The Financial Materiality of Corporate Governance: Evidence from ESG Practices in FTSE 100 Firms

Abstract

Despite the growing reliance on Environmental, Social, and Governance (ESG) metrics, empirical evidence linking ESG to financial performance remains fragmented, largely due to a methodological reliance on aggregate scores that obscure the varied impacts of individual sustainability pillars. This study addresses this critical gap by examining the relationship between disaggregated ESG performance and corporate financial outcomes among FTSE 100 companies from 2012 to 2024. Using a quantitative panel data approach with fixed effects regression models, this research evaluates the impact of both aggregate ESG scores and individual ESG components on firm profitability, measured by Return on Equity (ROE) and Return on Assets (ROA). The analysis further contributes to the literature by exploring the moderating effects of the COVID-19 pandemic and sectoral variation, with particular attention to the energy-intensive sectors. Findings reveal that overall ESG engagement does not significantly influence profitability; instead, governance performance emerges as a highly material ESG component, consistently demonstrating positive and significant associations with ROE. The study also finds that governance’s effectiveness was slightly dampened during the pandemic, yet its positive correlation is amplified in the energy sector due to heightened regulatory and operational risks. These results underscore the novelty of isolating governance within ESG frameworks, demonstrating that broad sustainability initiatives yield limited financial returns without robust internal oversight structures. Practical implications are discussed for corporate managers, investors, and policymakers seeking to align sustainability initiatives with financial performance.