The Impact of ESG Scores on Financial Performance, Capital Structure, and Bankruptcy Risk in the Finnish Corporate Sector

Abstract

Growing emphasis on Environmental, Social, and Governance (ESG) practices necessitates understanding their impact on company financials and riskiness. The study explored the abovementioned phenomenon within the Finnish corporate sector and investigated how ESG scores influenced financial performance as measured by return on assets (ROA), capital structure as measured by debt to assets (D/A), and bankruptcy risk as measured by Z-score. A comprehensive literature review of journal articles was conducted to master deep insights into the phenomena and further propose the hypotheses. 287 firm-year observations belonging to 74 firms from 6 years from 2017-2022 were analyzed to see the impact of ESG combined score and all individual components on ROA, D/A, and Z-score. Results showed that ESG, E, and S pillars increased ROA. However, the governance score did not impact ROA. In addition, social scores decreased the capital structure ratio D/A, but other ESG scores did not have significant impacts on D/A. Finally, ESG scores and all individual components decreased bankruptcy risk Z-score. Overall, the results indicated that ESG scores were able to enhance profitability as well as decrease bankruptcy among Finnish companies. The findings contributed to the ongoing discussion on the financial implications of ESG scores. This knowledge was valuable for Finnish corporations seeking to understand the financial benefits of ESG initiatives and for investors integrating ESG factors into their decision-making processes.