ESG Factors: How Are Stock Returns, Operating Performance, and Firm Value Impacted?

(Pages 144-153)

Joseph Falzon* and Reana Micallef**
University of Malta, Department of Banking & Finance, Malta


This study evaluates the relationship between an aggregate score for environmental, social, and governance indicators and financial performance for US firms. The study uses publicly listed firms on the S&P Mid Cap 400, S&P 500, and the S&P Small Cap 600 Index. To accomplish the empirical analysis of this dissertation, two methods are used; the Fama & French portfolio formation method and a panel regression of operating performance (ROA) and firm value (Q) against ESG.

The stock return analysis using Fama and French methodology is implemented by forming portfolios of firms with robust ESG scores and lower ESG scores using the top 10% of the S&P 1500 and the lowest 10% of companies. We find a negative alpha for both portfolios, which is less negative for the High ESG portfolio, displaying a link between ESG and CFP. The operating/firm value analysis uses annual data from 2010 – 2016 for 1,371 companies. ROA and Tobin's Q (dependent variables) are regressed on ESG, controlling for firm size and sales growth. A weak positive relationship is discovered between ROA, Q, and ESG.

An agreement on the effect of sustainability factors on performance has not been established in the existing literature. Some studies indicate a positive link between sustainability factors. Alternate studies show an inverse connection. Still, various studies have unclear results or are absent from statistical influence. Consequently, this creates opportunities for further investigation on the subject.


Corporate Financial Performance, ESG score, Fama & French, Stock Returns, Sustainability.

How to Cite:

Joseph Falzon and Reana Micallef. ESG Factors: How Are Stock Returns, Operating Performance, and Firm Value Impacted?. [ref]: vol.20.2022. available at:

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