How Do ESG Ratings Impact the Valuation of the Largest Companies in Southern Europe?

This paper examines the relationship between ESG ratings, as a subset of criteria and a tool for assessing sustainability, and firm performance in Southern European economies. It focuses on publicly listed large-cap companies in Portugal, Italy, Greece, and Spain. By analyzing a sample of 110 firms over a four-year period and applying Ohlson’s valuation model, we evaluate how ESG scores influence these companies’ performance. Our findings indicate that the social dimension is positive and statistically significant, suggesting that investors in Southern Europe increasingly prioritize value social responsibility initiatives as they aim to identify and manage ESG risks. In contrast, the Environmental and Governance components do not show statistical significance. The “polluting dummy” variable is positive and significant at the 1% level, indicating a valuation premium for high-emission firms, possibly reflecting investors’ preference for financial stability in economically volatile environments. The baseline model yields an R2 of approximately 10%, consistent with expectations given the multifactor nature of stock prices. The study contributes to the sustainability literature by highlighting the nuanced and region-specific role that ESG factors play in market valuation. We discuss limitations related to the regional scope, rating methodologies, and model specification, and offer suggestions for future research.