Evaluation of the Relationship between ESG and Companies' Financial Performance

Nowadays, the ESG standards have become more widespread around the world due to the fact that there is a great interest from people’s side in relation to ESG standards and their impact on country’s development. ESG standards are mainly introduced in terms of scores and, thus, investors are willing to consider those scores in their investment decisions. There is a plenty number of research works, which were about the relationship between ESG scores and companies’ market financial performance. In the current work, Chinese companies were used to determine that connection since it is one of the developing countries, for this reason, from scientific point of view, it would be interesting to find out the real connection between ESG standards and financial performance of Chinese companies. Nevertheless, in different scientific papers, different results were obtained related to China. The main idea and goal of the current research paper is to investigate the relationship between ESG score and financial performance of Chinese companies for the period 2019-2022. The uniqueness of the work is the consideration of two particular sectors of one special industry of Chinese economy. The natural resource industry will be considered, where basic materials and energy sectors are included. Total return of Chinese companies’ stocks will be the same as the companies’ performance, it will stay for the dependent variable in the regression model. Also, the robustness check will be made with the alternative dependent variable in terms of Return on Assets. The number of observations will be 412, where 103 is the number of considered companies and 4 is the period of time in years. The panel data approach will be used in order to prove the expected results, which is about the positive relationship between total return and ESG score. What is more, individual effects of each E, S, G scores will be tested with relation to total returns and the difference between two sectors will be considered. All these hypotheses will be tested in the framework of panel data approach via best chosen model in the current work. As a result, the insignificance is caught between ESG score and total returns of the whole industry, and, also, the same is received for ESG score and ROA. While individual E, S, G scores are significant with total annual returns, and insignificant with ROA due to change of model specification. Nevertheless, it is essential to highlight that other variables may be also the reason for the positive progress in the performance and, that is why, they will be taken under the control. Key Words: ESG, China, total return, Return on Assets, Environmental score, Social score, Governance score, natural resource industry, basic materials sector, energy sector.