Do Legal Origins Shape the Nexus Between Environmental, Social, and Governance Performance and Financial Performance in Europe

Abstract

This study examines whether the relationship between environmental, social, and governance (ESG) performance and financial performance varies across legal systems in Europe. Drawing on institutional theory, we argue that legal origins shape how sustainability practices translate into financial outcomes. Using an unbalanced panel of 6210 firm‐year observations (1331 firms; 11 European countries; 2016–2023), we find that ESG performance enhances accounting profitability (ROA) only in civil law environments, particularly in French and Scandinavian systems. By contrast, ESG performance is positively associated with market valuation (Tobin's Q ) across all legal origins. These findings remain robust across alternative estimation methods and specifications, and suggest that institutional context shapes how ESG translates into firms' internal profitability, whereas investors appear to value ESG performance more uniformly across legal systems. The study contributes to the limited literature on legal origin as a moderator of the ESG‐financial performance relationship within a relatively homogeneous European institutional setting.