Oil and gas companies' ESG performance and firm value: impact of COVID-19 and the comparison between advanced economy and emerging market firms

Although there are extensive literatures that evaluate the ESG performance-firm financial performance (i.e., ESGP-FP) relationship, research on the ESGP-FP hyperlink among oil and gas companies (O&G) remain scarce. For practitioners especially oil firm managers, empirical work on ESG that account for the impacts of the recent COVID-19 pandemic and that also differentiate between advanced economy (AE) oil firms and emerging market (EM) oil firms are sorely lacking. This paper fills that gap. This study aims to explore i) if better ESG performance leads to higher firm value for O&G companies, ii) if better ESG performance leads to higher firm value for O&G companies during the COVID-19 pandemic, and iii) whether the ESGP-FP relationship is the same for AE oil firms and EM oil firms. ESG ratings are gathered from ESG provider ESG Book whereas oil companies’ financial performance data are retrieved from YCharts. The study examines a 4-year period from 2018 to 2021 to facilitate understanding the ESGP-FP relationship both before COVID-19 and upon the outbreak of the pandemic. Based on regression analyses of an unbalanced panel data of 85 global O&G companies across a 4-year period, this paper finds an overall positive ESGP-TOBINQ relation. Employing the COVID-19 pandemic as an event study, this paper discovers a value-destroying effect of ESGP on firm value one year into the outbreak. Upon segregating the larger sample into two groups comprising AE oil firms and EM oil firms, this paper confirms a positive ESGP-FP relation for the former but a negative ESGP-FP relation for the latter. This study makes a 2-part contribution to the body of knowledge on ESG-FP – and especially for ESG-FP research that focus on the O&G industry. Firstly, during economic downturns, ESG performance of oil companies have a negative effect on firm value. Secondly, EM oil firms that undertake ESG initiatives and garner high ESG performance are not positively rewarded in terms of firm market valuation unlike their AE counterparts. The study offers implications to oil firm managers especially the need to optimise ESG undertakings during economic crisis to avoid eroding firm market value. For managers of EM oil firms, the current negative ESGP-FP relation sets forth the need to be more innovative and cost-effective in conducting ESG activities as well as better showcasing ESG benefits and value such that EM investors do not continue viewing ESG initiatives as expensive, sacrificing scarce firm resources, or a disguise for managers’ personal gains