The relationship between corporate social performance and financial performance of European listed companies.

Abstract

Environmental, social and governance concerns are gaining ground recently and the growing amount of available data enables investors to integrate these issues in their investment strategies. Since a few years, the popularity of these ESG criteria are translated in a growing number of assets under management incorporating ESG criteria in Europe and in the rest of the world. With regard to the growing popularity amongst investors, research analysed the relationship between corporate social performance and financial performance and found a weak but positive relationship between both aspects of the firm. This thesis will try to contribute to the existing literature by analysing the relationship between CSP and CFP in European companies over the period 2007-2015. In order to perform the analysis, the Thomson-Reuters ASSET-4 database will be used as they provide a complete set of ESG data. The methodology that will be used consists of the repartition of all the stocks with ESG coverage in portfolios on the basis of their ESG score. Thereafter, the relationship will be analysed using least square regression analysis. The findings of this paper indicates that European markets are rewarding moderate levels of corporate social performance better than low and high levels of ESG. The uncertainty over the ability of firms to combine both projects to improve their societal impact and future growth seems to prevent markets from rewarding top performers. The knowledge of the optimal level of corporate social performance permitted the creation of an investment strategy. From an accounting point of view, this thesis shows that firms with high levels of ESG are able to achieve a return on equity that is three times higher than companies with very low levels of ESG.