Relationship Between Esg Ratings and Financial Performance of Heavily Polluting Industries

Abstract

The paper discusses the relation between Environmental, Social and Governance (ESG) performance and financial performance of the both the industries which are highly polluting in regards to profitability, market value, cost burden and risk reduction. It is analyzed in a quantitative form which is based on secondary data and the firms are divided into high, medium and low ESG performers. The results indicate that the percentage of high, medium and low ESG companies is 38, 42 and 20 respectively that implies that the industries are in a transitional stage of environmental scanning with ESG. The results indicate that there is a positive correlation between the ESG performance and profitability with the high ESG firms that reported an average of 18 proportion of profit margin compared to 14 and 10 proportion of profit margin of medium and low ESG firms respectively. Similarly, high ESF companies (22) relative to medium (16) and low (11) have greater growth in market values because of the preference of sustainable companies by investors. However, the realization of ESG is associated with the high-cost burden because ESG related costs increase by 26 percent that is greater than the revenue increase in the short term of 19%. The paper also mentions that, ESG plays a role in risk management, with high ESG firms having a smaller risk (30 percent) when compared to medium and low ESG firms (22 and 14 percent, respectively). In addition, the ESG ranks with a long-term financial impact (24) that is two times as much as its short-term impact (12), and this will serve to demonstrate its strategic importance. Overall, the findings suggest that, despite the fact that ESG investments may create short-term profitability, it has much to offer to the long-term financial performance, growth, and minimization of risks in highly polluting sectors.