Epsilon Archive for Student Projects

Abstract

The aim of this study is to contribute to a better understanding of the relationship between firm-level sustainability performance and financial performance among European firms.
The research has been conducted by collecting secondary financial and ESG data between 2014-2023 from a selection of 600 European firms across multiple industries and markets, that as of February 2026 make up the STOXX Europe 600 Index.
The data analysis was performed by conducting a panel regression with firm and year fixed effects, lagged ESG scores (t-1 and t-2), clustered standard errors, and winsorization of all continuous variables at the 1st and 99th percentile. The sample includes 508 firms and 4,833 firm-years after cleaning for missing financial and ESG data.
The analysis shows no significant association at t-1 and negative significant association at t-2 (β = -0.0364, p = 0.005). A joint Wald test confirms that the two ESG lag coefficients are jointly significant (χ²(2) = 8.03, p = 0.018), with the effect concentrated at the two-year horizon. The research null hypothesis (H0), that the association between sustainability and financial performance is non-positive, cannot be rejected. The findings are consistent with recent European evidence of a negative association between sustainability and financial performance.
This is the first European study to combine lagged ESG, firm fixed effects and within-industry analysis simultaneously, adding temporal precision to the negative ESG-ROA pattern documented in prior European studies.