Do Companies with Strong ESG Rating Show a Better Financial Performance? The Case of Retail Industry

Nowadays Environmental, Social, and Governance (ESG) ratings become more and more relevant, especially in the retail sector, where consumer satisfaction and brand reputation play an important role. However, opinions of researchers are contradictory. Some researchers claim that investments in ESG contribute to sustainable growth and improve financial results of a company, while others suggest that they are a waste of money. Thus, the following question can be asked: Do companies with strong ESG rating show a better financial performance in retail industry? The aim of this study is to identify whether there is a positive influence of the total ESG score, as well as an individual pillar score of each ESG factor separately, on the indicators of financial success of retail companies. The sample consists of 343 retail companies, located all around the world. The majority of financial indicators, particularly return on assets, growth of earnings before interest and tax, debt to equity ratio, and logarithm of total assets are measured for 2022-2024, while all types of ESG scores and the indicator of developed country are time independent. 3 regression models are provided, and the analysis consists of several steps. Firstly, models are checked for the presence of heteroscedasticity and autocorrelation. Secondly, Hausman test is conducted in order to select the most suitable model. Thirdly, coefficients and their significance are estimated for the appropriate model. Empirical analysis concludes that ESG score and social pillar score have significant positive impact on the ROA of a retail company, in contrast to environmental and governance factors. Moreover, ESG rating does not influence the growth of EBIT in retail sector, according to the third model but it appears to be statistically insignificant. These findings aim to analyze the influence of ESG factors on the financial performance of retail companies. Future research should explore this topic overcoming limitations that are present in this study.