The Influence of Sustainability Reporting on the Profitability of Listed Companies in the European Union

Abstract

Sustainability reporting, an imperative for European companies, is a multidimensional effort that results in performance measured by ESG metrics. The unintended consequence of this imperative has been the influence on companies’ profitability. By using quantitative research methods, the objective of the study is to identify the indicator, i.e., the combined ESG score and its components Environment (ENV), Social (SOC) and Governance (GOV), with the most significant impact on the profitability of companies in the European Union, measured by using the Return on Assets (ROA) and Earnings Before Interests and Taxes (EBIT) indicators. The statistical analysis, using multiple linear regression models applied to the panel data, led to the achievement of the research objective. The sample is composed of 432 companies operating in 18 of the EU member countries, and the period under analysis is 2014-2023. The obtained results revealed that the factor with the most significant impact on the ROA profitability indicator is the Social Pillar, and in terms of the EBIT profitability indicator, the factor with the highest impact was shown to be the combined ESG score. Thus, we prove that although sustainability reporting is a complex process involving numerous efforts and organisational changes for companies it also delivers value-added by medium and long-term financial performance and by confirming the estimated positive effects of the Corporate Sustainability Reporting Directive (CSRD). The study contributes to the ESG literature by bringing together companies from developed and emerging EU economies, using the EBIT indicator to test the influence of the ESG score and its components on profitability.

Keywords

• sustainability reporting
• esg score
• profitability
• european union
• multiple linear regression
• stakeholder theory
• directive 2014/95/eu