What is the effect of ESG on firm's performance? UK FTSE All-Share Index Evidence

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Date
2022-06-03Author
Inkova, NikolPublisher
Πανεπιστήμιο Κύπρου, Σχολή Οικονομικών Επιστημών και Διοίκησης / University of Cyprus, Faculty of Economics and ManagementPlace of publication
CyprusGoogle Scholar check
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The purpose of this study is to identify whether investing in ESG practices is beneficial for a
firm’s financial and market performance. The current paper will answer the questions: “Do
environmentally friendly companies have better firm performance?” and “Do firms with
higher ESG score and better corporate governance mechanisms, lead to better firm
performance?”. Moreover, the study will implement the ideas developed in the agency and
stakeholder theory. The dataset includes 2196 UK FTSE All-Share Index observations for the
period 2009-2020. The companies are drawn from manufacturing, retail, and services
industries. The data has been collected from Refinitiv and Thomson Reuters Asset4
Datastream. Three proxies have been used for representing a firm’s performance - ROA,
MVBV and annual stock returns. As the expected relations on this topic are contradictory, the
hypothesis used for this paper is in a non-directional form stating that ESG is associated with
future firm performance. A negative significant relationship has been found between ESG and
ROA which can be due to the increase of the additional environmental cost implemented
which will decrease firm profitability. A negative significant relationship has been discovered
between ESG score and MVBV and annual stock returns, explaining that investors are not so
focused on ESG practices rather than pure profits as stated by the traditional economic
theory. The results can be used to optimise management activities on the board of directors.
The current study contributes to the overall literature by investigating the association
between ESG score and firm performance of the UK FTSE All-Share Index corporations.
Moreover, the paper compensates for the gap between the UK’s ESG and firm performance
association analysis and thus, confirms the importance of ESG practices in today’s days. The
conclusions of this study have placed a foundation for further and more in-depth examination
in the future. Future research could consider a multi-national sample, focusing on a broader
group of environmental attributes.