Which Came First: The Sustainable Practices or The Financial Performance? An Analysis of the Relationship Between Corporate Social Responsibility Practices and Company Profitability

In recent years, corporate social performance (CSP) has continued to become an integral part of any business, however the true financial impact of these practices is still highly debated. The environmental, social, and corporate governance (ESG) scores assigned by databases such as Bloomberg or Thomson Reuters Eikon are a newer form of valuation to quantify the positive impact companies are making through sustainable practices related to production, employee and community relationships, and company leadership. This thesis explores the impact corporate social performance has on firm profitability in the manufacturing and trade industries over a 10 year time period spanning from 2009 to 2018. This paper shows that while ESG score is positively linearly related to certain financial performance indicators, it does not account for enough of the variation in firm performance to claim a strong positive relationship. However, it is concluded that sustainability practices, again measured by ESG score, are a result of increased financial performance and firm size. This finding suggests that ESG practices are an essential investment made by larger public companies that are more visible due to increased attention from press and consumers. Specifically, ESG ratings are tested both as a factor of financial performance and as a result of it. Financial performance is measured using indicators such as annual return, return on assets, return on equity, and the price-to-earnings ratio without extraordinary items with controls for firm size and the leverage of the company. Data on ESG ratings comes from Thomason Reuters Eikon and data for controls and financial performance indicators come from Compustat