A Holistic Examination of the Relationship Between ESG Ratings and Corporate Financial Performance (thesis)

Abstract

This paper examines the effect of Environmental, Social, and Governance (ESG) ratings and several of their component parts core accounting performance metrics, proxied by metrics in the DuPont decomposition. Further, I examine the idea of two-way causality, examining if strong accounting performance gives rise to improvement in ESG performance. Using a sample of 377 S&P 500 firms between January 2010 and September 2019, I find that environment components have a positive relationship with accounting performance, whereas the evidence for social and governance components is relatively more mixed. I also test whether strong accounting performance gives rise to improvement in ESG performance. My findings indicate that strong financial performance gives rise to marginal reductions in ESG performance. However, the evidence of reverse causality is relatively weak, suggesting the principal relationship involves ESG performance's impact on corporate financial performance rather than the other way around.