ESG Measurement and Financial Performance: A Comparison of Rating-Based and Disclosure-Based Evidence from European Listed Firms

Sammanfattning

Abstract Purpose: This study examines whether the relationship between sustainability-related activities and corporate financial performance depends on how ESG performance is measured. It focuses on European listed firms and compares a composite ESG rating with selected disclosure-based ESG indicators. Design/methodology/approach: The study uses a pooled firm-year panel of 4,319 observations across 1,223 European listed firms for the period 2020–2024, obtained from LSEG Refinitiv Workspace. Observations with non-positive ROA are excluded, and ROA is winsorised at the 1st and 99th percentiles. Two pooled OLS regression models are estimated with HC3 robust standard errors and year fixed effects. The first model uses the Refinitiv ESG score; the second uses CO₂ intensity, board independence, and female representation in management, with firm size as a control variable. Findings: The results suggest that both regression models are statistically significant, but the individual ESG variables show different patterns. The composite ESG score is positively associated with ROA. In the disclosure-based model, CO₂ intensity and board independence are positively associated with ROA, while female representation in management shows no significant relationship. These results provide exploratory evidence that the ESG–ROA association may differ depending on how ESG is measured, though caution is warranted given the model limitations. Originality: The study contributes to the ESG and financial performance literature by comparing rating-based and disclosure-based measurement within the same empirical setting. Rather than resolving debates about ESG measurement or construct validity, the study engages with these concerns by exploring whether measurement choice is associated with different empirical patterns. Research limitations: The study uses pooled OLS and does not establish causality. Firm and industry fixed effects are not included, and the complete-case sample may be biased toward larger and more transparent firms. Leverage is excluded due to missing data, and the disclosure-based model includes only three ESG indicators. Practical implications: The findings suggest that managers and investors should be cautious when interpreting composite ESG scores as direct indicators of short-term profitability. Disclosure-based indicators may provide more transparent information about specific sustainability activities. Social implications: The study highlights the importance of transparent and reliable ESG disclosure. Improved measurement of sustainability-related activities can support better decision-making by firms, investors, regulators, and other stakeholders.