University of Western Ontario

Department of Economics
Financial Economics

The ESG Impact and Firms’ Performance by Industries

Corporate Finance Final Project

Chloe (Jinghong) Wu #: 251172455

Cassie (Yingting) He #: 250859374
Course Code: Economic 9502B
Word Count: 2826

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Contents
Abstract ...................................................................................................................................................... 2
1. Introduction............................................................................................................................................ 3
2. Literature Review and Hypothesis Development ................................................................................ 4
3. Data Description .................................................................................................................................... 6
4. Methodology ........................................................................................................................................... 8
5. Findings .................................................................................................................................................. 9
6. Conclusion ............................................................................................................................................ 11
References................................................................................................................................................. 13
Appendix................................................................................................................................................... 15
SAS Code .................................................................................................................................................. 23

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 Abstract

This paper investigates the relationship between environmental, social, and governance

(ESG) disclosure and firm performance and profitability which is measured by return on assets

(ROA). We calculate the ESG score by aggregating the scores based on corporate social

responsibility (CSR) data from the MSCI ESG KLD STATS (KLD) data from 1991 to 2018. We

divide the total sample by industries and choose the top five industries with the most data points

for further tests. We run two fixed-effect GLM regressions for the total sample and subsamples

and investigate the relationship between ROA and the aggregate and decomposed ESG scores.

Though the ESG scores have significant positive impacts on the performance of some firms, the

impacts can vary according to industry. The governance score has the most significant positive

impact on firms’ performance in the Manufacturing industry, while the environmental score has

the most significant negative impact on the Mining industry.

Key Words: CSR, ESG, firm performance, firm profitability, industries

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1. Introduction

Environmental, social, and governance (ESG) have received more and more attention

these years since companies have been encouraged to behave in a socially responsible manner.

The environmental dimension assesses a company’s impact on the environment. The social

dimension assesses how businesses treat and value people. The governance dimension assesses

corporate policies and how companies are governed thus stakeholder interests can be met and

firms’ long-term goals can be transparent. Social responsibility has a positive effect on firms’

financial performance, and it is also helpful for reducing their potential risks. Besides, reputation

is an important factor for a company to attract enough customers. Every firm is encouraged to

disclose its ESG activities to stakeholders to promote accountability and reputation since it can

enhance value for firms. Therefore, ESG has become an important indicator of a firm’s non-

financial performance. However, the idea of ESG might be on the opposite side of corporate

economics since the concept causes a higher cost structure, especially in the short run. For

example, the companies which rely heavily on fossil fuels have to apply renewable energy which

leads to extra costs. Reputation is important for customers to make purchase decisions in the

current society with a rapidly developed network. Companies which do not adopt ESG are likely

to be criticized by the media which has negative impacts on the companies’ reputation, and it

makes the firms hard to attract enough clients to generate profits. Besides, the potential penalty

from governments for the companies which do not adopt ESG will increase their costs. Some

literature argues negative or neutral impacts of ESG exist on firms’ financial performance.

Therefore, in the long run, it is hard to determine whether ESG truly increases the firm value. In

our paper, we aim to investigate whether ESG is associated with company profitability in

different industries.

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2. Literature Review and Hypothesis Development

The relationship between social responsibility and firm performance has been assessed in

the literature in the past years. Most academic literature papers demonstrate the positive and

significant effects of the implementation of ESG on the firm's profitability. Brogi and Lagasio

(2018) study the relationship between environmental, social, and governance (ESG) disclosure

and company profitability which is calculated by the return on assets (ROA). They apply a two-

step methodology: First, they generate an ESG index by equally weighting the scores in each of

the environmental, social, and governance dimensions of ESG by each company in the sample.

Besides, a linear regression model is used to examine whether companies’ profitability is related

to ESG scoring. Last, the model is run over three components of the ESG score - environmental,

social, and governance to assess which is the most important driver of ROA. As measured by

ROA, they find a significant and positive association between ESG and the environmental

awareness in banks is largely related to profitability.

Besides Orlitzky, Schmidt and Rynes (2003) apply a meta-analysis of 52 studies and the

results demonstrate that a strong and positive one-to-one relationship is found between corporate

social performance (CSP) and corporate financial performance (CFP). For example, CSP is more

highly correlated with accounting-based CF than other indicators of CSP. This meta-analysis

ensures the strong relationship between CSP and CFP.

Last, Eccles, Loannou, and Serafeim (2014) examine the impact of corporate

sustainability on organizational processes and performance. They study a sample of 180 U.S.

companies, 90 of which are defined as high sustainability firms while another 90 are defined as

low sustainability firms. For labour supply, the result demonstrates that highly trained human

capital will prefer high-quality brands with high ESG scores which increases the firms’ survival

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rate and make them able to compete in the market. During the 18 years, the high sustainability

firms outperform the low sustainability firms related to stock markets and accounting

performance. High sustainability firms benefit more in B2C sectors and especially where firms’

products rely on extracting heavy amounts of natural resources. Moreover, high sustainability

companies are more able to establish processes for stakeholder engagement, realizing long-term

goals, conducting higher measurements and disclosure of non-financial information. However,

survivorship bias and omitted variables can also be the potential reason for the significant and

positive impact of the ESG scores on organizational performance.

Although the predominant literature finding demonstrates the positive relationship

between ESG and financial performance, some negative or neutral impacts of ESG on financial

performance are also displayed. McWilliams and Siegel (2000) demonstrate a certain flaw in

existing econometrics studies of the relationship between CSR and financial performance. Their

studies assessed the impact of CSR by regressing firm performance on CSR and some control

variables. This model is inaccurate since it does not control for investment in R&D which is a

key factor indicator of firm performance. It leads to upwardly biased estimates of the impact of

CSR. After the model is properly set, the result shows that CSR has a neutral impact on firms’

financial performance.

Kang, Huh and Lee (2010) assess the various impacts of positive and negative CSR

activities on firms’ financial performances including profitability and firm value across four

industries in the hospitality field. The results demonstrate that a positive impact of positive CSR

activities is shown on the firm value measured by PER and Tobin’s Q while there is an

insignificant impact of positive and negative CSR on profitability. However, negative CSR

activities harm the firm value. The mixed results are important for managements’ strategic

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decision-making for implementing CSR since CSR helps increase firm value through increasing

social responsibility such as for hotels and restaurants or decreasing social responsibility such as

for airlines.

Based on the literature on ESG research, there is still controversy whether social

responsibility and firm performance are associated closely and how social responsibility impacts

the firm’s performance according to various industries. To resolve the confusion, two hypotheses

are proposed in our paper:

1) ESG has significantly positive relationships with firms’ performance.

2) The ESG’s impacts on the firm’s performance can vary for Industries.

3. Data Description

Following Deng, Kang, and Low (2013), we collect the annual corporate social

responsibility (CSR) data from the MSCI ESG KLD STATS (KLD) database from 1991 to 2018.

‘The KLD database covers approximately 650 companies that comprise the Domini 400 Social

SM Index and the S&P 500 since 1991 and more than 3,000 firms that comprise the Russell 3000

since 2003” (Deng et al., 2013). The ESG scores are calculated based on the CSR data referring

to the methods in Lioui and Tarelli (2021).We adopt the environmental and governance strength

and concern variables categorized in the KLD database and use the strengths and concerns of the

categories -- community, diversity, employee relations, human rights, and product as jointly

contributing to the social variable. Then, we calculate the differences between the sum of

strengths and the sum of concerns for the firm-year, which are normalized by the total number of

potential strengths (concerns) respectively:

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 1 %
1 %
𝐸𝑠𝑐𝑜𝑟𝑒 = Σ()* 𝐸!"#$%&"',( − Σ()* 𝐸,-%,$#%,( , (1)
𝑛!"#$%&"' 𝑛,-%,$#%

where 𝐸!"#$%&"',( are the environmental strength variables, and 𝑛!"#$%&"' is the total number of

potential strengths. 𝐸,-%,$#%,( are the environmental concern variables, and 𝑛,-%,$#% is the total

number of potential concerns.

1 %
1 %
𝑆𝑠𝑐𝑜𝑟𝑒 = Σ()* 𝑆!"#$%&"',( − Σ()* 𝑆,-%,$#%,( , (2)
𝑛!"#$%&"' 𝑛,-%,$#%

where 𝑆!"#$%&"',( are the social strength variables, and 𝑆,-%,$#%,( are the social concern variables.

1 %
1 %
𝐺𝑠𝑐𝑜𝑟𝑒 = Σ()* 𝐺!"#$%&"',( − Σ()* 𝐺,-%,$#%,( , (3)
𝑛!"#$%&"' 𝑛,-%,$#%

where 𝐺!"#$%&"',( are the governance strength variables, and 𝐺,-%,$#%,( are the governance

concern variables.

The ESG score is calculated as the average of the three scores above:

1
𝐸𝑆𝐺𝑠𝑐𝑜𝑟𝑒" = (𝐸𝑠𝑐𝑜𝑟𝑒" + 𝑆𝑠𝑐𝑜𝑟𝑒" + 𝐺𝑠𝑐𝑜𝑟𝑒" ), (4)
3

The return-on-total assets (ROA) annual data from 1991 to 2018 is collected from the

CompStat database, using the net income variable divided by the total asset variable. Meanwhile,

referring to the research of Brogi and Lagasio (2018), we also adopt the logarithm of the total

asset (size) as the control variable to study the relationships between the ESG scores and the firm

performance (ROA).

The total sample size after data consolidation is 47,249 observations. We use the SIC

industry classification code to divide the total sample by industries and choose the top five

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industries (Finance, Insurance & Real Estate; Manufacturing; Services; Mining; and

Transportation & Public Utilities) with the most data points for further tests. The summary

statistics of the total sample and subsamples of five different industries are reported in Table 1

and Table 2. We can see in Table 1 that the means of the separate and combined ESG scores are

generally negative. This may be influenced by the characteristics of the historical data back to

the 1990s. The governance score has the largest magnitude of mean and standard deviation

among the ESG variables. Table 2 shows that the Finance, Insurance & Real Estate and Services

industries have a positive mean of the environmental score, while the rest industries have a

negative mean of environmental score. By the magnitude of the statistics, the environmental

score is the most influential in the Mining industry, and the governance score is the most

influential in the manufacturing and services industries.

4. Methodology

Table 3 and Table 4 report the correlations between variables in the total sample and

subsamples in five industries. There are no significant correlations between the independent

variables except the ESG score and its decomposed elements. Therefore, we decide to regress the

ROA on two models, one for the ESG score and another one for the decomposed elements. As

discussed in Brogi and Lagasio (2018), the firm performance has a stronger association with

ESG scores when the dependent variable is in the same period as the independent variables. That

is, we will use 𝑅𝑂𝐴" instead of 𝑅𝑂𝐴".* in our regressions. The first model is to regress on the

ESG score, controlling the firm size variable and fixing effects from the time (year dummy

variables) and firm-specific characteristics (absorbed due to space limit):

𝑅𝑂𝐴" = 𝛽* 𝐸𝑆𝐺𝑠𝑐𝑜𝑟𝑒" + 𝛽/ 𝑆𝑖𝑧𝑒" + 𝛾𝑌𝑒𝑎𝑟 + ℇ (5)

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The second Model is to regress on the environmental, social and governance scores separately,

controlling the firm size variable and fixing effects from the time (year dummy variables) and

firms specifics (absorbed due to space limit):

𝑅𝑂𝐴" = 𝛽* 𝐸𝑠𝑐𝑜𝑟𝑒" + 𝛽/ 𝑆𝑠𝑐𝑜𝑟𝑒" + 𝛽0 𝐺𝑠𝑐𝑜𝑟𝑒" + 𝛽1 𝑆𝑖𝑧𝑒" + 𝛾𝑌𝑒𝑎𝑟 + ℇ (6)

Thus, we can test the relationship of firms’ performance with the ESG score as well as its

decompositions. We decide to adopt the fixed effects method because it notably decreases the

standard errors of the output and increases the model fit. The regression results are shown in the

following section.

5. Findings

After fitting the two models, we get the regression results in Table 5 and Table 6. Table 5

reports the fixed-effects general linear model (GLM) output for the total sample. The

environmental score is significantly negative with a -0.181 coefficient and a 0.087 p-value within

the 0.10 significance level in model 2, which is opposite to our initial hypothesis. The difference

can be the result of sample source and sample period choices. As discussed in Lioui and Tarelli

(2021), the data vendor differences have substantial implications on the performance of the ESG

factor. We also take a longer history of sample than similar studies such as in Brogi and Lagasio

(2018). The firm size control variable has a positive coefficient, 0.125 in both models with p-

values smaller than 0.0001. The standard errors of the coefficients are relatively small and are

generally below 0.15. The sample used by the models is 56,556 observations, which is large

enough for our analysis. The R-square statistics for both models are relatively large at 0.772. The

F-statistic is 35.73 for the first model and 35.72 for the second model. The root-mean-square

error (RMSE) statistics are relatively small for both models, at 0.826.

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 Table 6 reports the fixed-effects GLM regression output for the subsamples in five

industries – 1) Finance, Insurance & Real Estate, 2) Manufacturing, 3) Services, 4) Mining, and

5) Transportation & Public Utilities respectively. For the Finance, Insurance & Real Estate

(finance) industry, the environmental score has a negative significant coefficient at -0.623, with a

p-value equal to 0.053 within the 0.10 significance level in model 2. The standard error is

relatively small at 0.322. While the rest variables in the first and second models are not

significant. This result indicates that the ESG scores do not have a very significant impact on the

firm performance or profitability of the finance industry in the past three decades. The

environmental score has some negative relationship with firms’ profitability, but it is not too

robust.

For the Manufacturing industry, the governance score has a positive significant

coefficient at 0.075, with a p-value equal to 0.041 within the 0.05 significance level in model 2.

The standard error is relatively small at 0.037. The firm size control variable is also significant

with a p-value smaller than 0.0001. The model uses 17,807 sample observations. The R-square

and F-statistics are sufficiently large at 0.967 and 246.08 respectively and the RMSE is small at

0.225 in model 2. This outcome indicates that the governance score has a significant influence on

firms’ performance and profitability, especially in the manufacturing industry. The result aligns

with the study of Sumarno et al. (2016), where good corporate governance has a positive,

significant, and direct impact on manufacturing firms’ performance and profitability.

For the Mining industry, the ESG score has a significant negative coefficient at -0.44,

with a p-value equal to 0.084 within the 0.10 significance level in model 1. The standard error is

0.254. This effect is mainly driven by the environmental score in model 2, where the coefficient

is -0.305 with a p-value equal to 0.037 within the 0.05 significance level. The standard error is

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small at 0.146. The firm size control variable is significant in both models with a p-value smaller

than 0.0001. Both models incorporate 2,477 observations. The R-square is 0.4 (0.401); the F-

statistic is 5.79 (5.75); and the RMSE is 0.334 (0.334) in model 1(model 2). The regression

outcome indicates that the ESG scores (especially the environmental score) have a significant

negative impact on the firms’ profitability in the mining industry. It is intuitive as the mining

industry relies heavily on natural resources. For the Service and Transportation& Public Utilities

industries, both models do not generate a very significant indication of the relationship between

the ESG scores and the firm’s profitability.

The model test outcomes demonstrate that some components of the ESG scores can have

a significantly positive impact on firms’ performance and profitability. The impact varies by firm

industries. For firms relying heavily on natural resources, the impact of ESG scores (or ESG

index) can be negative on firms’ performance. It also partially explains why there is a weakly

negative relationship between the ESG scores and the firms’ profitability in the finance industry -

- where companies’ performance has a strong connection with other industries.

6. Conclusion

In this paper, we have studied the relationships between the ESG aggregate and

decomposed scores and firm performance and profitability (measured by ROA). We have

proposed two hypotheses based on the literature -- 1) ESG has significantly positive relationships

with firms’ performance. 2) The ESG impact on the firm’s performance can vary for Industries.

Adopting the fixed-effect GLM models, we test firms’ ROA (profitability) regressing on the

ESG scores and the firm size control variable. The regression results show that some companies

show significant positive effects of ESG (or a single component of ESG) scores on the firms’

performance and profitability. However, the relationship varies and even reverses according to

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different industries. The governance score has the most significant positive impact on firms’

performance in the Manufacturing industry, while the environmental score has the most

significant negative impact on the Mining industry. The test results align well with our second

hypothesis and partially agree with our first hypothesis. Further studies and explorations can be

done to address the different associations between ESG scores and the firms’ performance in

different industries. Our research also provides implications and insights to policymakers

promoting the ESG developments. That is, the incentive and capability to adopt the ESG

mandate vary by industry as the association between ESG and firm performance varies in

different industries. Policymakers and company decision-makers should consider the diversity of

industry and company characteristics and adapt the ESG policies to the specific conditions.

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 References

Brogi, M. and Lagasio, V. (2018). Environmental, social, and governance and company

profitability: Are financial intermediaries different? Corporate Social Responsibility and

Environmental Management, 26, 576–587. https://doi.org/10.1002/csr.1704.

Deng, X., Kang, J., & Low, B. S. (2013). Corporate Social Responsibility and Stakeholder Value

Maximization: Evidence from Mergers. Journal of Financial Economics, 110, 1, 87-109.

Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The Impact of Corporate Sustainability on

Organizational Processes and Performance. Management Science, 60(11), 2835–2857.

https://doi.org/10.1287/mnsc.2014.1984.

Kang, H. K., Lee, S. & Chang, H. (2010). Impacts of Positive and Negative Corporate Social

Responsibility Activities on Company Performance in the Hospitality Industry,

International Journal of Hospitality Management 29(1):72-82,

https://doi.org/10.1016/j.ijhm.2009.05.00

Lioui, A. & Tarelli, A. (2021). Chasing the ESG Factor. Journal of Banking and Finance,

Forthcoming, Available at SSRN: https://ssrn.com/abstract=3878314 or

http://dx.doi.org/10.2139/ssrn.3878314.

McWilliams, A., & Siegel, D. (2000). Corporate social responsibility and financial performance:

Correlation or misspecification? Strategic Management Journal,

https://doi.org/10.1002/(SICI)1097-0266(200005)21:5<603::AID-SMJ101>3.0.CO;2-3.

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Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance:

A meta‐analysis. Organization Studies, 24(3), 403–441.

https://doi.org/10.1177/0170840603024003910.

Sumarno, J. Widjaja, S. & Subandriah, S. (2016) "The Impact of Good Corporate Governance to

Manufacturing Firm's Profitability and Firm's Value." Signifikan, 5, 2.

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 Appendix

Table 1: Summary Statistics of Total Sample

Variable Observations Mean Std Dev Minimum Maximum
Escore 47249 -0.002 0.047 -0.441 0.353
Sscore 47249 -0.006 0.040 -0.273 0.271
Gscore 47249 -0.011 0.060 -0.400 0.375
ESGscore 47249 -0.006 0.032 -0.280 0.210
ROA 47249 0.023 1.808 -150.125 226.310
Size (logTA) 47249 7.750 1.924 -3.817 14.780
Total Assets 47249 19899.706 106885.200 0.022 2622532.000
Note: Summary statistics of the environmental, social, governance and the combined ESG scores, ROA, firm size
(natural log of total assets) and the total assets are reported. Specifically, the table reports the observation number,
mean, standard deviation, minimum and maximum. Annual panel data is retrieved from the MSCI ESG KLD
STATS (available from 1991 to 2018) and CompStat databases on the WRDS website. Data vintage is April 2022.

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Table 2: Summary Statistics of Subsamples in Five Industries
Variable Observations Mean Std Dev Minimum Maximum
Finance, Insurance & Real Estate
Escore 20804 0.003 0.023 -0.250 0.294
Sscore 20804 -0.003 0.035 -0.182 0.225
Gscore 20804 -0.003 0.061 -0.400 0.250
ESGscore 20804 -0.001 0.026 -0.157 0.154
ROA 20804 0.030 2.266 -2.246 226.310
Size (logTA) 20804 8.333 2.743 -1.698 14.780
Total Assets 20804 56018.331 212764.017 0.183 2622532.000
Manufacturing
Escore 17807 -0.001 0.055 -0.441 0.353
Sscore 17807 -0.006 0.042 -0.191 0.271
Gscore 17807 -0.013 0.059 -0.300 0.375
ESGscore 17807 -0.007 0.035 -0.280 0.210
ROA 17807 -0.012 1.170 -120.974 2.170
Size (logTA) 17807 7.275 1.814 -3.817 13.081
Total Assets 17807 7789.752 25477.200 0.022 479921.000
Services
Escore 7065 0.004 0.026 -0.167 0.294
Sscore 7065 -0.006 0.039 -0.273 0.225
Gscore 7065 -0.014 0.059 -0.300 0.275
ESGscore 7065 -0.005 0.027 -0.175 0.171
ROA 7065 0.021 0.244 -12.331 0.722
Size (logTA) 7065 7.064 1.722 -1.013 12.464
Total Assets 7065 5481.586 15159.666 0.363 258848.000
Mining
Escore 2477 -0.024 0.068 -0.417 0.235
Sscore 2477 -0.014 0.038 -0.242 0.183
Gscore 2477 -0.008 0.062 -0.300 0.250
ESGscore 2477 -0.015 0.039 -0.231 0.143
ROA 2477 0.024 0.408 -6.971 6.198
Size (logTA) 2477 8.111 1.739 -1.118 12.088
Total Assets 2477 12235.817 24142.194 0.327 177757.000
Transportation& Public Utilities
Escore 4470 -0.01 0.06 -0.42 0.29
Sscore 4470 -0.01 0.04 -0.21 0.23
Gscore 4470 -0.01 0.06 -0.30 0.25
ESGscore 4470 -0.01 0.04 -0.22 0.16
ROA 4470 0.00 2.25 -150.13 2.76
Size (logTA) 4470 8.54 1.76 -1.31 13.18
Total Assets 4470 19377.44 45034.08 0.27 531864.00
Note: Summary statistics of the environmental, social, governance and the combined ESG scores, ROA, firm size
(natural log of total assets) and the total assets are reported. Specifically, the table reports the observation number,
mean, standard deviation, minimum and maximum for five different industries. Annual panel data is retrieved from
the MSCI ESG KLD STATS (data available from 1991 to 2018) and CompStat databases on the WRDS website.
Data vintage is April 2022.

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Table 3: Correlation Table of Total Sample
ROA Escore Sscore Gscore ESGscore Size
ROA 1.000 -0.003 0.010 0.001 0.003 0.031
Escore 1.000 0.250 0.086 0.622 -0.003
Sscore 1.000 0.111 0.601 0.179
Gscore 1.000 0.725 -0.094
ESGscore 1.000 0.013
Size 1.000
Note: The correlation coefficients of the environmental, social, governance, and the combined ESG scores, ROA,
and firm size (natural log of total assets) are reported. Annual panel data is retrieved from the MSCI ESG KLD
STATS (data available from 1991 to 2018) and CompStat databases on the WRDS website. Data vintage is April
2022.

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Table 4: Correlation Table of Subsamples in Five Industries
Finance, Insurance & Real Estate
ROA Escore Sscore Gscore ESGscore Size
ROA 1.000 -0.015 0.005 -0.001 -0.003 -0.006
Escore 1.000 0.247 0.009 0.412 0.123
Sscore 1.000 0.068 0.570 0.181
Gscore 1.000 0.808 -0.117
ESGscore 1.000 0.026
Size 1.000
Manufacturing
ROA Escore Sscore Gscore ESGscore Size
ROA 1.000 0.001 0.028 0.004 0.014 0.134
Escore 1.000 0.291 0.144 0.715 -0.040
Sscore 1.000 0.129 0.619 0.226
Gscore 1.000 0.685 -0.111
ESGscore 1.000 0.007
Size 1.000
Services
ROA Escore Sscore Gscore ESGscore Size
ROA 1.000 0.020 0.041 -0.003 0.024 0.171
Escore 1.000 0.278 0.004 0.465 0.151
Sscore 1.000 0.041 0.605 0.206
Gscore 1.000 0.755 -0.161
ESGscore 1.000 0.031
Size 1.000
Mining
ROA Escore Sscore Gscore ESGscore Size
ROA 1.000 -0.029 0.001 -0.024 -0.029 0.037
Escore 1.000 0.267 0.128 0.729 -0.190
Sscore 1.000 0.325 0.649 0.152
Gscore 1.000 0.704 -0.028
ESGscore 1.000 -0.075
Size 1.000
Transportation & Public Utilities
ROA Escore Sscore Gscore ESGscore Size
ROA 1.000 -0.002 0.000 0.000 -0.002 0.078
Escore 1.000 0.186 0.067 0.713 -0.134
Sscore 1.000 0.116 0.579 0.160
Gscore 1.000 0.626 -0.070
ESGscore 1.000 -0.054
Size 1.000
Note: The correlation coefficients of the environmental, social, governance, and the combined ESG scores, ROA,
and firm size (natural log of total assets) are reported. Annual panel data is retrieved from the MSCI ESG KLD
STATS (data available from 1991 to 2018) and CompStat databases on the WRDS website. Data vintage is April
2022.

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Table 5: Fixed-effect GLM Regression for the Total Sample
Variable Model 1 p-value Model 2 p-value
ESGscore 0.010 (0.142) 0.946
Escore -0.181 (0.106) 0.087
Sscore 0.026 (0.124) 0.834
Gscore 0.106 (0.075) 0.154
Size 0.125 (0.009) <.0001 0.125 (0.009) <.0001
Observations 56556 56556
𝑹𝟐 0.772 0.772
F-stat 35.730 35.720
RMSE 0.826 0.826
Note: The fixed-effect GLM regression results are reported. Specifically, the upper panel reports the coefficients and
p-values of the ESG score and firm size for the regression (Model 1) of ROA and the coefficients and p-values of
the environmental, social and governance scores and size for the regression (Model 2) of ROA. Standard errors are
shown in the parenthesis. The lower panel reports the observations, 𝑅! , F-statistics, and the root mean-square errors
(RMSE) of the models.

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Table 6: Fixed-effect GLM Regression for Subsamples in Five Industries
Finance, Insurance & Real Estate
Variable Model 1 p-value Model 2 p-value
ESGscore -0.121 (0.305) 0.693
Escore -0.623 (0.322) 0.053
Sscore 0.195 (0.248) 0.432
Gscore 0.026 (0.138) 0.853
Size -0.002 (0.018) 0.911 -0.001 (0.018) 0.960
Observations 19843 19843
R^2 0.861 0.861
F-stat 104.150 103.980
RMSE 0.889 0.889
Note: The fixed-effect GLM regression results are reported. Specifically, the upper panel reports the coefficients and
p-values of the ESG score and firm size for the regression (Model 1) of ROA and the coefficients and p-values of
the environmental, social and governance scores and size for the regression (Model 2) of ROA. Standard errors are
shown in the parenthesis. The lower panel reports the observations, 𝑅! , F-statistics, and the root mean-square errors
(RMSE) of the models.

Manufacturing
Variable Model 1 p-value Model 2 p-value
ESGscore 0.096 (0.062) 0.125
Escore -0.004 (0.043) 0.928
Sscore 0.008 (0.058) 0.888
Gscore 0.075 (0.037) 0.041
Size 0.039 (0.004) <.0001 0.039 (0.004) <.0001
Observations 17807 17807
R^2 0.967 0.967
F-stat 246.080 245.820
RMSE 0.225 0.225
Note: The fixed-effect GLM regression results are reported. Specifically, the upper panel reports the coefficients and
p-values of the ESG score and firm size for the regression (Model 1) of ROA and the coefficients and p-values of
the environmental, social and governance scores and size for the regression (Model 2) of ROA. Standard errors are
shown in the parenthesis. The lower panel reports the observations, 𝑅! , F-statistics, and the root mean-square errors
(RMSE) of the models.

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 Services
Variable Model 1 p-value Model 2 p-value
ESGscore -0.075 (0.112) 0.504
Escore -0.129 (0.105) 0.218
Sscore -0.069 (0.084) 0.412
Gscore 0.033 (0.052) 0.525
Size 0.015 (0.006) 0.012 0.016 (0.006) 0.008
Observations 7065 7065
R^2 0.486 0.486
F-stat 6.440 6.430
RMSE 0.187 0.187
Note: The fixed-effect GLM regression results are reported. Specifically, the upper panel reports the coefficients and
p-values of the ESG score and firm size for the regression (Model 1) of ROA and the coefficients and p-values of
the environmental, social and governance scores and size for the regression (Model 2) of ROA. Standard errors are
shown in the parenthesis. The lower panel reports the observations, 𝑅! , F-statistics, and the root mean-square errors
(RMSE) of the models.

Mining
Variable Model 1 p-value Model 2 p-value
ESGscore -0.440 (0.254) 0.084
Escore -0.305 (0.146) 0.037
Sscore -0.138 (0.246) 0.576
Gscore -0.006 (0.146) 0.966
Size -0.140 (0.017) <.0001 -0.143 (0.017) <.0001
Observations 2477 2477
R^2 0.400 0.401
F-stat 5.790 5.750
RMSE 0.334 0.334
Note: The fixed-effect GLM regression results are reported. Specifically, the upper panel reports the coefficients and
p-values of the ESG score and firm size for the regression (Model 1) of ROA and the coefficients and p-values of
the environmental, social and governance scores and size for the regression (Model 2) of ROA. Standard errors are
shown in the parenthesis. The lower panel reports the observations, 𝑅! , F-statistics, and the root mean-square errors
(RMSE) of the models.

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 Transportation & Public Utilities
Variable Model 1 p-value Model 2 p-value
ESGscore 0.465 (1.162) 0.689
Escore -0.151 (0.679) 0.824
Sscore 0.948 (0.971) 0.329
Gscore 0.029 (0.672) 0.966
Size 1.480 (0.086) <.0001 1.483 (0.086) <.0001
Observations 4470 4470
R^2 0.214 0.214
F-stat 2.590 2.580
RMSE 2.097 2.097
Note: The fixed-effect GLM regression results are reported. Specifically, the upper panel reports the coefficients and
p-values of the ESG score and firm size for the regression (Model 1) of ROA and the coefficients and p-values of
the environmental, social and governance scores and size for the regression (Model 2) of ROA. Standard errors are
shown in the parenthesis. The lower panel reports the observations, 𝑅! , F-statistics, and the root mean-square errors
(RMSE) of the models.

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SAS Code

libname final "E:\Western MFE\2022 Winter\ECON9502 Corporate Finance\Final

Project";

/*Environmental*/
data E;
set final.E;
array change _numeric_;
do over change;
if change=. then change=0;
if change= "R" then change=0;
end;
run ;

data E_score;
set E;
Escore = (ENV_STR_NUM/17 - ENV_CON_NUM/12);
*COMPANYNAME CUSIP ISSUERID DOMICILE LEGACY_COMPANYID;
keep TICKER YEAR Escore;
run;

/*Governance*/
data G;
set final.G;
array change _numeric_;
do over change;
if change=. then change=0;
if change= "R" then change=0;
end;
run ;

data G_score;
set G;
Gscore = CGOV_STR_NUM/8-CGOV_CON_NUM/10;
keep TICKER YEAR Gscore;
run;

/*Social*/
data S;
set final.S;
array change _numeric_;
do over change;
if change=. then change=0;
if change= "R" then change=0;
end;
run ;

data S_score;
set S;
Sscore =
(COM_STR_NUM+DIV_STR_NUM+EMP_STR_NUM+HUM_STR_NUM+PRO_STR_NUM)/(8+9+14+4+12)-
(COM_CON_NUM+DIV_CON_NUM+EMP_CON_NUM+HUM_CON_NUM+PRO_CON_NUM)/(4+5+8+10+6);
keep TICKER YEAR Sscore;
run;

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proc sql;
create table ESG as
select *
from E_score, S_score, G_score
where E_score.TICKER = S_score.TICKER = G_score.TICKER and E_score.YEAR =
S_score.YEAR = G_score.YEAR;
quit;

/*ESG*/
data ESG_score;
set ESG;
ESGscore = 1/3*(Escore+Sscore+Gscore);
run;

/*Firm Characteristics*/
data firm_charac;
set final.charac;
ROA = NI/AT;
Size = log(AT);
run;

proc sql;
create table data as
select *
from ESG_score, firm_charac
where ESG_score.TICKER = firm_charac.TIC and ESG_score.YEAR =
firm_charac.FYEAR;
quit;

data data_var;
set data;
if ROA~=.;
if Size~=.;

/*Summary Statitsics*/
proc means maxdec=4 data= data_var;
var Escore Sscore Gscore ESGscore ROA AT Size;
title 'Summary Statitsics';
run;

/*SIC Sector*/
proc import datafile = 'E:\Western MFE\2022 Winter\ECON9502 Corporate
Finance\Final Project\SIC_Industry.xlsx'
out = SIC_industry
dbms = xlsx
replace;
run;

data SIC;
set SIC_industry;
keep Ticker_Symbol Data_Year___Fiscal SIC_industry;
run;

/*Combined total data*/

proc sql;
create table data_var1 as

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select *
from SIC, data_var
where SIC.Ticker_Symbol = data_var.TIC and SIC.Data_Year___Fiscal =
data_var.FYEAR;
quit;
data final.data_variables;
set data_var1;
run;
/*Correlation.*/
proc corr data = data_var1;
var ROA Escore Sscore Gscore ESGscore Size;
title 'Correlation Table';
run;
/*Regression 1*/
proc glm data = data_var1;
absorb TIC;
class year;
model ROA = ESGscore Size year/solution;
title 'Fixed Effects GLM Regression';
run;
/*Regression 2*/
proc glm data = data_var1;
absorb TIC;
class year;
model ROA = Escore Sscore Gscore Size year/solution;
title 'Fixed Effects GLM Regression';
run;

/*Industry
data=========================================================================
==================================*/
data Fin;
set data_var1;
where SIC_industry = 'Finance_Insurance_RealEstate';
run;
proc means maxdec=4 data= Fin;
var Escore Sscore Gscore ESGscore ROA AT Size;
title 'Summary Statitsics - Finance,Insurance& Real Estate';
run;
/*Correlation.*/
proc corr data = Fin;
var ROA Escore Sscore Gscore ESGscore Size;
title 'Correlation Table - Finance,Insurance& Real Estate';
run;
/*Regression 1*/
proc glm data = Fin;
absorb TIC;
class year;
model ROA = ESGscore Size year/solution;
title 'Fixed Effects GLM Regression - Finance,Insurance& Real Estate';
run;
/*Regression 2*/
proc glm data = Fin;
absorb TIC;
class year;
model ROA = Escore Sscore Gscore Size year/solution;
title 'Fixed Effects GLM Regression - Finance,Insurance& Real Estate';

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run;

/*=================================================*/
data Manu;
set data_var1;
where SIC_industry = 'Manufacturing';
run;
proc means maxdec=4 data= Manu;
var Escore Sscore Gscore ESGscore ROA AT Size;
title 'Summary Statitsics - Manufacturing';
run;
/*Correlation.*/
proc corr data = Manu;
var ROA Escore Sscore Gscore ESGscore Size;
title 'Correlation Table - Manufacturing';
run;
/*Regression 1*/
proc glm data = Manu;
absorb TIC;
class year;
model ROA = ESGscore Size year/solution;
title 'Fixed Effects GLM Regression - Manufacturing';
run;
/*Regression 2*/
proc glm data = Manu;
absorb TIC;
class year;
model ROA = Escore Sscore Gscore Size year/solution;
title 'Fixed Effects GLM Regression - Manufacturing';
run;

/*=================================================*/
data Ser;
set data_var1;
where SIC_industry = 'Services';
run;
proc means maxdec=4 data= Ser;
var Escore Sscore Gscore ESGscore ROA AT Size;
title 'Summary Statitsics - Services';
run;
/*Correlation.*/
proc corr data = Ser;
var ROA Escore Sscore Gscore ESGscore Size;
title 'Correlation Table - Services';
run;
/*Regression 1*/
proc glm data = Ser;
absorb TIC;
class year;
model ROA = ESGscore Size year/solution;
title 'Fixed Effects GLM Regression - Services';
run;
/*Regression 2*/
proc glm data = Ser;
absorb TIC;
class year;
model ROA = Escore Sscore Gscore Size year/solution;

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title 'Fixed Effects GLM Regression - Services';
run;

/*=================================================*/
data Mine;
set data_var1;
where SIC_industry = 'Mining';
run;
proc means maxdec=4 data= Mine;
var Escore Sscore Gscore ESGscore ROA AT Size;
title 'Summary Statitsics - Mining';
run;
/*Correlation.*/
proc corr data = Mine;
var ROA Escore Sscore Gscore ESGscore Size;
title 'Correlation Table - Mining';
run;
/*Regression 1*/
proc glm data = Mine;
absorb TIC;
class year;
model ROA = ESGscore Size year/solution;
title 'Fixed Effects GLM Regression - Mining';
run;
/*Regression 2*/
proc glm data = Mine;
absorb TIC;
class year;
model ROA = Escore Sscore Gscore Size year/solution;
title 'Fixed Effects GLM Regression - Mining';
run;

/*=================================================*/
data Tran;
set data_var1;
where SIC_industry = 'Transportation_Public_Utilities';
run;
proc means maxdec=4 data= Tran;
var Escore Sscore Gscore ESGscore ROA AT Size;
title 'Summary Statitsics - Transportation& Public Utilities';
run;
/*Correlation.*/
proc corr data = Tran;
var ROA Escore Sscore Gscore ESGscore Size;
title 'Correlation Table - Transportation& Public Utilities';
run;
/*Regression 1*/
proc glm data = Tran;
absorb TIC;
class year;
model ROA = ESGscore Size year/solution;
title 'Fixed Effects GLM Regression - Transportation& Public Utilities';
run;
/*Regression 2*/
proc glm data = Tran;
absorb TIC;
class year;

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model ROA = Escore Sscore Gscore Size year/solution;
title 'Fixed Effects GLM Regression - Transportation& Public Utilities';
run;

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