A cross-country analysis on the relation between sustainability performance and financial performance: Empirical evidence from Europe

The aim of this paper is to find an answer to a question that has received extended attention in prior literature, but for which evidence provided has not yet reached a single unanimous consent: is there an association between companies’ corporate sustainability performance (CSP), as measured by inclusion in Dow Jones Sustainability Index Europe (DJSI Europe), and their corporate financial performance, proxied by return on assets (ROA) and return on equity (ROE)? The paper adopts pooled ordinary least square (OLS) regression models, as well as fixed effects (FE) panel data models to focus on the association between CFP and CSP in a cross-country analysis based on European companies. The application of OLS models reveals a significantly strong positive impact of high CSP on CFP, when proxied by ROA and a neutral relation when measured by ROE. Under the FE models, the coefficient for CSP is statistically insignificant when CFP is measured by ROA. A negative relation is found when CFP is measured by ROE and CSP is proxied by a measure that assesses inclusion in DJSI Europe on an annual basis. When the analysis is taken a step further, to include temporal consistency in the construction of the CSP, the sign of the association changes - for ROE, or becomes significantly positive - for ROA. Our analysis therefore suggests that when simultaneity biases are included in the model, and once temporal effects are controlled for, CSP and CFP are positively related, when CFP is measured by either ROA or ROE. Overall, the findings suggest that the CSP – CFP relation is sensitive to firm specific heterogeneity, and the choice of proxy for each of the two types of performance.