Author: Riccardo Corsi
Date: 05-12-2025

The energy industry has historically been among the most unsustainable sectors of the global economy. From an environmental standpoint, it has been responsible for a significant share of greenhouse gas emissions since the Industrial Revolution. On the social side, the energy sector has often been associated with worker safety risks, human rights violations and the exploitation of local communities. Moreover, it has been linked to several cases of governance failures and corruption scandals. These dynamics have contributed to a growing demand for increasing sustainability initiatives across the sector in recent decades. Energy companies’ commitments towards ESG principles are increasingly reflected in their annual reports, which showcase investments and practices aimed at reducing negative environmental and social externalities. For instance, these include emissions reduction and waste management efforts, the protection of human rights and worker safety, improvements in transparency and accountability.

In this context, a major debate that is often raised concerns the ambiguous relationship between ESG practices and corporate financial performance (CFP). Although the ESG – CFP nexus has been extensively studied in the energy sector, academic findings remain inconclusive. Indeed, scholars have reported positive, negative, and mixed evidence of the link between ESG ratings  (often employed a proxy of ESG performance) and CFP, making it difficult to draw a definitive conclusion on whether and how ESG translates into improved financial performance. While some argue that the divergent views in the academic literature simply reflect the fact that ESG criteria influence financial performance only indirectly, it could be argued that methodological limitations also play a significant role. For example, empirical outcomes are highly sensitive to the scope of the analysis and the timeframe considered. In addition,  the choice of ESG data provider plays a role, since rating agencies often assign different sustainability scores to the same firm in the same year.

AGGREGATED ESG SCORES: OVERSIMPLIFIED SUSTAINABILITY PROXIES

However, another major and often overlooked limitation in the existing literature concerns the use of aggregated ESG scores rather than their individual subcomponents while assessing the ESG – CFP nexus. Indeed, ESG scores provided by major rating agencies are typically constructed as overall evaluations of the three broad pillars: environmental, social, and governance scores, which constitute the three aggregated ESG ratings. These scores, in turn, are composed of a set of individual subcomponents (with their own scores) that capture performance on specific sustainability practices. For instance, the figure below illustrates Refinitiv’s (LSEG) ESG scoring framework, which is the rating system this analysis relies upon. The uppercase letters indicate the aggregated scores linked to the subunits scores. Additionally, the table below provides a brief qualitative description of each subcomponent.

By employing aggregated ESG ratings as independent variables rather than their underlying subcomponents, as most of the academic literature does, researchers risk two main drawbacks: a reduction in the explanatory power of their models and a potential misinterpretation.

1. Limited explanatory power: when researchers rely on aggregated ESG scores, the analysis cannot reveal which specific ESG practices are driving the relationship with CFP (g. whether the governance influence on CFP is driven by CSR, corporate governance or shareholders engagement
2. Misinterpretation risk: aggregated scores can also hide significant but opposing relationships between the ESG subcomponents and CFP. A positive effect of one subcomponent may be neutralized by a negative effect of another within the same pillar, causing the aggregated score to appear statistically insignificant. This may lead to the false conclusion that sustainability practices do not influence financial performance.

OBJECTIVES AND METHODOLOGY

The purpose of this article is to examine whether results in the ESG – CFP nexus differ when aggregated ESG scores are replaced with their underlying subcomponents. To this end, two regression models are designed: Model 1, which includes the aggregated ESG ratings as explanatory variables for CFP and Model 2 that employs the individual ESG subunits scores.

This approach serves two main objectives:

1. First objective: to assess whether models based on ESG subcomponents (model 2) provide greater explanatory power compared to those using aggregated ESG scores (Model 1).
2. Second objective: to identify which specific ESG subcomponents, if any, play a significant role in shaping CFP within the energy sector.

Coming to the models design, Models 1 and 2 are estimated using fixed-effects panel regressions on longitudinal data covering the 2016–2024 period. The sample consists of 563 publicly listed energy companies (according to Refinitiv’s TRBC classification), and the analysis is run both on the global sample and separately for Europe, Asia-Pacific, and the Americas to capture potential regional heterogeneity. In both models, ROA at time t+1 is used as proxy of CFP, while firm size, current ratio (CR), price-to-book ratio (PB), total debt-to-equity (TDTE), and clean energy involvement are included as control variables. The key distinction between the two models lies in the explanatory variables: Model 1 uses the aggregated E, S and G scores, whereas Model 2 replaces these with the individual ESG subcomponents.

It is important to note that a preliminary descriptive analysis revealed moderate to high correlations both between the dependent and independent variables and among the independent variables themselves (i.e., strong associations across the aggregated ESG scores as well as among the ESG subcomponents). Given a potential multicollinearity risk, a Variance Inflation Factor test was conducted, showing that multicollinearity does not represent a serious concern in the analysis.

REGRESSIONS OUTCOMES AND CRITICAL ANALYSIS

Model 1 shows no statistically significant relationship between the aggregated ESG scores and ROA across all regional samples. At first glance, this result already suggests that the aggregated ratings have limited explanatory power in capturing how sustainability practices influence financial outcomes within the energy sector. Instead, statistical significance is mainly concentrated among the control variables (such as size, leverage, and investment intensity) indicating that conventional financial and operational factors remain stronger determinants of performance in these models.

In contrast, Model 2 reveals a greater number of statistically significant coefficients across the global and regional samples. Although the direction and magnitude of these effects vary by region, certain subcomponents show a significant link with financial performance. This supports the view that specific sustainable practices should be controlled in the ESG -CFP nexus rather than broad ESG metrics.

Assessment of the first objective: models explanatory power

To assess whether ESG subcomponents provide greater explanatory power than aggregated ESG scores, attention is placed on the Within R², which captures the proportion of variation in ROA explained by the model within firms over time. The comparison between Model 1 and Model 2 shows that Model 2 consistently yields a higher Within R² across all geographical samples, indicating that incorporating ESG subcomponents enhances the model’s ability to explain changes in financial performance.

Specifically, the Within R² increases:

• from 18.31% to 19.14% in the global sample,
• from 26.62% to 27.47% in the Americas,
• from 11.42% to 13.10% in Europe,
• from 18.17% to 20.48% in Asia-Pacific.

These results support the idea that disaggregating ESG scores into their subcomponents allows for a more complete and accurate understanding of the ESG–CFP relationship.

This conclusion also aligns with the regression coefficients: while none of the aggregated ESG ratings in Model 1 are significant, several ESG subcomponents in Model 2 emerge as significant drivers of ROA. The contrast highlights how aggregated scores conceal opposing or neutral effects among subcomponents, causing the aggregated rating to appear statistically irrelevant. Therefore, it could be maintained that ESG disaggregation materially improves model explanatory power and provides a clearer depiction of how sustainability practices relate to financial outcomes in the energy sector.

Assessment of the second objective: significant practices in the ESG – CFP nexus

Using ESG subcomponents makes it possible to identify which specific sustainability practices meaningfully shape financial outcomes, and how these effects vary across geographical regions.

Within the environmental dimension, two subcomponents emerge with distinct roles: emissions control and resource use.

• Emissions control
  This metric, which captures corporate actions related to pollution prevention, waste management, and biodiversity protection, shows a negative association with ROA in the Americas, suggesting that firms in this region may incur compliance or abatement costs that do not translate into immediate financial returns.
  Conversely, in the Asia-Pacific region, emissions control shows a positive relationship with profitability, indicating that effective environmental risk mitigation may be more valued by investors and stakeholders in these markets.
• Resource use
  This subcomponent reflects the efficiency with which firms manage energy, water, and raw materials throughout their production processes. It exhibits a consistently negative relationship with ROA in the global, European, and Asia-Pacific samples. This suggests that investments aimed at improving resource efficiency may entail substantial costs that outweigh short-term financial benefits.
• Environmental innovation
  This dimension does not display statistically significant relationships with profitability in the context of this analysis.

Within the social dimension, two subcomponents emerge with distinct roles: workforce management and product responsibility.

• Workforce management
  This subcomponent, which encompasses employee development, training, workplace safety, and labor conditions, shows a positive association with ROA, highlighting the value of human capital enhancement as a driver of firm performance.
• Product responsibility
  This dimension, concerned with product safety, quality assurance, and customer transparency, exhibits a negativeassociation with profitability, suggesting that these practices may entail costs that outweigh immediate financial gains.
• Community and Human rights
  These subcomponents do not show statistically significant effects, indicating a weaker or more indirect link with short-term financial performance.

Within the governance dimension, only one ESG subcomponent emerges as a significant and distinctive driver:

• CSR (Corporate Social Responsibility)
  This subcomponent, which reflects the integration of sustainability into strategic planning, managerial incentives, and ESG reporting, emerges as the only significant and positive driver of ROA in both the global and Americassamples.
• Shareholders and Corporate governance
  These subcomponents do not exhibit statistically significant relationships in this analysis.

MANAGERIAL IMPLICATIONS

These findings also carry meaningful implications for managers in the energy sector. Managers can rely on the evidence regarding the financial performance impact from specific ESG subcomponents to prioritize initiatives that most effectively support financial outcomes, taking into account the characteristics of the regional context in which they operate (such as resources, cultural approach towards sustainability, and political setting). At the same time, practices that currently exhibit neutral or negative financial associations should not be overlooked. Instead, they should be analyzed to identify the sources of inefficiencies, transitional costs, or implementation barriers, and to determine whether strategic adjustments could unlock future benefits. By adopting this differentiated and evidence-based approach, firms can strengthen both sustainability and profitability, ensuring that ESG strategies are aligned with operational realities and contribute to long-term value creation.