When Does ESG Become Valuable? The Impact of ESG Ratings on Profitability and Market Value of Companies
Year: 2025 Volume: 75 Issue: 2 Pages: 128-169
Abstract: This study examines the impact of ESG (environmental, social, and governance) performance on corporate profitability and market value. Using a dataset of microeconomic panel data of 7,353 ESG-rated companies worldwide combined with macroeconomic data, fixed-effect regression models reveal that high ESG performance negatively impacts profitability, as measured by return on assets (ROA), but increases market value. This negative impact on profitability is particularly pronounced for companies with higher market value, indicating that companies may sacrifice short-term profitability to achieve higher market valuations. Conversely, the positive impact on market value appears to be particularly significant for companies with below-average traditional performance metrics. These findings contribute to a broader understanding of the dual impact and the trade-off between costs and benefits of ESG and suggest that while ESG engagement may reduce immediate financial returns, it enhances long-term market position and value.
JEL classification: G30, M14, Q50
Keywords: ESG, ESG performance, financial performance, panel data, profitability
DOI: https://doi.org/10.32065/CJEF.2025.02.02
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