The market value relevance of ESG: evidence from large European firms

This study examines the market value relevance of firms’ sustainability performance, using a sample of European largest firms. The findings reveal that while a firm’s current ESG score by itself is not significantly associated with its stock price performance, year-on-year improvements in ESG are positively related to stock returns, particularly for best-in-class firms – those performing above the industry median. A year-on-year marginal increase of 1 point in the ESG score corresponds to an increase in stock returns of about 0.084% for these leading firms. Results also highlight a pronounced sensitivity to extreme changes in the ESG score,with the effect being amplified for the best-in-class performers. Surprisingly, these findings are driven exclusively by changes in the social pillar of sustainability performance.