Finance Thesis Abstract Example

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Abstract

This thesis investigates the impact of environmental, social, and governance (ESG) factors on firm financial performance within the U.S. market. While the integration of ESG considerations into investment strategies has gained substantial traction, empirical evidence regarding its definitive effect on financial outcomes remains mixed and often context-dependent. This study aims to contribute to this ongoing debate by employing a panel data analysis of publicly traded U.S. companies spanning the period 2012-2022. Specifically, we examine the relationship between various ESG scores, sourced from Refinitiv Eikon, and key financial metrics, including return on assets (ROA), return on equity (ROE), Tobin’s Q, and stock price volatility.

Our analysis controls for a range of firm-specific characteristics, such as firm size, leverage, profitability, and industry affiliation, to mitigate potential confounding effects. Furthermore, we incorporate macroeconomic variables, including GDP growth rate, inflation rate, and interest rates, to account for broader economic influences on firm performance. To address potential endogeneity issues arising from the reciprocal relationship between ESG performance and financial outcomes, we employ a dynamic panel data estimation technique, specifically the System Generalized Method of Moments (GMM) estimator. This approach allows us to control for both time-invariant unobserved heterogeneity and the potential for reverse causality.

Preliminary findings suggest a nuanced relationship between ESG performance and firm financial performance. While we observe a positive correlation between overall ESG scores and Tobin’s Q, indicating a potential market premium for companies with strong ESG profiles, the relationship with ROA and ROE is less clear-cut. We find evidence that the ‘social’ component of ESG has a stronger positive association with profitability metrics compared to the ‘environmental’ and ‘governance’ components. Furthermore, our results indicate that the impact of ESG on financial performance varies across industries. Companies in industries with high environmental impact, such as energy and materials, appear to benefit more from improved ESG performance in terms of market valuation.

This research offers valuable insights for investors seeking to incorporate ESG considerations into their investment decisions. By disentangling the complex relationship between ESG factors and financial performance, this thesis provides a more granular understanding of the potential financial implications of sustainable investing. The findings also have implications for corporate managers seeking to improve their firm’s ESG performance, suggesting that targeted improvements in specific areas, particularly the ‘social’ dimension, may lead to enhanced financial outcomes. Finally, this study contributes to the broader academic literature on sustainable finance by providing further empirical evidence on the financial effects of ESG integration within the U.S. market.

Keywords: ESG, Financial Performance, Sustainable Investing, Panel Data, GMM, Tobin’s Q, Return on Assets, Return on Equity

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