Abstract

This study investigates the impact of environmental, social, and governance (ESG) factors on the financial performance of non-financial companies in the S&P 500 Index from 2017 to 2020. The study utilizes ESG data from MSCI IVA, Bloomberg, and KLD; financial data from COMPUSTAT; and clean revenue (CR) data from Corporate Knights. The study is divided into two parts: First, we analyze the relationship between ESG ratings and financial performance as measured by a firm’s Tobin’s Q and return on assets (ROA); next, we employ a mediation analysis to explore the effect of MSCI (IVA) data on the relationship between CR and Tobin’s Q. Our study finds that MSCI IVA has a positive and significant association with Tobin’s Q. Bloomberg ESG Disclosure score is positively and significantly associated with ROA but not with Tobin’s Q. When breaking down the ESG components, CR shows a positive and significant association with Tobin’s Q only. The Bloomberg Performance and KLD Environmental scores are significantly positively related to both Tobin’s Q and ROA. We propose that the lack of a standardized ESG reporting framework for companies and the diverse measurement approaches employed by vendors contribute to the limited correlation among various sets of ESG scores. Furthermore, we observe a significant partial mediation effect, which suggests that MSCI IVA mediates the relationship between CR and Tobin’s Q. To validate our findings, we also conduct a robustness check by replacing CR with the Bloomberg Performance Environmental score, and we find that the results remain consistent.