Market capitalisation and environmental, social and governance ratings in the European Union

Abstract

Purpose: The paper aims to study the relationship between market capitalisation and environmental, social and governance (ESG) ratings of the companies in the European Union (EU). Methodology: The authors analysed a sample of 1,456 companies over five years, from 2016 to 2020. The ESG combined score and market capitalisation of the companies were observed. Spearman’s correlation coefficient was used to determine the relationship between the observed variables. The companies from twenty-one EU Member States have been analysed due to data availability. Results: The results showed that a negative correlation is statistically significant, which confirms the results obtained in previous research. Since the ESG scores are measured on a scale where a higher value means a lower rating, the results can be interpreted as valid, and they show that higher ESG ratings positively correlate with the company’s market capitalisation. Conclusion: According to the analysis results, the correlation between ESG ratings and market capitalisation has improved over the years. In the first two years of the analysis, the correlation was weak, while it became stronger in the last three years of analysis. It is crucial for companies to understand this information since it gives them recommendations for future actions. ESG reporting can improve their market position. Since ESG reporting is still voluntary, companies which incorporate ESG reporting into their business strategy can become market leaders.

Keywords

• ESG ratings
• market capitalisation
• the European Union