What is the relationship between ESG Performance and Financial Constraints? Evidence from Europe

Abstract

The importance of the ESG and firm behavior connection has evolved rapidly in recent years. The introduction of EU’s Green Deal in 2020 la- beled Europe as a particularly interesting area for further research. Prior academic literature argued that ESG performance and financial constraints display a significant negative relation. This thesis investigates the rela- tionship between ESG performance and financial constraints for listed Eu- ropean firms from 2010 to 2019. The investigation was extended by the deconstruction of ESG to each respective E, S and G pillar scores, and eventually to a sub-category component level. We find robust evidence of a time consistent negative relationship between ESG performance and the financial constraints indices, WW, KZ and SA index. Our evidence sup- ports the proposition of high ESG scoring firms suffering less from financial constraints through a superior attraction of external capital. Furthermore, the results suggest Environmental and Social engagements to be the pri- mary enablers of the exhibited superior access, with an especial emphasize on climate and employee enhancing activities. Key words: Financial Constraints, ESG Performance, Access to Finance, CSR, Environmental, Social and Governance (ESG), Europe