The Effect of Environmental Scores on Financial Performance of Energy Companies in the European Region

Increasing awareness and expectations for a sustainable environment increases the pressure on the energy industry to reduce its pollution. Despite the importance of the subject, the number of studies examining the effect of environmental responsibility activities on financial performance of companies operating in the energy sector is limited. Also, the findings obtained from previous studies are mixed about the direction of the relevant relationship. This study examines the impact of environmental responsibility on financial performance within the framework of companies operating in the energy sector in the European Region. In doing so, it probes the validity of the stakeholder theory and agency theory in explaining the relationship between corporate social-environmental responsibility and financial performance. We consider 58 European energy companies that have detailed and classified environmental responsibility scores between 2011 and 2020. According to the applied three-dimensional panel data regression results, we find that the aggregate environmental score of the European energy companies has not a significant effect on their financial performance. However, the resource use score, which is one of the environmental sub-scores, is negatively related to both the return on assets and return on equity of the companies. Moreover, the emission reduction and environmental innovation scores, which are the other environmental sub-scores, do not have a significant effect on the environmental-financial performance relationship. Although we have obtained findings showing that activities aimed at reducing the use of environmentally harmful resources, energy and water have a reducing effect on financial performance by shedding light on the validity of the agency theory, we see that a neutral effect is dominant between the environmental responsibility activities and financial performance carried out in European energy companies in general.