Differential Associations Between ESG Performance, Firm Value, and Profitability: Evidence From S&P 500 Companies in Energy and Energy‐Related Sectors

Abstract

Amid the growing prominence of sustainability considerations in financial decision‐making, the question of how environmental, social, and governance (ESG) performance translates into measurable financial outcomes has become particularly salient for industries exposed to intense regulatory pressure and environmental scrutiny, such as the energy sector. Addressing this issue, the paper investigates the relationship between ESG performance and firm‐level financial outcomes for a selected sample of 58 S&P 500 companies operating in energy and closely energy‐related activities, using historical firm‐level data covering 2015–2024. The analysis focuses on two widely used performance indicators, Tobin's Q and ROA, while ESG performance is captured through both a composite score and its environmental, social, and governance sub‐dimensions. The empirical models control for firm size, leverage, and sales growth and incorporate firm and year fixed effects with Driscoll–Kraay robust standard errors. The findings indicate that, in the preferred two‐way fixed‐effects specifications, aggregate ESG performance is negatively associated with both firm value and profitability, although the Tobin's Q association is statistically weak and sensitive to model specification. When the ESG pillars are estimated separately, environmental performance is negatively and significantly associated with both Tobin's Q and ROA, social performance is negatively and significantly associated with ROA but statistically insignificant for Tobin's Q, and governance performance is negatively associated with both outcomes, with weaker statistical evidence for Tobin's Q. In the combined‐pillar specifications, the environmental dimension remains negatively and significantly associated with Tobin's Q, while governance is also negatively associated with Tobin's Q and remains weakly negatively associated with ROA. The social dimension is statistically insignificant in both combined‐pillar models. Sales growth is positively associated with financial performance, with particularly consistent and statistically significant coefficients across the ROA specifications. Overall, the findings reveal that ESG–financial performance associations are heterogeneous across ESG dimensions and performance measures and suggest that, within the analyzed energy‐sector setting, stronger contemporaneous ESG performance does not necessarily translate into higher market valuation or accounting profitability. These results highlight the importance of accounting for firm growth dynamics and sector‐specific characteristics when evaluating the financial implications of ESG performance.