ESG and The Petroleum Industry – Is there an Advantage : A quantitative study concerning the impact of ESG ratings on the financial performance of European petroleum companies

Background: Sustainability has emerged as a vital and pressing issue for both investors, corporate leaders, and policy makers. Sectors previously not exposed to sustainability matters,such as the petroleum industry, are now expected to toe the line in Europe. At the same time, the petroleum industry is one of the largest sectors worldwide and accounts for a significantportion of greenhouse gas emissions. Given this, and the mixed empiricism about financial performance and sustainability, this paper seeks to answer if the European petroleum industry benefits from sustainability and ESG practices in the form of financial reward. Purpose: The aim of this study is to investigate the correlation between ESG ratings and financial performance in European petroleum firms due to the changing legislative environment, growing importance of sustainability matters among policy makers and due to previously mixed results in other papers. Financial performance is measured through return on capital employed (ROCE) and Tobin´s Q. Method: This paper uses a quantitative method using secondary data from the Refinitiv Eikon database. The collected sample data were gathered for the years 2020-2021 and includes 30 companies. The data was gathered using Refinitiv Eikon and cleaned through Excel before being analysed in SPSS. The data is analysed through different OLS regression models and with a Pearson correlation matrix. Findings: No significant correlations are found between ESG ratings and ROCE or Tobin’s Q.Positive correlations are however found between ROCE and the ESG pillars of Environmentaland Social. Conclusion: The conclusions drawn is that within the petroleum industry, the investments in ESG does not significantly correlate positively with financial performance. This is further supported by shareholder theory, stating that the major focus of a company is to generate profits to its shareholders. While most of the alternative hypotheses were rejected, the Social and Environmental factors from the ESGC had a positive correlation with ROCE.