ESG Investing: Does Sustainability Improve Financial Performance?
Xiaolu Li
Co-Presenters: Individual Presentation
College: College of Business and Public Management
Major: Accounting
Faculty Research Mentor: Huaibing Yu
Abstract:
Environmental, Social, and Governance (ESG) investing has gained significant traction as investors seek to align financial returns with sustainability objectives. While proponents argue that strong ESG performance enhances long-term profitability through improved risk management and brand loyalty, critics contend that its financial benefits remain uncertain. This study examines the relationship between ESG scores and key financial indicators, specifically Return on Assets (ROA) and Return on Equity (ROE), to determine whether ESG initiatives directly influence firm performance.Using quantitative data analysis, we analyze 82 A-share listed companies in China, spanning the technology and mining sectors. ESG scores were obtained from Bloomberg, while financial data (ROA, ROE, and growth rates) were sourced from CSMAR and Wind databases. A linear regression model was employed to assess the correlation between ESG scores and financial performance, complemented by scatter plots and descriptive statistics for visualization.The findings indicate no clear linear correlation between ESG scores and financial performance. Scatter plots reveal widely dispersed data points, suggesting that other factors, such as industry-specific conditions and operational efficiency, may play a more significant role in influencing profitability. Although ESG scores have risen post-2015, particularly following the Paris Agreement, their immediate impact on financial returns remains inconclusive. ROE fluctuations further suggest that higher ESG scores do not necessarily translate into greater shareholder returns in the short term.These results underscore the complexity of the ESG-financial performance relationship, highlighting the need for businesses to balance ESG initiatives with traditional financial strategies. While ESG investments are crucial for sustainability and risk management, their direct financial benefits may take time to materialize and vary across industries. Future research should explore sector-specific dynamics and long-term financial trends to provide a more comprehensive understanding of ESG’s impact.Keywords: ESG Investing, Financial Performance, Return on Assets, Return on Equity, Sustainability