ESG Risks and Financial Performance. Analysis of Romanian-Listed Companies

Abstract The term “sustainability” is often used interchangeably with the acronym ESG (Environmental, Social, Governance). This happens as investors trust ESG scores to provide an accurate measurement of a company's sustainability performance. The traditional approach for evaluating sustainability performance involves analysing the scores for a given company, for each of the 3 ESG pillars: Environmental, Social and Corporate Governance. Moreover, most studies show that these scores are positively correlated with financial performance. While this approach is rather straightforward, usually it is not exhaustive and fails to capture the risks behind a company's exposure to material ESG issues and its management. Therefore, this study proposes an approach based on material ESG risk, exposure and management scores. Particularly, this paper focuses on the sector-wide analysis of ESG risk scores and their correlation with financial performance, for Romanian-listed companies, using the most recent data from one of the largest ESG rating provider. The methods employed are data analysis & visualization and correlation analysis. The results reveal, on average, a year-on-year decrease of the ESG Risk Score for the selected companies, along with increased exposure to material ESG risks, yet better management of these risks. Interestingly, the results do not show a significant correlation between the selected ESG variables and financial performance, measured by ROE, ROA and Tobin's Q, though a significant positive correlation between the Exposure and Management scores and firm size, measured by Market Cap, is found. Although there are limitations to this paper, for example, related to sample size or timeframe, it provides valuable insights on both the sustainability performance of Romanian-listed companies and, more broadly, its relationship with financial performance from a regional perspective.