Abstract

The relationship between environmental, social and governance (ESG) performance and corporate financial performance (CFP) remains an open question, particularly in capital-intensive sectors exposed to regulatory pressures and long-term transition costs. This study analyses the relationship between ESG ratings and financial performance using accounting data from 59 listed European energy companies over the period 2014–2023. ESG ratings were obtained from standardised sustainability scores available on Yahoo Finance and are therefore used as proxies for corporate sustainability performance. Financial data were extracted from Orbis Europe Full. The empirical design adopts an exploratory multi-method approach combining correlation analysis, multiple linear regression (OLS) and structural equation modelling (SEM). In the SEM model specification, ROE, ROA and ROCE are modelled as reflective indicators of a latent construct termed ‘economic performance’, whilst financial leverage is treated as a distinct observed variable representing firms’ financing structure. The results show that traditional linear models have limited explanatory power in explaining ESG ratings. The SEM analysis indicates that the latent construct of economic performance has a positive but statistically insignificant association with ESG ratings, whilst financial leverage shows a marginally significant positive association. Factor loadings confirm that ROE, ROA and ROCE consistently represent the common dimension of economic performance. Overall, the results suggest that ESG ratings in the European energy sector are explained not solely by short-term accounting profitability but also by broader strategic, organisational, governance, and financing conditions. The study contributes to research on the ESG-CFP relationship by proposing an exploratory structural equation modelling approach to modelling economic performance as a latent accounting construct. It offers food for thought for managers and policymakers evaluating sustainability strategies in capital-intensive transition contexts.

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