Examining the Relationship between ESG Score and Financial Performance of FTSE 100 Companies

PROJECT Finance and
Accounting

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION....................................................................................................3
CHAPTER 2: LITERATURE REVIEW.........................................................................................9
CHAPTER 3 : RESEARCH METHODOLOGY..........................................................................23
Research Type...........................................................................................................................23
Research Approach....................................................................................................................23
Research Philosophy..................................................................................................................24
Data Collection..........................................................................................................................25
Data analysis..............................................................................................................................25
Reliability and Validity..............................................................................................................26
Research Limitations.................................................................................................................26
Ethical Consideration.................................................................................................................27
CHAPTER 4: FINDINGS AND RESULTS.................................................................................27
CHAPTER 5: DISCUSSION AND CONCLUSION....................................................................31
Discussion..................................................................................................................................31
Conclusion.................................................................................................................................33
REFERENCES..............................................................................................................................35
APPENDIX....................................................................................................................................38

CHAPTER 1: INTRODUCTION
1.1 Background of the Study
In accordance with a practise that has lasted the test of time, analysts often use a preset
set of criteria when measuring the effectiveness and efficiency of businesses. For making a well-
informed investment choice it is important for investors to know efficiency of business and it is
the reason, data analysts present a set of criteria. “Return on Equity (ROE) and Return on
Investment (ROI)” are the two most essential profitability ratios (ROI) (Sinha Ray and Goel,
2022). The rate of return is the one that businesses offer to its shareholders on the money that
have invested by shareholders and it is one of the best method to measure the performance of a
corporation. ROI, on the other hand, measures the profitability of a firm relative to the amount of
money spent or invested by company. 8, therefore pointing the investment in the appropriate
direction (De Lucia et al., 2020).

So, it is important to know as whether it is important to stray from the norm at this
particular time or not. “Environment, Social, and Governance Score, sometimes known as the
ESG Score” and it is a method that may be used by investors to measure company’s intention
actions as ways of treatment with employees, stakeholders, ways of making board decisions and
solving problems. ESG has had tremendous expansion from its inception, which was more of a
regulatory and legal need than a “social responsibility” (Alhawaj et al., 2022). Concurrently,
firms have eagerly embraced “corporate social responsibility” (CSR). However, the circumstance
has altered recently. One of the key reasons why the ESG score is so often praised is the fact that
firms are investing vast sum of money in “corporate social responsibility (CSR)” initiatives
(Domanović, 2022).
People are increasingly interested in investment returns that do not just focus on a
company's bottom line. In addition to publishing their financial information, companies that
operate transparently and make positive contributions to society for them, environment are
crucial to the success of this transformation (De Lucia et al., 2020). “Wide-ranging,
comprehensive, and trustworthy” reports assist to rectify this aspect of the situation by boosting
the market's knowledge circulation and the quality of communication between institutions and
stakeholders. According to the findings of the 2018 “Eurosif European Socially Responsible
Investment” (SRI) survey, the integration of “environmental, social, and governance” factors into
the investment decisions made by 263 asset managers and asset owners in “Europe with a total
AUM of 20 trillion Euros in 2017 increased by 27% annually between 2015 and 2017” (Alhawaj
et al., 2022).
According to Eurosif, the expansion of ESG investment decision techniques is happening
twice as quickly as the expansion of the other six types of investment choices. For “attracting

and retaining customers, decreasing operational costs, and enhancing the company's image in the
marketplace”, it is becoming increasingly common for companies to include sustainability into
their business strategies (De Lucia et al., 2020). The core features of the notion of “sustainable
development, such as social responsibility, economic viability, and environmental preservation”,
are woven into the organization’s day-to-day activities because of a corporate sustainability plan.
As a result, the “organization’s social, economic, and environmental sectors” are interconnected
to form a “closed-loop supply value chain” (Buallay, 2018).
Numerous businesses are learning that implementing this complete approach provides
them with a significant competitive edge on the global market. Therefore, firms that priorities
sustainability often have higher chance of attaining success and being in business longer than
their conventional competitors (Sinha Ray and Goel, 2022). According to the conclusion of the
research, a company's commitment to ESG, decreases risk and uncertainty whilst enhancing its
reputation amongst investors. Potential investors may lose faith in businesses that engage in
irresponsible behavior with respect to the environment, their staff, or their consumers (De Lucia
et al., 2020). However, Alhawaj et al. cite the “tobacco, gambling, alcohol, and adult
entertainment” industries to suggest that this may not always be the case. According to them, this
is because these enterprises largely appeal to adults (Alhawaj et al., 2022).
Therefore, these industries are not considered by the SRI measures. In this regard, the
primary distinction between SRI indicators and ESG indicators is that SRI indicators exclude
some firms, but ESG indicators include all companies that meet the definition of a
comprehensive portfolio (Baran et al., 2022). Thus, SRI indicators concentrate on
“environmental, social, and governance concerns” or ECG score. The ESG approach will be the
focal point of this investigation. In addition, we study the health of British businesses in light of

the most recent efforts, made by the “European Union in 2015” with the main aim of integrating
its capital market with the UK's agreements. This is done in an effort to achieve the sustainable
development objectives (Yu et al., 2018).
In order to explore ESG measures, we are examining an idea of integrating machine
learning and inferential models. In this paper, we contribute to the ongoing discussion by
employing a machine learning technique to forecast financial indicators such as “Return on
Equity (ROE) and Return on Assets (ROA) on a variety of environmental, social, and
governance (ESG) and economic metrics”, and by employing a logistic regression model to infer
the relationships between “ESG factors and the ROE and ROA performances of European firms”
(De Lucia et al., 2020). Thus, we are able to demonstrate a favorable link between “ESG
parameters and financial performance”.
This research aims to examine the development and importance of the ESG Score in
relation to the well-known “ROE and ROI ratios”. It aims to demonstrate a relationship between
profitability and ESG score and to propose that this score should be considered alongside
“standard financial indicators” when “assessing investment possibilities”. This is done in order to
establish a relationship between profitability and ESG score. Even whilst previous research has
given some light on the subject, there has been no persuasive argument for using it as a decision-
making indicator, which is why this analysis is necessary. Previous studies have given some
insight on the subject.
This study is organised in a way that “environmental, social, and governance” (ESG)
practises and financial performance are reviewed in the second section. The third section
explains the methodology of research utilised in the case study. The fourth section describes the

results in depth and draws connections between the findings and international literature to
emphasise the primary policy implications. The fifth section contains a summary and conclusion.
1.2 Aims and Objectives of the Research
1.2.1 Aims of the Research
This research aims to examine the development and importance of the “ESG Score” in
relation to the well-known “ROE and ROI ratios”. This article's objective is to illustrate why
“environmental, social, and governance (ESG)” ratings should be evaluated alongside
profitability when evaluating investment opportunities.
1.2.2 Objectives of the Research
This investigation is motivated by the necessity to include ESG evaluations into
“financial planning and budgeting methods”. This number, along with return on equity and
return on investment, is crucial to evaluate, since these are the two indicators that potential
buyers and investors value the most. Formally, the objective is to investigate the impact of ESG
score on the performance of the firms comprising the FTSE 100 and determine whether or not
there is a positive correlation or none at all with the market value of the shares. A comprehensive
analysis would also be useful for identifying the impact of the different ESG components on the
organization, namely “E-Environment, S-Social, and G-Governance”. This will result in an
explanation of the relationship or an extent to which it influences company's performance, and
how it is transformed into market value data for the organization.
1.3 Research Questions
“This research will be focused to answer the following questions:”

 “How has the ESG score impacted the performance of the companies?”
 “Is there any relation between the ESG score and profit of the company?”
 “Does Higher ESG score mean that it is safe to invest in a particular stock of the firm?”
 “Can ESG Score be established as a variant in determining the relevance of the
investment plan?”
 “Is it really a time to consider ESG score also as a factor along with ROE and ROI for the
purpose of investment decision?”