The Impact of ESG Scores on Firm Performance: A Comparison of the European Market Before and After the 2008 Financial Crisis Master’s Thesis 15 credits Specialization: Financial Management Department of Business Studies Uppsala University Spring Semester of 2021 Date of Submission: 2021-06-02 Arran Pickwick Jacob Sewelén Supervisor: Shruti Kashyap Abstract This study explores the impact of ESG Scores on firm performance and seeks to establish whether the impact increased since the 2008 financial crisis. This is done by performing regressions on ESG Scores, and the respective pillars of Environmental, Social, and Governance, and firm performance, measured as both accounting-based performance, using ROA, and market-based performance, using Tobin’s Q. The study adopts a quantitative approach, utilising a random-effects model to analyse panel data across two sample periods - a pre-crisis period, from 2003-2006, and a post-crisis period, from 2010-2019. In addition, t-tests were performed to see if the impact changed significantly from the pre-crisis to post-crisis period. The study analyses data from 218 firms from the STOXX Europe 600 index, with four smaller sub-samples. The results indicate that ESG Scores have a positive impact on firm performance, with market-based firm performance being significantly correlated both before and after the crisis. Accounting-based performance, however, was only significantly correlated with ESG Scores before the crisis. In addition, the Environmental pillar was positively correlated with both measures of performance before and after the crisis, and the same was true for the Social pillar, except for with post-crisis accounting-based performance. Interestingly, the Governance pillar was not significantly correlated with performance in any of the regressions. Finally, while the average ESG Score among the observed companies increased in the post-crisis period, the impact of ESG performance on firm performance did not change significantly. The results of this study are supportive of the stakeholder theory perspective over the principal-agent theory, and show that ESG performance does indeed positively impact firm performance. Future research could explore whether other events have played a significant role in the rising importance of ESG, or if the results of the present study can be replicated across different time periods and geographical regions. Key words: ESG, CSR, firm performance, Europe, EU, 2008 financial crisis, principal-agent theory Acknowledgments We would like to take this opportunity to thank our seminar participants for their useful feedback each week. Most of all, we would also like to thank our supervisor, Shruti Kashyap, for providing us with truly invaluable support, insight, and guidance, from start to finish. Without this support, writing this thesis would not have been possible. Thank you. Arran Pickwick & Jacob Sewelén Table of Contents 1. Introduction ................................................................................................................................................... 1 1.1 Research Gap ............................................................................................................................................... 3 1.2 Research Questions ...................................................................................................................................... 5 2. Theoretical Background and Previous Literature .......................................................................................... 6 2.1 Theoretical Background ............................................................................................................................... 6 2.1.1 ESG and CSR ........................................................................................................................................ 6 2.1.2 ESG Scores ........................................................................................................................................... 7 2.1.3 Differing Perspectives of ESG .............................................................................................................. 7 2.1.4 The Principal-Agent Theory Perspective of ESG ................................................................................. 8 2.2 Previous Literature ....................................................................................................................................... 9 2.2.1 The Increasing Importance of ESG ....................................................................................................... 9 2.2.2 The Impact of ESG on Firm Performance .......................................................................................... 10 2.3 Development of Hypotheses ...................................................................................................................... 11 2.3.1 The Impact of ESG on Accounting-Based Firm Performance ............................................................ 12 2.3.2 The Impact of ESG on Market-Based Firm Performance ................................................................... 12 2.3.3 Growth in the Impact of ESG on Firm Performance ........................................................................... 13 2.4 Summary of Theory and Literature ............................................................................................................ 15 3. Methodology ............................................................................................................................................... 16 3.1 Research Design ......................................................................................................................................... 16 3.2 Operationalisation ...................................................................................................................................... 16 3.3 Data Collection and Sample ....................................................................................................................... 18 3.4 Data Analysis ............................................................................................................................................. 20 3.4.1 Properties of the Estimators- Unbiasedness, Consistency, and Efficiency ......................................... 21 3.4.2 Generalised Least Squares .................................................................................................................. 21 3.4.3 Fixed Effects and Random Effects ...................................................................................................... 22 3.4.4 T-Tests ................................................................................................................................................ 23 3.4.5 Hypothesis Testing .............................................................................................................................. 23 3.5 Reliability and Validity .............................................................................................................................. 23 3.6 Summary of Methodology ......................................................................................................................... 24 4. Results ......................................................................................................................................................... 25 4.1 Descriptive Statistics .................................................................................................................................. 25 4.2 Pre-Crisis Accounting-Based Firm Performance Results .......................................................................... 25 4.3 Post-Crisis Accounting-Based Firm Performance Results ......................................................................... 28 4.4 Pre-Crisis Market-Based Firm Performance Results ................................................................................. 30 4.5 Post-Crisis Market-Based Firm Performance Results ................................................................................ 33 4.6 Test of Change in Coefficients for ESG Scores and ROA ......................................................................... 35 4.7 Test of Change in Coefficients for ESG Scores and Tobin’s Q ................................................................. 36 4.8 Test of Change in Mean ESG Scores ......................................................................................................... 36 4.9 Summary of the Results ............................................................................................................................. 37 5. Analysis....................................................................................................................................................... 38 5.1 ESG Scores and Accounting-Based Firm Performance ............................................................................. 38 5.2 ESG Scores and Market-Based Firm Performance .................................................................................... 40 5.3 Change in Impact of ESG Score on Firm Performance ............................................................................. 43 5.4 Limitations ................................................................................................................................................. 45 6. Conclusion .................................................................................................................................................