Environmental Performance and Firm Value: The Moderating Role of <scp>ESG</scp>‐Executive Compensation

ABSTRACT This paper examines the moderating role of executive compensation tied to environmental, social, and governance (ESG) metrics in the relationship between environmental performance and firm value. Data from 586 publicly listed European firms across various industries between 2016 and 2021 were analyzed using OLS regression and a series of robustness checks. Findings reveal a significant positive relationship between environmental performance and firm value within these firms. Furthermore, empirical evidence is provided proving that this relationship is strengthened when executive compensation is linked to ESG metrics. To enhance the robustness of the results, lagged variables of Tobin's Q and the generalized method of moments (GMM) were employed. This study offers valuable insights for policymakers, firms, and stakeholders regarding the strategic benefits of aligning executive compensation with ESG objectives, ultimately fostering improved environmental performance and greater firm value.