyen (2013) argue that as firms improve their governance practices, they are more 

likely to develop socially responsible agendas and thus engage in more corporate social 

responsibility (CSR) activities. Such a combination of CSR with governance practices has 

a higher positive impact on corporate financial performance than CSR alone. 

 

The importance of corporate governance has received much attention, particularly after 

the economic crises of 2008-2009. Various research studies have examined the impact 

of corporate governance (CG) on different measures of firm financial performance with 

diverse outcomes. Although governance quality has often been said to have a positive 

relationship with financial performance, some studies find mixed or even negative re-

sults. For example, (Bhagat & Bolton, 2008) found a positive impact of governance on 

performance of institutions in the Nordic financial sector, indicating that good 



35 

governance leads to more profits by better utilizing assets. Contrarily, there are studies 

such as Conca et al. (2020) which find a negative impact of corporate governance over 

financial performance. These mixed results, notwithstanding, there is a general agree-

ment that corporate governance does have a positive effect on the firm’s financial per-

formance. 

 

 

2.2.5 Temporal Dimensions of ESG Performance and Financial Outcomes 

ESG performance may affect financial outcomes differently across time periods. Many 

sustainability initiatives require extended periods before generating returns. Research-

ers now recognize that ESG investments often involve significant upfront costs. The ben-

efits of these investments may only appear after a delay (Eccles et al., 2014; Fatemi et 

al., 2018). 

 

Research indicates the ESG-financial performance relationship follows a dynamic pattern. 

Wang and Sarkis (2017) found ESG practices needed at least a two-year lag before posi-

tively affecting financial performance. Their study showed immediate ESG implementa-

tion creates short-term costs. Financial benefits emerge later as stakeholder relation-

ships strengthen. Krüger (2015) observed strong negative market reactions to ESG events 

in the short term. These reactions moderate over time. 

 

Stakeholder theory helps explain this dynamic relationship. Building stakeholder rela-

tionships through ESG initiatives takes time. Eventually, these relationships yield finan-

cial benefits (Brooks & Oikonomou, 2018). Gregory et al. (2014) found CSR investments 

initially reduced cash flows. Later, they improved growth opportunities and reduced firm 

risk. Industry-specific factors influence these temporal dynamics. Energy and other cap-

ital-intensive industries often require longer periods to generate returns from sustaina-

bility investments. This delay occurs due to substantial infrastructure requirements. En-

vironmental initiatives show the strongest lagged effects in high-environmental-impact 



36 

industries. Initial compliance costs eventually translate to operational improvements 

(Galema et al., 2008). 

 

The concept of "ESG momentum" emphasizes time-based effects. Nagy et al. (2016) 

found changes in ESG ratings associated with subsequent stock returns. This suggests 

improvement of trajectories matter more than static performance. Markets reward firms 

demonstrating commitment to improving ESG performance over time. Artiach et al. 

(2010) identified lag structures between sustainability and financial outcomes. Sustain-

ability leadership often followed financial outperformance rather than preceded it. This 

raises questions about causality in the ESG-financial performance relationship. 

 

Market-based measures show persistent ESG impacts. Luo and Bhattacharya (2009) 

found corporate social performance influenced firm value for up to two years. Market 

reactions evolved as information asymmetry decreased. El Ghoul et al. (2011) demon-

strated ESG performance had sustained effects on cost of equity capital. These benefits 

accumulated over time. 

 

Understanding temporal dimensions proves particularly important during energy transi-

tion. Firms face pressure to make substantial sustainability investments. These invest-

ments may initially reduce financial performance. Later, they could yield competitive ad-

vantages (Horváthová, 2012). Examining only contemporaneous effects may lead to in-

complete conclusions about ESG initiatives (Sassen et al., 2016). 

 

Prior research indicates that ESG effects often follow distinct temporal patterns. Initial 

ESG investments frequently show neutral or negative short-term financial impacts. 

These impacts typically transform over time. Environmental initiatives particularly 

demonstrate delayed benefits, with initial compliance costs eventually yielding opera-

tional efficiencies. Social initiatives show mixed temporal patterns, sometimes producing 

immediate reputational benefits but requiring longer periods for operational 



37 

improvements (Luo & Bhattacharya, 2009). Governance changes often demonstrate the 

most rapid financial effects, though these too evolve over time (El Ghoul et al., 2011). 

The energy sector presents unique temporal challenges due to its capital-intensive na-

ture and regulatory environment. Sustainability investments in this sector may require 

particularly extended periods before generating returns (Galema et al., 2008). Market 

reactions to ESG initiatives also demonstrate temporal evolution, with initial skepticism 

sometimes giving way to recognition of value as initiatives mature and prove their worth 

(Krüger, 2015). Understanding these time-dependent patterns is essential for accurately 

assessing the relationship between ESG disclosure and financial outcomes, particularly 

in sectors undergoing significant sustainability transitions (Sassen et al., 2016). 

 

 

2.3 Theoretical Framework 

2.3.1 Stakeholder Theory 

According to stakeholder theory, successful organizations are those that can manage and 

reconcile the diverse interests of a variety of stakeholders, such as employees, customers, 

suppliers, communities, and investors (Freeman, 2010). It calls for a transition from the 

shareholder centered paradigm to a more inclusive paradigm of creating value and be-

having ethically. This will in turn push organizations to view the concerns of stakeholders 

in a more comprehensive manner that encompasses all aspects and desires of all stake-

holders as important for the long-term sustainability and success of the organization. 

The role of stakeholders in creating a space for continuing with operations and expansion 

processes cannot be overstated (Clarkson, 1995).  

 

It is the perceptions of stakeholders that can have an impact on a firm’s ESG conduct. A 

favorable perception by stakeholders will increase the reputation of a firm, attract and 

maintain customers, as well as investor confidence, which is essential in gaining compet-

itive advantage and achieving higher financial performance levels (Eccles et al., 2014). 

Alternatively, negative attitudes may produce boycotts, divestment, and reputational 



38 

harm and, ultimately, harm the firm’s long- term viability. This makes understanding and 

engaging with stakeholders essential for firms that wish to customize their ESG strategy 

to be in line with stakeholders’ desired outcomes. 

 

In the investor’s point of view, a company’s ESG performance shows their commitment 

to long-term sustainability and doing the right thing (Dimson et al., 2015). Investors may 

use high levels of ESG performance as a proxy for a firm's commitment to sustainability 

and in turn impact investment decisions and the cost of capital. As for the performance 

of companies, there is empirical evidence supporting a positive association between ESG 

practices and performance, while, from a theoretical point of view, stakeholder theory 

provides some explanations by stressing the relevance of trust, loyalty and cooperation 

among multiple stakeholders.  

 

Given the motivation behind this study, stakeholder theory is an adequate baseline to 

analyses the relationship between ESG disclosure and corporate financial performance, 

particularly in terms of Return on Assets (ROA). In this way, the ability of stakeholder 

engagement to affect ESG performance can help the present study in determining the 

cost of disclosure of ESG information. On top of that, the value of the firm, as proxy by 

Tobin’s Q, can be interpreted using the expectations of the stakeholders and how well 

the firm has met these expectations and how such fulfillment of the expectations can 

have a positive impact on the market valuation. 

 

 

2.3.2 Institutional Theory 

This theory maintains that the institutional context, which includes the regulatory envi-

ronment, culture, and social norms and expectations, has a profound effect on the be-

haviors, strategies and overall success of firms (Huang & Sternquist, 2007). Institutional 

Theory states that organizations must comply with external norms and rules to gain le-

gitimacy, resources and survival for business- Regarding the ESG, this theory highlights 



39 

that companies are driven by internal purposes and external pressures to engage in sus-

tainable and socially responsible activities. 

 

The first research goal is to investigate the relationship between the level of disclosure 

on sustainability (ESG) issues and the financial performance of companies, in terms of 

profitability as measured by Return on Assets (ROA). Institutional Theory has supported 

analyses on ESG and firm performance by proposing that firms are not only driven by 

internal motivations and by the market but also by external institutional pressures        

(Iatridis & Kesidou, 2018). Formal regulations, standards and policies as well as informal 

norms and stakeholder expectations, are some of the pressures. Strong regulation and 

good governance are part of the higher quality institutional environment that is required 

in order to encourage the adoption and success of ESG practices. Firms that operate in a 

more heavily regulated environment are more likely to engage in ESG activity because of 

the higher compliance standards in such an environment and the associated high costs 

of non-compliance. 

 

The second objective of this research is to determine the effect of sustainability (ESG) 

disclosure on firm value, where Tobin’s Q is leveraged as the market value of the firm’s 

assets relative to their book value. From a theoretical perspective, it has been suggested 

that, in countries with well- established regulation and efficient governance, companies 

are more likely to integrate a full set of ESG measures because of high levels of compli-

ance and accountability (Singhania & Saini, 2023). This supportive environment sensi-

tizes firms to the effects and benefits of ESG initiatives on firm performance. When pol-

icies are effective in reducing uncertainty and risks in investing in ESG, firms can allocate 

resources to sustainable activities and practices (Singhania & Saini, 2023). 

 

The third objective of this study is to determine the weight of each of the three ESG 

pillars- environmental, social and governance- in the determination of firm value and 

corporate financial performance. Institutional Theory also brings the idea of institutional 



40 

isomorphism, which argues that, in the same institutional environment, firms tend to 

adopt similar practices to obtain legitimacy and to adhere to societal norms.  

 

In considering the relevance of external institutional environments in the effectiveness 

of ESG practices, Institutional Theory offers a broader perspective. In this sense, this re-

search contributes to the existing literature by investigating the role of regulatory quality 

and government effectiveness in the ability of ESG practices to improve firm perfor-

mance in Europe. This vision is important as it highlights the role that institutions can 

have in fostering a culture and offering incentives for a sustainable business model. 

 

This time-dependent perspective, research objective four, enriches the framework by 

acknowledging that ESG effects may not be immediately observable but might emerge 

over subsequent periods. The concept of "ESG momentum" further emphasizes this dy-

namic aspect, suggesting that improvement trajectories in ESG performance may be 

more financially relevant than static scores. For energy companies undergoing sustaina-

bility transitions, understanding these temporal patterns is particularly crucial, as market 

valuation may initially respond skeptically to ESG investments before recognizing their 

long-term value. By incorporating both contemporaneous and lagged measures, the 

framework provides a more comprehensive view of how ESG disclosure translates into 

financial outcomes across different time horizons. 



41 

2.4 Research Framework 

 

 

Figure 6. Research Framework 

 

The research model provides a general overview of the relationships between Environ-

mental, Social, and Governance (ESG) disclosures, corporate financial performance, and 

firm value (Figure 6). This approach is consistent with the research goals of examining 

the relationship between ESG disclosure and firm financial performance, understanding 

the effect of ESG disclosure on firm value, looking at the differential relevance of the 

three pillars of ESG, and exploring the differential impact that ESG scores have on finan-

cial performance and firm value.   

 

At the center of the framework is ESG Disclosure, defined as the degree to which firms 

disclose information on their sustainability practices and performance to stakeholders. 

This is important as it helps to formulate the first research objective, which seeks to an-

alyse the relationship between ESG disclosures and corporate financial performance, as 

measured by Return on Assets (ROA). The established literature indicates that corpora-

tions that are more transparent about their ESG practices perform better financially, be-

cause stakeholders are increasingly demanding that they be accountable and act ethi-

cally. Strong ESG disclosure shows the market that the company is well managing its risks 

ESG Disclo-

sure 

Environmental Disclo-

sure 

Social Disclosure 

Governance Disclosure 

Firm Financial Perfor-

mance 

(ROA, Tobin's Q) 

Stakeholder Theory Institutional Theory 



42 

and is committed to sustainable behavior and can thus lead to better financial perfor-

mance. 

 

The framework links to Corporate Financial Performance based on ESG disclosures. It is 

a straight reflection of a company's efficiency in using its assets to produce income. The 

second research objective explores the effect of ESG disclosure on firm value, operation-

alized via Tobin’s Q, which measures market value over asset value. Firms that are suc-

cessful in conveying the ESG actions they have taken are expected to be valued higher in 

the market, as investors are more willing to invest in the companies that are in line with 

their value systems (Lins et al., 2017). This suggests that strong ESG practices not only 

drive financial performance but are also value creating activities that attract investor 

confidence and long-term growth strategies. 

 

The research framework also highlights the role of Stakeholder Engagement. This section 

emphasizes the varied interests of employees, customers, suppliers, investors and the 

local community among others in determining corporate ESG behavior. This understand-

ing is necessary to reach, understand, and comprehend and fulfill the needs and expec-

tations of these groups and effective stakeholder engagement is fundamental for that. 

Solid ESG initiatives can also translate into enhanced brand reputation, customer loyalty 

and investor confidence driven by good stakeholder perceptions (Bellucci et al., 2019). 

These dynamics are consistent with the second and third objectives of the study, which 

are concerned with the impact of ESG practices on financial performance and firm value. 

Another important component of the framework is the Institutional Context which in-

cludes the external forces that shape corporate behaviour such as regulations, cultural 

values and social expectations (Huang & Sternquist, 2007). The third research objective 

attempts to understand the role of each component of ESG, environmental, social, and 

governance, in determining firm values and corporate financial performance. Firms in 

areas with strong regulation and governance are more likely to engage in meaningful 

ESG activities. This results in better performance outcomes as organizations are forced 

to abide by the set standards promoting sustainability (Singhania & Saini, 2023). 



43 

 

 

2.5 Research Gap 

Although there has been a growing focus on Environmental, Social, and Governance (ESG) 

concerns, there are still several areas in the literature that could be further developed. 

The first one refers to the ambiguous and sometimes contradictory results of the large 

body of research that has been conducted in an attempt to understand the link between 

ESG practices and the financial performance of firms (Giannopoulos et al., 2022; Alareeni 

and Hamdan, 2020; Ademi and Klungseth, 2022). Most of these works on particular ESG 

dimensions, which could potentially create a skewed vision of the interrelatedness of 

these factors. Plus, the lack of research on the effects of a composite ESG score relative 

to its individual dimensions calls for additional studies that explore the interrelations of 

these different aspects and their joint effects on firm performance. 

 

Second, and the most significant, is the absence of focused research looking at the en-

ergy sector – a pivotal contributor to global greenhouse gas emissions. This is particularly 

important in the case of the energy sector, responsible for 75.6% of the world’s emissions 

(37.6 GtCO₂e) as it is necessary to know the impact of ESG sustainability practices in 

financial performance. These specific challenges and pressures that energy companies 

face in the adoption and disclosure of ESG practices are not well articulated in existing 

research. 

 

Finally, the impact of ESG on firm value and financial performance has not been widely 

researched in the energy sector. Despite the existing research on the individual compo-

nents of ESG, “the combined effect of these three dimensions on firm’s performance and 

market valuation is not yet clear” (Singhania& Saini, 2023). This cut-off is particularly 

pertinent for energy firms as they must manage their sustainability initiatives along with 

their financial performance, while being under increasing scrutiny by regulators and 

stakeholders. 

 



44 

Addressing these research gaps will provide a more refined view on the relationship be-

tween ESG practices and corporate performance in general, particularly for those com-

panies in the energy sector. This research seeks to address this gap by exploring ESG 

factors collectively and their role in shaping financial outcomes in the energy sector. 

 

 

 

 



45 

3 Data and Methodology 

This chapter describes the methodological framework to analyze the association be-

tween Environmental, Social and Governance (ESG) disclosure and financial perfor-

mance in European energy companies. This chapter begins with a detailed presentation 

of the research approach followed by the data collection procedures and sample selec-

tion criteria. Then, reports the variable measurements and model specifications that are 

used to test the research hypotheses statistically. This chapter ends with the limitations 

and validity issues specific to this particular study. 

 

 

3.1 Research Approach 

This is a quantitative research study that investigates the relationship of ESG disclosure 

and financial performance in European energy companies. This quantitative approach 

is appropriate as variables can be statistically tested (Creswell & Creswell, 2018). It also 

allows to study the cause-and-effect relationship among variables as well as generalizing 

findings to a population of interest (Saunders et al., 2019). 

 

This study follows a positivist philosophical approach that suggests reality can be em-

pirically observable and tested through objectively (Bellucci et al. 2019). This view is con-

sistent with the study's purpose in providing an empirical investigation of the relation-

ship between ESG disclosure practices and financial performance indicators. In addition, 

the research is deductive, starting from theory and moving towards data through hy-

pothesis development and tests based on existing theoretical frameworks, especially 

stakeholder theory and institutional theory (Bryman & Bell, 2022). 

 

 



46 

3.2 Research Design 

This study uses a panel data design, analyzing the association between ESG disclosure 

and financial performance during multiple periods of time. In many ways, panel analysis 

is a hybrid, cross-sectional and time-series analysis; however, it is generally considered 

to have certain strengths compared to pure cross-sectional and time-series approaches 

(Wooldridge, 2016). Such advantages are more degrees of freedom, less collinearity be-

tween the explanatory variables and the ability to control unobserved heterogeneity be-

tween firms (Hsiao, 2014). 

 

The research design involved the use of both descriptive and inferential statistics. De-

scriptive statistics provide a summary of the basic characteristics of the data, while in-

ferential statistics are used to test the research hypotheses and infer the relationships 

among the variables (Fama & French, 2020).The panel regression analysis is performed 

to analyze the effects of various levels of ESG Disclosure on financial performance 

measures (Tobin’s Q and Return on Assets) in relation to the environmental, social and 

governance dimensions while controlling potential omitted variables that may bias the 

results. 

 

 

3.3 Population  

The population of this study is all energy companies listed in the European stock market. 

This sample is selected for the relevance of the energy sector to greenhouse gas emis-

sions, as discussed in chapter 1, and the growing regulatory pressure on European en-

ergy firms to implement and report on ESG policies. The European context is particularly 

relevant for this study because the continent’s energy policies have been more aggres-

sive and innovative in terms of sustainability and because “12.7% of the EU’s greenhouse 

gas emissions are coming from the energy sector” (Liesen et al., 2017).  

 



47 

The sample of this study is all publicly traded energy firms in Europe from 2014 – 2023. 

This period is chosen in order to have the most up to date trends in ESG disclosures and 

to have available aggregate ESG data. This particular time frame is also useful to observe 

ESG disclosure strategies prior and post- actual European sustainability legislations such 

as the European Green Deal. 

 

The sample has been chosen according to a purposive sampling technique, looking at 

energy companies that are publicly traded in major European stocks exchanges. The cri-

teria to include in the sample are: 

The core business of the company must be in energy (oil and gas, electricity, or renewa-

ble energy). 

The company must be publicly listed in a European stock exchange. 

The firm must have complete financial information for the purposes of the sample period. 

The company should have ESG disclosure scores from reputable ESG rating agencies. 

 

In order to have a clearer view of how the energy sector is organized for the present 

research study, Table 1 presents a compilation of the main subsectors within the energy 

industry. This encompasses representation of established fossil fuel energy companies 

as well as electric, utilities and renewable energy companies at large. 

 

Table 1. Overview of the Energy Sector 

Oil, Gas and Coal Electricity and Utility Services 

Exploration & production Power generation & grid management 

Refining & marketing Gas, water, and multi-utility services 

Storage & transportation of oil & gas 
Renewable and alternative energy technol-

ogies 

Coal & other consumable fuels   

(Source: Thomson Reuters Refinitiv Eikon, 2024). 

 



48 

This selection aims to provide a sample that is representative of the European energy 

sector and guarantees to collect as much complete data as possible on ESG disclosure 

and financial performance. The specificity of the sample regarding companies falling 

within different subsectors of the energy sector provides a better understanding on 

whether ESG practices and their financial implications might vary for traditional fossil 

fuel operations or renewable energy providers, thus capturing the ongoing European 

energy transition (Friede et al., 2015). 

 

 

3.4 Sample Size  

The initial dataset covers the years from 2014 to 2023 and includes 5,579 unique firms 

conducting energy activities in Europe (Thomson Reuters Refinitiv Eikon, 2024). From 

this, 2,797 observations are from the oil and gas segment, and the remaining 3,038 are 

from electricity, utilities, and renewable energy firms. The panel is unbalanced due to 

firm years without ESG reporting or lacking financial data, resulting in variation in firm 

coverage across years. The final analytic sample used in regression analyses contained 

3, 691 firm-year observations from 860 unique firms after listwise deletion to deal with 

missing values on the dependent and main independent variables. This last sample pro-

vides adequate power for statistical tests and is consistent with previous studies using 

panel data to investigate ESG effects in the energy sector (Dyck et al., 2019). 

 

This sample size complies with recommendations from methodological literature indi-

cating that the analysis of panel data is robust when there are enough cross-sectional 

units and time periods (Wooldridge, 2016). The final data set offers sufficient statistical 

power to run fixed and random effects panel regression models as encountered in this 

study (Greene, 2018). The sample is also of a similar size to recent empirical studies in 

the area (e.g., Giannopoulos et al., 2022; Aouadi & Marsat, 2018) expanding the external 

validity and generalizability of the results to the entire European energy market. 

 



49 

3.5 Data Collection and Source 

This study is conducted based on secondary data in terms of ESG disclosures and differ-

ent financial metrics. The use of secondary data is justified by the fact that these can 

offer unbiased, reliable, and complete information in the variables of interest (Zikmund 

et al., 2013).  

 

The sources for this data collection are:  

The ESG disclosure scores is collected from a well-known ESG rating agency such as Re-

finitiv (formerly Thomson Reuters ESG). These ESG ratings are generated by an agency 

that issues overall ESG scores, which are derived through a process of systematically an-

alyzing environmental, social, and governance behavior within companies (Berg et al., 

2022). Financial variables such as Return on assets (ROA), market capitalization, total 

assets, and total debt is obtained from Thomson Reuters Eikon. The same financial data-

bases are used for collecting information regarding the control variables, such as firm 

size, growth and industry leverage. 

 

 

3.6 Variable Measurement 

The variables studied can be grouped into dependent variables, independent variables 

associated to ESG disclosure, and control variables that capture possible effects from 

other factors. A summary of all variables employed in the study, their measurement, and 

relevant references from the literature is provided in Table 2. 

  



50 

Table 2. Variables Description, Measurement, and References 

Variable 
Type 

Variable 
Name 

Description Measurement Reference 

Dependent 
Variables 

ROA Return on Assets 
Net Income / Total As-

sets 
(Atan et al., 2018) 

Independent 
Variables 

Tobin's Q 
Market-to-Book 

Value 
(Market Capitalization + 
Total Debt)/Total Assets 

Chung & Pruitt (1994) 

ESG 
Overall ESG 

Score 
Composite ESG rating 

(0–100) 
Eccles et al. (2014) 

ENV 
Environmental 

Score 
Environmental rating (0–

100) 
(Drempetic et al., 

2020) 

SOC Social Score Social rating (0–100) 
Singhania & Saini 

(2023) 

GOV 
Governance 

Score 
Governance rating (0–

100) 
Arayssi et al. (2020) 

Control Vari-
ables 

SIZE Firm Size 
Natural logarithm of To-

tal Assets 
Alareeni & Hamdan 

(2020) 

LEV Leverage Total Debt / Total Assets Buallay, A. (2019) 

GROWTH Sales Growth 
Percentage change in 

annual sales 
Ademi & Klungseth 

(2022) 

 

 

3.7 Dependent Variables 

Two main indicators of financial performance are used in the present study as dependent 

variables: 

 

Return on Assets (ROA): 

It represents the operational efficiency of a company in generating profits from its assets 

(Giannopoulos et al., 2022). Consistently with prior financial studies, ROA is computed 

as net income divided by total assets.  In contemporary fiancé research ROA is a very 

common performance metric in ESG studies by offering information on the operational 

implications of sustainability activities on financial performance (Alareeni & Hamdan, 

2020). 

 



51 

(1) Return on Assets (ROA) = 
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
  

 

Tobin’s Q:  

It measures the market valuation of a firm in relation to its asset replacement cost and 

is a market-based indicator. Following Chung and Pruitt (1994), Tobin’s Q is calculated as 

market capitalization plus total debt divided by total assets. By consideration of the mar-

ket on the firm’s future growth opportunities and on its intangible value, Tobin’s Q is a 

good measure to understand how ESG practices affect investor’s valuation. 

 

(2) Tobin’s Q = 
𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛+𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
 

 

 

3.8 Independent Variables 

Divided into different dimensions, the key independent variables to ESG information 

disclosure are as follows: 

 

ESG score:  

An aggregate metric of the relative ESG performance of a firm, sourced from leading ESG 

rating agencies.  An ESG score can be understood as an assessment of a firm on the three 

pillars of sustainability, namely the environmental, social, and governance (Eccles et al. 

2014) 

 

Environmental Score (ENV): 

This score more precisely represents companies' environmental performance related to 

energy use and emissions, water use, and climate change (Drempetic et al., 2020). This 

point is particularly relevant for oil companies due to the extensive level of environmen-

tal externalities associated with their industry. 

 

 



52 

Social Score (SOC): 

It is an assessment of the social impact of a company based on labor practices, human 

rights, community, and product responsibilities (Singhania & Saini,2023) Needless to say, 

it is a metric of how a company manages its stakeholders. 

 

Governance Score (GOV): 

The governance score summarizes the quality of corporate governance with respect to 

its board structure, executive compensation, shareholder rights, and business ethics 

(Arayssi et al., 2020). But that is particularly needed when it comes to environmental 

and social programs that will have to be implemented. 

 

 

3.9 Control Variables 

To reflect the effect of ESG disclosure on financial performance, three key control vari-

ables were considered. 

 

Firm Size (SIZE): 

Measured by the natural logarithm of total assets to control for scale effects that may 

affect ESG disclosure and also financial performance (Alareeni & Hamdan, 2020). Big 

companies are likely to have more capital to spend on ESG initiatives and may also have 

scale of implementation to get sustainability at lower costs. Firm size has been linked 

to ESG engagement and performance repeatedly in literature (e.g., Giannopoulos et al., 

2022). 

 

(3) Size=Ln(Total Assets) 

 

Leverage (LEV): 

This proxy measures the effect of capital structure on financial performance and risk 

profile and is calculated as the ratio of total debt to total assets Buallay, A. (2019). Firms 

that are highly leveraged might be less able to invest in ESG initiatives because they must 



53 

pay their debt. Additionally, it needs to clarify that leverage affects a firm's risk exposure, 

which can influence both market valuation and operational performance (Jiraporn et al., 

2014). This is an important variable in the energy industry, especially because capital 

structure can vary so greatly between different sub- sectors. 

 

(4) Leverage = 
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
 

 

Growth (GROWTH): 

It is defined as the annual sales growth in percentage to account for the effect of growing 

operations on the firm’s financial performance and investment opportunities (Ademi & 

Klungseth, 2022). It is an important control variable because growing firms may have 

different ESG priorities and investing patterns than mature firms. Also, growth opportu-

nities can have an important impact on market valuations, one of which is Tobin’s Q 

(Friede et al., 2015). 

 

(5) Growth = 
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒𝑖,𝑡−𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒𝑖,𝑡−1

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒𝑖,𝑡−1
 

 

 

3.10 Model Specification  

This study utilizes panel regression models to assess the relationship between ESG dis-

closure and corporate financial performance. Two main specifications are developed cor-

responding to the two dependent variables: Return on Assets (ROA) and Tobin's Q. 

 

 

3.10.1 Financial Performance (ROA) 

To examine the effect of ESG on accounting-based performance, the following fixed/ran-

dom effects model is specified: 



54 

 

(6) 𝑅𝑂𝐴𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑆𝐺𝑖𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽3𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 + 𝛽4𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

 

3.10.2 Firm Value (Tobin's Q) 

For the market-based measure of firm value, the model is specified as: 

 

(7)  𝑇𝑜𝑏𝑖𝑛𝑠𝑄𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑆𝐺𝑖𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽3𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 + 𝛽4𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

Where: 

i indexes’ firms 

t indexes time (year) 

ui captures unobserved firm-specific effects 

εit is the idiosyncratic error term. 

 

For extended analysis, the ESG score is decomposed into its three components --- Envi-

ronmental, Social, and Governance --- to test their individual effects: 

 

 

(8) 𝑅𝑂𝐴𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑁𝑉𝑆𝑖𝑡 + 𝛽2𝑆𝑂𝐶𝑖𝑡 + 𝛽3𝐺𝑂𝑉𝑖𝑡 + 𝛽4𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽5𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 +

𝛽6𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

 

(9) 𝑇𝑜𝑏𝑖𝑛𝑠𝑄𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑁𝑉𝑆𝑖𝑡 + 𝛽2𝑆𝑂𝐶𝑖𝑡 + 𝛽3𝐺𝑂𝑉𝑖𝑡 + 𝛽4𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽5𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 +

𝛽6𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

These models are estimated using fixed-effects or random-effects techniques, with 

model selection based on the results of the Hausman test. 

 

 



55 

3.10.3 Lagged Effect Models 

To examine the potential delayed effects of ESG disclosure on financial performance and 

firm value, the following lagged models are specified: 

 

Lagged Effects on Financial Performance (ROA): 

(10)  𝑅𝑂𝐴𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑆𝐺𝑖(𝑡−1) + 𝛽2𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽3𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 + 𝛽4𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

Lagged Effects on Firm Value (Tobin’s Q): 

(11)  𝑇𝑜𝑏𝑖𝑛𝑠𝑄𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑆𝐺𝑖𝑡 + 𝛽2𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽3𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 + 𝛽4𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

Disaggregated ESG Lagged Effects on ROA: 

(12) 𝑅𝑂𝐴𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑁𝑉𝑆𝑖(𝑡−1) + 𝛽2𝑆𝑂𝐶𝑖(𝑡−1) + 𝛽3𝐺𝑂𝑉𝑖𝑡(−1) + 𝛽4𝑆𝑖𝑧𝑒𝑖𝑡 +

𝛽5𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 + 𝛽6𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

Disaggregated ESG Lagged Effects on Tobin’s Q: 

(13) 𝑇𝑜𝑏𝑖𝑛𝑠𝑄𝑖𝑡 = 𝛼 + 𝛽1𝐸𝑁𝑉𝑆𝑖(𝑡−1) + 𝛽2𝑆𝑂𝐶𝑖(𝑡−1) + 𝛽3𝐺𝑂𝑉𝑖𝑡(−1) + 𝛽4𝑆𝑖𝑧𝑒𝑖𝑡 +

𝛽5𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 + 𝛽6𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝑢𝑖 + 𝜀𝑖𝑡 

 

 

3.11 Estimation Technique 

3.11.1 Panel Model Specification 

Using static panel data analysis, this study investigates the relationship between ESG 

disclosure and financial performance in European energy companies. This panel model 

analysis is suitable for this research as they control heterogeneous unobserved variables 

that do not vary across firms while measuring the contemporaneous effects of ESG dis-

closure on financial performance (Wooldridge, 2016). 

 



56 

There are several reasons why the static panel model is justified. At first, the relation-

ship between ESG disclosure and financial performance is more stable in the short to 

medium term with less dynamic effects (Giannopoulos et al., 2022). Furthermore, unlike 

financial investments or decisions about capital structure which may demonstrate high 

path dependencies, ESG disclosure practices and their effects in terms of financial per-

formance typically occur in the same period or with minor lags (Velte, 2017).  

 

Secondly, using static panel models provides a robust framework for controlling both 

unobserved and observed heterogeneity between firms. The static panel model specifi-

cation with fixed-effects, effectively controls time invariant unobserved factors that af-

fect both ESG practices and financial performance (potential omitted variable bias) 

(Greene, 2018). This is especially important for ESG research, as firm-specific character-

istics (like corporate culture and management philosophy) may simultaneously impact 

sustainability and financial outcomes.  

 

Finally, the static panel method is consistent with the leading ESG-financial performance 

research in literature. Broadstock et al.  (2021) used static panel models to study the link 

between ESG performance and firm value, confirmed that using this approach is suffi-

cient since the association is contemporaneous. Similarly, Elamer & Boulhaga (2024)  

studied the effect of ESG disclosure on financial performance measures by using static 

model specification and argued that it is the most appropriate methodology for ac-

counting data that displays both cross-sectional and time-series variation. 

 

The dynamic panel model is appropriate for understanding potential feedback effects 

and lagged relationships, but a static panel approach in this study is based on the theo-

retical expectation of ESG disclosure that influences financial performance mainly in the 

same period and this is widely supported in the recent literature (Friede et al., 2015). In 

addition, the methodological approach is consistent with the research questions and ob-

jectives outlined in Chapter 1, that is, the contemporaneous relationship between ESG 



57 

disclosure and financial performance rather than the dynamic or long-term adjustment 

processes. 

 

 

3.11.2 Estimation Technique 

This study employs several panel data estimation techniques to analyze the relationship 

between ESG disclosure and financial performance. The following estimation methods 

were implemented: 

 

Diagnostic Tests 

Breusch-Pagan Lagrangian Multiplier Test is conducted to determine whether random 

effects estimation is appropriate compared to pooled OLS regression. The significant test 

statistics (chi-bar2(01) values of 491.91 and 1868.24 with p-values of 0.0000) confirmed 

the presence of random effects, justifying the use of panel estimation methods. 

Hausman Specification Test is performed to decide between fixed effects and random 

effects models.  

 

Robust Standard Errors were employed with both FE and RE models to address potential 

heteroskedasticity and autocorrelation in the panel data. For fixed effects models with 

robust standard errors, the "vce(robust)" option is utilized, while for random effects 

models, "vce(cluster firm_id)" is used to account for within-firm error correlation. 

Extended Model Specifications were implemented by disaggregating the composite ESG 

score into its three component pillars (Environmental, Social, and Governance) to exam-

ine their distinct effects on financial performance measures. 

 

All statistical analyses is conducted using Stata software, with panel regression com-

mands "xtreg" with appropriate options for fixed effects ("fe") and random effects ("re") 

specifications. 

 



58 

4 Results and Analysis 

This chapter describes the results of the relationship between ESG disclosure and firm 

financial performance for European energy companies for the years 2014 to 2023. The 

purpose of the analysis is to provide answers about the research questions discussed in 

chapter 1, namely: (1) What is the relationship between ESG disclosure and firm financial 

performance as proxied by the Return on Assets (ROA); (2) What is the influence of