How ESG performance affects corporate financial performance: An empirical study of the shipping sector

Abstract

This thesis explores the relationship between ESG performance and financial performance in the shipping sector. Utilizing a fixed effects model adjusted with Newey-West standard errors, we analyzed data from 244 shipping companies from 2010 to 2022. We discover that improvements in the overall ESG score significantly improve financial profitability proxied by Return on Assets (ROA) and Return on Equity (ROE). However, they do not have a statistically significant effect on market valuation, proxied by Tobin's Q.

Further dissection of ESG scores into their constituent pillars— environmental, social, and governance—shows that social initiatives distinctly improve ROA, ROE, and Tobin´s Q. This demonstrates that activities such as effective workforce management, robust community engagement, and strong customer relations ensure adherence to ethical standards and contribute positively to financial results in the shipping sector. Despite these benefits, their influence on market valuation, as reflected by Tobin's Q, remains limited.

The study also highlights the mixed impact and significance of environmental and governance efforts. These initiatives are essential but often yield benefits not immediately evident in financial metrics, challenging the traditional focus on short-term returns.