ESG Performance and Corporate Financial Performance: Disentangling Sector Effects

Abstract

This paper examines the relationship between Environmental, Social and Governance (ESG) performance and corporate financial performance using a panel dataset of S&P 500 companies for the period 2015 to 2023, comprising approximately 2,614 firm-year observations. The study employs two empirical approaches: sorting firms into portfolios by ESG quartile, and fixedeffects panel regression on three financial performance measures, namely Return on Assets (ROA), Tobin’s Q, and Return on Equity (ROE). The portfolio sort shows that firms in the highest ESG quartile earn 6.2 percentage points lower stock returns and 0.86 percentage points lower ROA than firms in the lowest ESG quartile. However, panel regressions with both industry and firm fixed effects show that the ESG coefficient is statistically insignificant across all six main specifications. The observed negative univariate association is driven by systematic sectoral differences: ESG-intensive industries such as Utilities and Energy are structurally lower-return, while ESG-light sectors such as Information Technology are structurally higherreturn. A pillar-level breakdown provides marginal cross-sectional evidence of a positive association between environmental performance and ROA, but this is not robust to firm fixed effects. The results indicate that, once firm- and industry-specific heterogeneity is controlled for, ESG performance neither improves nor harms corporate financial performance for large-cap U.S. firms. These findings emphasise the importance of methodological rigour, especially the use of fixed-effects controls, in ESG research.