How does ESG affect the financial performance of oil and gas companies relative to traditional firm characteristics? - An empirical examination of oil and gas companies in Europe

Abstract

This thesis investigates potential indicators of financial performance on European oil and gas companies. With the use of panel data regressions, it seeks to detect potential significant effects of traditional firm characteristics and various ESG subcategories on financial performance. The companies in our sample are observed monthly from January 2011 to March 2021. We find that previous research is conflicting and many of the studies detect low statistical significance between ESG scores and financial performance. In this thesis, financial performance is measured by three different performance indicators; monthly change in market capitalization, return on equity, and return on assets. The traditional firm characteristics we implement in our regressions are firm size, leverage, firm age, and market-to-book ratio. In addition to these characteristics, we include regressions with both overall ESG factors (Environmental, Social, Governance) and ten different subcategories of the overall ESG factors. The result of our research suggests that commonly used firm characteristics are more significant than ESG scores in relation to financial performance. Firm size has the most substantial positive effect on financial performance, while leverage and firm age has significant negative effects on financial performance. Although we find that overall ESG scores do not have any significant effect on our performance variables, we find that some of the ESG subcategories have some significant effect. This research concludes that the overall effect of ESG scores on financial performance is negative for European oil and gas companies as the Human Rights score is the only subcategory that indicates a weak positive significant effect. It seems that demanding ESG implementations and ESG measures that cause major restructuring may appear to be a trade-off against companies’ financial performance, although the trade-off could prove to be positive for future financial performance.