ESG Impact on Financial Performance: Evidence from S&P 500

The current study examines the relationship between ESG (environmental, social, governance) and financial performance (FP), using both accounting-based measures (ROA and ROE) and mixed- measure (Tobin’s Q). ESG disclosure scores and financial performance measures were both extracted from Thomson Reuters Refinitiv database covering S&P 500 firms for a five years period from 2015-2019. Financial data was further broken down into two sectors, manufacturing and a services, and tested via a linear and three non-linear models using both aggregate and segregated ESG. Results show that environmental performance (EP) and percentage growth in governance performance (GP) have a significant positive impact of the FP of manufacturing firms, whereas social performance (SP) has a significant positive impact on the FP of services firms. A straightforward implication of the results is that ESG activities of manufacturing firms should be mainly dedicated towards EP, while ESG activities of services firms should be mainly dedicated towards SP, possibly leading to a higher stakeholder satisfaction.