Exploring the Impact of ESG on Firm Performance : Empirical Evidence for the European Real Estate Sector

University essay from KTH/Fastighetsföretagande och finansiella system

Abstract: The increased interest in sustainability issues in recent years due to climate change has led to an increased interest among capital investors to invest more sustainably. In addition, there has been an increased interest among stakeholders, regulators and citizens to know more about the positive impact of sustainability reporting on business results. Sustainable investments are often followed by high costs, which makes it interesting from an investor perspective to investigate whether this investment can have a positive impact on a firm's financial result. Among the sectors that play a major role in sustainability investment is the real estate sector, as buildings currently account for 36 percent of CO2 emissions and 40 percent of energy consumption in the EU. Therefore, it is interesting to investigate how sustainability performance affects real estate firm performance. In this study, sustainability performance is measured using ESG scores while company performance is represented by ROA, ROE and Tobin's Q. Several regression analyses have been conducted using data from Eikon on real estate companies from 15 European countries. In addition to the overall ESG scores, the various ESG pillars were examined separately. The data analysis provides evidence of a positive significant impact of the overall ESG result on all three performance measures. Furthermore, we find that environmental disclosure has a positive impact on ROE and Tobin's Q, social disclosure has a positive effect on ROA and ROE and Governance disclosure has a positive effect on Tobin's Q. By applying these results to the shareholder- and the stakeholder theory, we can conclude that our study provides limited support for the stakeholder theory as most of our hypotheses are supported. This implies that the positive impact of sustainability investments on firm performance can lead to value creation for all stakeholders, not just the shareholders.

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