How do ESG scores influence the financial performance of companies in periods of high inflation?

Details

Supervisors

Nguyen, Anh

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

This master's thesis explores the impact of ESG scores on the financial performance of companies, specifically during the high inflation crisis of 2021-2022. The literature review reveals conflicting findings. While some argue for a positive correlation between ESG and financial performance, attributing it to increased transparency and investor trust, others suggest negative effects due to additional costs and reduced resources. During crisis periods, ESG-intensive companies may exhibit higher profitability by adapting to market conditions, but decreased consumption and investments, liquidity issues, and reduced investor interest in ESG stocks can hamper financial performance. This thesis employed regression analyses including panel data techniques on data from 435 companies globally for a period of 20 years. The findings indicate a positive impact of ESG, E, and S scores on financial performance in normal market conditions. However, the relationship becomes negative during high inflation periods. The impact of the G score varies depending on the performance indicator used, requiring further investigation. The findings contribute to understanding the dynamics between ESG, inflation, and financial performance. It also contributes to the existing literature on this topic as it completes it. Indeed, the existing literature only studies a relationship between two variables (ESG-financial performance, ESG-inflation, or inflation-financial performance) while this thesis tried to study the interaction between the three factors together. This knowledge can also assist companies, investors, and policymakers in navigating the challenges and opportunities associated with ESG and inflation in the financial landscape.