Annexure - I

Cover Page
(Impact of ESG Factors on Financial performance of the
companies)
A Project Report
Submitted in partial fulfilment of the requirement for the
Award of the degree of

“Master of Business Administration (Finance)– Lateral Entry”

By
Sahil
(22306290024)

Centre for Distance and Online Education

LOVELY PROFESSIONAL UNIVERSITY

PHAGWARA, PUNJAB

2024

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 Table of contents
S. No. Title Page

1. Declaration by students 3

2. Abstracts 4

3. List of Tables 2

4. Chapter-1 Introduction 5

5. Chapter-2 Review of Literature 19

6. Chapter-3 Implementation of Project 25

7. Chapter-4 Results & Discussion 38

8. Chapter-5 Conclusion 47

9. Publication Details 48

10. References 49

List of Tables
S. No. Title Page

1. Table-1 Summary of Previous Research 24

2. Table-2 OLS Assumptions 34

3. Table-3 Descriptive Analysis 36

4. Table-4 Correlation Matrix 37

5. Table-5 Regression Model for ESG & Tobin’s Q 39

6. Table-6 Regression Model for E & Tobin’s Q 40

7. Table-7 Regression Model for S & Tobin’s Q 40

8. Table-8 Regression Model for G & Tobin’s Q 41

9. Table-9 ESG & ROA 41

10. Table-10 E & ROA 42

11. Table-11 S & ROA 43

12. Table-12 G & ROA 43

13. Table-13 Results of hypothesis 44

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 Annexure – II
Declaration by the Student
To whom -so-ever it may concern

I, Sahil , 22306290024, hereby declare that the work done by me on “ Impact

of ESG on Financial Performance of the Companies”s original work for the
partial fulfilment of the requirements for the award of the degree, MBA-
Finance- lateral entry.

Sahil (22306290024)

Signature of the student

Dated:-05.07.2024

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 Abstract
In recent years, sustainability has become a crucial consideration for companies, expanding
from environmental factors to encompass working conditions, equality, and ethical business
practices. This evolution has led to the emergence of ESG (Environment, Social, and
Governance) responsibility as a framework for assessing corporate performance. ESG ratings
have gained popularity as a means of evaluating a company's sustainability. The automotive
industry, a major contributor to global CO2 emissions, is facing challenges in transitioning
towards sustainability. A study aims to explore the link between ESG ratings in the
automotive sector and financial performance, particularly in relation to the three ESG pillars
(Environment, Social, and Governance). Despite previous research on the topic, there
remains a need for further investigation due to varying results.
The regression analyses from 2012 to 2023 involving 79 automotive & auto parts companies
revealed a significant negative relationship between ESG and Tobin’s Q, and a non-
significant relationship between ESG and ROA. Additionally, the ESG pillars displayed
significant negative relationships with financial performance, except for Governance, which
had a non-significant relationship. These results contradict the Stakeholder Theory and align
with the Shareholder Theory regarding profit maximization.

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 Chapter -1
Introduction

What is ESG?
ESG stands for environmental, social and governance. These are called pillars in ESG
frameworks and represent the 3 main topic areas that companies are expected to report in.
The goal of ESG is to capture all the non-financial risks and opportunities inherent to a
company's day to day activities.

Why is ESG here to stay?

Our world is grappling with significant challenges, including climate change, transitioning to
a circular economy, growing inequality, and balancing economic and societal needs.
Investors, regulators, consumers, and employees are increasingly calling for companies to
prioritize not only financial capital but also natural and social capital, supported by proper
governance. ESG factors are becoming more vital in securing both debt and equity capital as
investors incorporate them into their decision-making processes.

1.1 Scope

1.1.1 What falls under the Environmental Pillar?

The environmental pillar of sustainability reporting covers emissions including greenhouse

gases and air, water, and ground pollution. It also includes resource use, like the choice
between virgin or recycled materials, and how companies manage their products' life cycle.
Companies are expected to be responsible stewards of water resources and address land use
concerns such as deforestation. Positive sustainability impacts can provide long-term
business advantages. This pillar is the most complex one to report on.

1.1.2 What falls under the Social Pillar?

Under the Social Pillar, companies are required to report on their employee development,
labour practices, product safety and quality, supply chain labour and health standards, and
controversial sourcing issues. They also need to report on how they provide access to their
products and services to underprivileged social groups.

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1.1.3 What falls under the Governance Pillar?

The main issues reported under the Governance Pillar are shareholders rights, board diversity,
how executives are compensated and how their compensation is aligned with the company’s
sustainability performance. It also includes matters of corporate behaviour such as anti-
competitive practices and corruption.

What is the purpose of ESG reporting and what does it include?

ESG reporting provides stakeholders with essential information to assess a company's

environmental, social, and governance performance. It aims to enhance transparency and
comparability among companies, enabling stakeholders to make informed decisions based on
standardized metrics and disclosures. Reporting covers a wide range of topics related to ESG
factors and is increasingly included in sustainability reports or integrated into annual filings
within regulatory frameworks.

1.2 What are some common ESG reporting frameworks companies can
report to?

There are a variety of ESG frameworks that companies choose to report to. These
standardised guidelines provide companies with a structured approach to assess, measure, and
report their ESG performance and help companies identify and disclose relevant information
on their most material ESG topics, allowing for comparability and consistency in reporting
across different organisations.

Some common reporting frameworks include:

• Global Reporting Initiative(GRI): GRI is one of the most widely used ESG
reporting frameworks. It provides a comprehensive set of indicators and reporting
principles to guide organisations in reporting their sustainability performance.

• Sustainability Accounting Standards Board(SASB): SASB develops industry-

specific sustainability accounting standards, enabling companies to identify, manage,
and communicate financially material sustainability information to investors. These
standards focus on environmental, social, and governance factors relevant to specific
industries, helping companies determine which topics are most material to their
industry.

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 • The international Sustainability Standards Board(ISSB) is an organisation
established under the oversight of theIFRS Foundation. Its main objective is to
develop standards that guide the finance sector in reporting sustainability-related
risks, opportunities, and climate-related information. These standards aim to enhance
transparency, comparability, and decision-making by providing consistent and reliable
sustainability reporting guidelines. ISSB has now released its first two inaugural
standards– IFRS S1 and IFRS S2.
• Task Force on Climate-related Financial Disclosures(TCFD): TCFD focuses
specifically on climate-related risks and opportunities. It provides recommendations
for disclosing climate-related information, helping companies assess and disclose the
potential financial impacts of climate change on their business.
• United Nations Sustainable Development Goal(SDGs): The SDGs are a set of 17
goals adopted by the United Nations to address global challenges. Many companies
align their ESG efforts with these goals and report their contributions towards
achieving them.

1.3 Applicability
India has introduced new environment, social, and governance (ESG) reporting requirements
for the top 1,000 listed companies in the country by market capitalization. These companies
are now required to disclose their performance through a new format called the Business
Responsibility and Sustainability Report (BRSR), with reporting being voluntary for FY
2021-22 and mandatory from FY 2022-23. This move reflects the increasing global emphasis
on sustainability and ethical responsibilities for businesses, prompted by shifts in investor
priorities. The Securities and Exchange Board of India (SEBI) plays a key role in
implementing efficient ESG policies and has been driving these new reporting requirements.
This is a significant development for corporates in India, and it aligns the country's
sustainability reporting with global standards. In 2021, SEBI issued a circular containing
details of a new sustainability-related reporting requirements called the Business
Responsibility and Sustainability Report (BRSR), which brings India’s sustainability
reporting to global reporting standards. BRSR is a departure from the BRR format.
What are the disclosure requirements under India`s new ESG policy?

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The new reporting format outlines mandatory ESG policies and requirements for the top 1000
listed companies by market capitalization. The RBC Guidelines are influenced by leading
international standards, including the UN Guiding Principles on Business and Human Rights,
UN Sustainable Development Goals, Paris Agreement, and International Labour Organisation
(ILO) Core Conventions. The RBC Guidelines addresses key sustainability matters, such as
business ethics and transparency, human rights, environmental safety, and fair labor practices.
The BRSR is aimed at securing transparent and standardized disclosures by companies on
their ESG parameters and sustainability-related risks.

Aspects Disclosure requirements Principles

General a) Overview of the company’s General management and

material environmental, social, process disclosures
and corporate governance risks
and opportunities and approach
to mitigate or adapt to these
ESG risks as well as relevant
financial implications
b) Sustainability related goals
and targets and related
performance
c) Management structures,
policies, and processes related to
sustainability

Environment a) Resource usage (energy and Principle 6: Businesses should

water) and intensity metrics respect and make efforts to
protect and restore the
b) Air pollutant emissions
environment.
c) Greenhouse gas emissions
(Scope 1, Scope 2, and Scope 3)
d) Waste generated and waste
management practices
e) Impact on biodiversity

Social Employees Principle 3: Businesses should

respect and promote the well-
a) Gender and social diversity,
being of all employees,
including measures for

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 differently abled employees including those in their value
chains.
b) Turnover rates
c) Median wages
Principle 5: Businesses should
d) Welfare benefits to permanent
respect and promote human
and contractual employees
rights.
e) Occupational health and
Principle 8: Businesses should
safety
promote inclusive growth and
f) Trainings equitable development.
Communities
a) Social impact assessments Principle 9: Businesses should
engage with and provide value
b) Rehabilitation and
to their consumers in a
resettlement
responsible manner.
c) Corporate social
responsibility
Consumers
a) Product labelling
b) Product recall
c) Consumer complaints with
respect to data privacy, cyber
security, etc.

Governance a) Training on the principles Principle 1: Businesses should

stipulated in the “National conduct and govern themselves
Guidelines on Responsible with integrity, and in a manner
Business Conduct” (RBC that is ethical, transparent and
Guidelines) for members of the accountable.
Board, senior managers, and
employees
b) Anti-corruption and anti-
bribery policies
c) Awareness programs
conducted for value chain
partners on the principles in the
RBC Guidelines

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How big Indian companies are adapting to the ESG pivot

Many leading companies in India have begun to include environmental, social, and
governance targets as a part of key result areas (KRAs) for top management when computing
their variable pay.

The move is influenced by an increasing push from investors to allocate capital that not only
generate financial returns but are also invested in social good. Overall, non-financial factors
are increasingly become a marker of material risks and growth opportunities for
investors.The pandemic and increasingly evident costs of climate change have elevated the
importance of these discussions, with many boards devoting significant time in their strategy
meetings to discuss ESG issues.

1.4 ESG consciousness among corporates in India: Leading examples

• For consumer goods maker Marico, ESG is now become a part of top management
KRAs.
• Diversified miner Vedanta is currently planning to embed ESG into every aspect of
the company’s decision-making and performance evaluation.
• Tata Group companies, such as Tata Steel, Tata Motors, Tata Consumer, Tata Power,
and Tata Consultancy Services (TCS) look at ESG as a priority. Their top management
claims that sustainability is among the top four business objectives for the
organization.
• Prominent Indian companies like Tech Mahindra, Infosys, and Wipro are part of the
Dow Jones Sustainability Index (DJSI), which assesses the ESG performance of
companies globally.Historically, the companies that are part of the DJSI follow ESG
best practices and have fared well on the Indian bourses.This may be attributed to the
fact that investors, both institutional and retail, wish to invest in companies seen to be
more socially responsible.
• Blue-chips stock, such as TCSand Reliance Industries,recently announced roadmaps
towards reduction in greenhouse gas emissions towards zero. Investors seem to have
an appetite for innovative instruments to finance environmental and social initiatives.

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1.5 How India compares with other countries

Being the first country to have mandated corporate social responsibility, India has for some
time taken the lead in demanding ethical commitments from businesses. However, different
countries have different approaches and beliefs when it comes to ensuring responsible
business activity.

The United Kingdom

In the UK, quoted companies are mandated to provide a report disclosing annual greenhouse
gas emissions, diversity, and human rights under the Companies Act 2006 (Strategic and
Director’s Report) Regulations, 2013. Companies with a premium listing of equity shares in
the UK also need to report on how they apply the main principles of the Corporate
Governance Code, 2012.

European Union

The European Commission (EC) Directive on Disclosure of Non-Financial and Diversity

Information (2013) is considered a major reporting instrument of the EU. It requires certain
large companies and public-interest companies to disclose material environmental, social, and
employee-related matters.

United States

According to the Regulation issued by the US Securities and Exchange Commission (SEC),
all listed companies should disclose their environmental compliance expenses. Another
sustainability reporting instrument by the New York Stock Exchange (NYSE) mandates that
listed companies adopt and disclose a code of business conduct and ethics.

China

Overall, China has seven regulations that act as instruments of mandatory disclosure on
sustainability matters. The Environmental Information Disclosure Act, 2008 mandates
corporations to disclose environmental information. Annual resource utilization, pollution
levels, waste generation, disposal method, and some other aspects can be disclosed
voluntarily to gain more rights to grants and public support. A separate report with an

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environmental disclosure is also requested from large companies listed on the Shanghai Stock
Exchange.

In India’s Nationally Determined Contribution (NDC)—its action plan for emissions

reduction and climate adaptation in support of the Paris Agreement—the country pledged to
reduce the emissions intensity of its gross domestic product by 45% by 2030. India also plans
to achieve half of its cumulative installed electricity production capacity from energy
resources that are not based on fossil fuels by 2030. In fact, the 35% year-over-year increase
in solar capacity achieved in 2022 demonstrates the country’s efforts to move toward green
energy. Another element of India’s NDC is its plan to add enough forest and tree cover to
provide an additional carbon sink (a natural environment that absorbs carbon from the
atmosphere) of 2.5 to 3 billion tons of carbon dioxide equivalent (CO2E).

1.6 Relevance

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ESG: A New Era of Sustainable Investing ESG (Environmental, Social, and Governance)
investing is becoming increasingly popular, with companies and investors realizing the
importance of sustainability and ethical practices. This Article will explore the impact of ESG
on financial performance and how it can benefit the banking sector.

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In recent years, corporate social responsibility (CSR) has received significant attention from

regulators, managers and investors. Nowadays, companies undertake different CSR initiatives

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and improve the disclosure on environmental, social and corporate governance (ESG) issues
not only due to external pressure to moral obligations, but also to attract more investors and,
thus, increase value of the firm
Although, CSR engagement helps to enhance corporate image, the evidence on the positive
impact of corporate financial performance continues to be inconclusive. On the one hand,
analysis of the literature from earlier decades provided the evidence of insignificant or
adverse market reaction to CSR practices. Other empirical studies concluded that the link
between sustainable initiatives and financial performance is a positive although mainly weak.
. The more broad meta-analysis also indicated economic benefits of such initiatives and
reported a big difference in empirical strategies which leads to a sizeable unexplained
variance between studies
The introduction introduces the subject, outlines the problem background, research purpose,
and expected contributions to the relationship between ESG and financial performance,
outlining the study's delimitations and the problems it will address.
1.7 PROBLEM BACKGROUND
Corporate Social Responsibility is not a new phenomenon and can be linked back to the mid-
20th century. One of the earliest research papers on the topic of corporate responsibilities was
published by Bowen (1953) which mainly focuses on the social responsibilities of leading
executives and how they have a direct bearing on the quality of the life of people,
stakeholders, and customers. (Bowen, 1953, p.3). Bowen states that corporations'
responsibilities should be in line with society’s values and conclude that businessmen can be
persuaded to accept new duties and obligations when the pressure from the public is shifted
to expect more social responsibility from companies. Meaning that corporations are led to
respond to public expectations and public attitudes and adapt their social work consequently .
More research was conducted on Corporate Social Responsibility in the following decades
after Bowen's publication. Where it shifted from primarily focusing on CSR work from an
ethical perspective to also investigating the relationship between CSR and financial
profitability. In 1984 Peter Drucker alleged that CSR can be a business opportunity rather
than only a financial cost, which can improve the financial profitability of a corporation. The
conclusion was also supported by Cochran and Wood in 1984 who found a positive
relationship between social responsibility and financial results.

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The topic of sustainability and how it is interconnected to economic development received
more attention after the UN-supported Brundtland’s commission released their report. The
commission was established after the increasing realization around the world that it is
impossible to separate economic development from environmental and social issues. The
report concluded that the world needs a broader perspective on the sustainability issue which
also includes the underlying factors such as world poverty, international inequality, and the
economy.
The development of sustainability and CSR was not only followed by non-governmental
organizations like the United Nations, but companies also adopted a more progressive view
on corporate social behaviours. The change in attitude among leading companies was
supported by the study conducted by the US Magazine Fortune which concluded that less
than half of the companies in the Fortune 500 embraced CSR as an essential component in
the annual report by the year 1977. By the end of 1990, the proportion had increased to 90%
of the Fortune 500 companies which listed CSR as one of the fundamental characteristics of
the corporation's target.
In today's society, corporations are expected to take on more responsibility. One of the most
apparent responsibilities is the environmental aspect and how corporations handle their
impact on the climate. Beyond just the environment, companies are expected to take
responsibility for their employees and stakeholders.
Climate change is a topic that has received increasing coverage in past years in regard to its
impact on life on earth and the world's economy being more apparent than ever before. The
unfavourable state of climate change will likely have a great negative impact on the
ecosystem which could last for many thousands of years (McNutt, 2013). Global warming is
mainly a consequence of the rapid growth in greenhouse gas emissions which is driven by
society’s use of coal, oil, and gas (WWF, 2022).
The demand for more detailed and thorough ESG ratings has increased since companies are
expected to take on more responsibility. ESG ratings are provided by several different actors
and the largest are MSCI, ISS ESG, and Refinitiv Eikon. Where in the mid twenty century the
main focus was on the social responsibility of corporations which started with Bowen’s paper
in 1953. Where the main focus was on human capital, product liability, and stakeholder
apposition in the Social pillar (Tayan et al., 2022). This was later expanded to also focus on
the Environmental pillar with the increasing attention of climate change, natural capital, and

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pollution. The view on corporate responsibility was therefore elaborated to include the
Environmental pillar, especially after the Brundtland’s commission in 1987. In today's
society, corporate responsibility also includes a third pillar, Governance, which focuses on
corporate governance and behaviour as well as environmental and Social
As the demand for greater corporate responsibility in today's society has grown, ESG ratings
have become increasingly important for companies. The automotive sector is responsible for
a significant portion of global CO2 emissions and has thus been under pressure to improve its
Regelated demands (Forbes, 2021). This has led to increasing competition in the sector (EPA,
2022).
1.8 RESEARCH PURPOSE
This paper explores the correlation between ESG ratings and financial performance in the
auto-mobile sector, focusing on Environmental, Social, and Governance ratings. The study
aims to provide insights into profitability in the automotive industry, highlighting its
environmental relevance and the lack of recent research on this topic. As mentioned in the
problem background the automotive sector has challenges in order to lower its CO2
emissions (Forbes, 2021).
This has led to an increased demand for technological innovation and advances in the
automotive field, mostly regarding CO2 emissions but also Electric Vehicles (EV) and
automotive vehicles. The automotive companies have taken responsibility for this demand
and the automotive sector has gone through major technological advances in the last ten
years. The authors of this thesis believe this demand to be one of the reasons for this
technological advance, but it comes at a price (EPA, 2022).
Because of the pressure on car companies to provide great results in regard to CO2
emissions, there have been several scandals throughout the years. Most of these scandals
involve hiding or disguising their actual CO2 emission and falsifying their actual CO2
emissions. We believe this to be a governance problem, and hence why we want to further
investigate it (Forbes, 2021).
Several other studies on this topic have been published before but the authors have yet to find
a study that investigates how ESG rating affects financial performance in the automotive
sector during the chosen time frame this study focuses on the ESG variables and their
potential effect on the financial performance of the automotive industry. It exists a research
gap that investigates the connection between how sustainable companies are and their

17
financial result. The issue is best explained by industry-specific research because of the
reason the previous studies are difficult to generalize.
1.9 RESEARCH QUESTION
With the above discussion in mind, this study expects answer two research questions.
Questions that will be crucial when conducting theoretical framework along with statistical
methodological tests in order to draw valid conclusions.
What is the relationship between ESG rating and financial performance within the automotive
sector?
What is the relationship between the separate E-, S- and G- ratings and financial performance
within the auto-mobile sector?
1.10 EXPECTED CONTRIBUTIONS
This study aims to investigate the relationship between ESG rating and financial performance
in the automotive industry, with the goal of demonstrating a positive relationship between
ERG-rating and financial performance. The automotive industry is crucial in mitigating
climate change and a positive relationship could encourage car companies to improve their
Drug-related operations. Despite the potential negative relationship, the study aims to
highlight the importance of ESG and its benefits for the automotive industry. A higher ESG
rating could still benefit a company's long-term financial performance. Proactive ESG
practices can help companies counteract government regulatory and legal intervention,
providing greater strategic freedom. The automotive sector, a regulated sector, relies on
government subsidiaries and other forms of state intervention, putting the value at stake at up
to 60%. The study also aims to determine the presence of Shareholder Theory or Stakeholder
Theory within the automotive industry, as previous research has failed to agree on the most
influential theory on the relationship between financial performance and ESG rating. The
study's findings could benefit management, retail investors, and car companies in prioritizing
social responsibility..

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 Chapter -2
REVIEW OF LITERATURE
The following section consists of this study’s theoretical reference point. Initially, the
previous studies are being presented which together build the foundation of which
assumptions and choices are made. As the previous studies are presented follows a summary
that highlights the most essential part of the respective study. Lastly, we summarize the
findings of every study in a table consisting overview of the topic, time frame, method, and
findings.
2.1 ARNOU & HAMMARSTEDT, 2021: DOES IT PAY TO BE ESG? – AN
EMPIRICAL ANALYSIS OF SUSTAINABILITY IN THE NORDIC
COUNTRIES FROM A RISK AND VALUATION PERSPECTIVE
In this study, the authors argue to investigate whether ESG has a relationship to sustainability,
risk, and valuation along with stock-price trends in times of crisis. The authors conducted the
study from large public listed firms in the Nordic countries, and in order to conclude a
relationship, they conducted various multiple regression models on quarterly data in the time
frame of 2011 to 2020. The thesis is also meant to discuss if equity market participants are
pricing sustainability risk as well as if investors are willing to pay a price premium for
sustainability and lastly if there is a pattern between a firm’s ESG impact with their stock
returns (Arnou and Hammarstedt, 2021, p.5-6).
The authors were able to conclude that there is a significant relationship between ESG-score
and cost of equity, P/E, P/B, and index-relative price decline during the crisis in March 2020
caused by the COVID-19 outbreak. The authors also showed that there was no significant
relationship between ESG-score and EV/EBIT (Arnou and Hammarstedt, 2021, p.58-59).
The main purpose of this study was to answer if equity market participants are considering
sustainability risk when pricing an instrument. The author’s expectation was that if a firm has
a high ESG, they should along with that also have a low cost of equity in relation to other
firms. The authors were able to show that the increase of ESG by 1 percentage point
decreases the cost of equity by 0,014 percentage points, which is according to previous
studies and literature (Arnou and Hammarstedt, 2021, p. 58).
The findings were also supported by the Share- and Stakeholder Theory, the authors argue
that a lower cost of equity capital should benefit ESG investments which in turn might
generate higher profits along with lower volatility of earnings, which is supporting the

19
stakeholder theory of being favorable. The shareholder’s theory means that the sole purpose
of managers is to make sure to maximize the firm’s valuation, which the authors mean is
valid with their findings because they were able to show a positive correlation between the
cost of equity and valuation (Arnou and Hammarstedt, 2021, p. 62-63)
2.2 ESMAIL & MATTSON, 2022: DOES ESG PAY OFF? A
QUANTITATIVE STUDY OF HOW ESG SCORES AFFECT SWEDISH
LARGE-CAP FIRMS PERFORMANCE AND STOCK RETURNS.
Esmail and Mattson’s study aims to examine the relationship between Swedish large-cap
firms' ESG score and firm performance, and secondarily the relationship between ESG rating
and stock returns. By firm performance, they rely on the measurements of total asset turnover
(AT), net profit margin (NPM), and operating profit margin (OPM). Stock returns are
measured with the use of historical yearly stock returns (Esmail and Mattson, 2022, p. 9-11).
The relationship is investigated with a regression analysis with data collected from the years
2016 to 2020. The study is based on data collected from Refinitiv Eikon and included 147
firms. The authors acknowledge that the research question has been investigated before but
with various results. The relationship between ESG and firm performance is not clearly
concluded where previous studies have shown both a positive and negative correlation
between ESG and financial performance (Esmail and Mattson, 2022, p.22). Esmail and
Mattson's studies found the relationship between ESG scores and total asset turnover to be
significantly negative, in other words, an increased ESG score would lead to less efficient use
of assets. The relationship between ESG score and net profit margin proved to be
insignificant ,therefore the authors could not draw any distinct conclusion from their results.
In contradiction, the relationship between ESG score and operating profit margin is positive
which gives support to the thesis that customers are willing to pay more if a company has
greater sustainability activities (Esmail and Mattson, 2022, p.55).The authors found the
relationship between ESG score and stock returns to be insignificantly negative, for that
reason, they could not draw any conclusions regarding the relationship. To conclude, the
thesis findings follow the same pattern as previous research within the same area that the
relationship between ESG and financial performance is contradictory. Since the two
relationships are significant, they could only draw valid conclusions about the relationship
between ESG scores and total asset turnover and ESG scores, and operating profit margin.
(Esmail and Mattson, 2022, p.58).

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2.3 BUALLAY, AMINA: BETWEEN COST AND VALUE –
INVESTIGATING THE EFFECTS OF SUSTAINABILITY REPORTING
ON A FIRM’S PERFORMANCE
Amina Buallay (2019) published a study where she investigated the relationship between
sustainability reporting and financial, operational and market performance. The purpose of
the study was to conclude when sustainable reporting is advantageous for firms and when it is
of disadvantage. Buallay conducted the study on 342 financial institutions across the 20
countries that are the top achievers of sustainable development. The time period the author
meant to investigate was between 2007 and 2016, with a total of 3420 observations. For
independent variables, the report chose environment, social and governance (ESG) score,
dependent variables being operational performance (ROA), financial performance (ROE),
and market performance (Tobin’s Q) (Buallay, 2019, p. 1-2). The two control variables that
were used were firm level and country level. The author's collection of data came from the
Bloomberg database and like many other ESG databases, they score corporations based on
their ESG data disclosure (Buallay, 2019, p.5). Buallay presented two theories on whether
sustainable reporting adds value or is value destructive. These two theories are the value
creation perspective and the cost of capital reduction theory. The value creation theory views
ESG initiatives as a competitive advantage that will result in increased financial performance.
The cost of capital reduction theory, however, views ESG initiatives as an increased cost for
companies and should lead to lower market value for the company (Buallay, 2019, p. 3). The
author found that ESG has a significant negative relationship with market performance,
which correlates with the literature regarding the value creation theory, Buallay also found
that ESG has a significant negative relationship with both financial and operational
performance, which correlates with the literature regarding the cost-of-capital theory. The
author continues to argue that this result is contradicting because companies that perform
poorly but have a good ESG score will have higher market value than companies that
perform exceptionally but has a poor ESG score
(Buallay, 2019, p. 12).
2.4 DINCĂ ET AL. 2022: THE RELATIONSHIP BETWEEN ESG AND
FIRM VALUE. CASE STUDY OF THE AUTOMOTIVE INDUSTRY

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This study is meant to investigate whether ESG factors have a significant effect on the firm
value of the automotive industry. The authors mention that the automotive industry is a sector
facing a series of challenges and changes, in regard to transitioning to electric vehicles and
autonomous cars. These challenges have led to an expectation on companies better address
environmental, social, and governance factors (Dincă et al., 2022, p. 1) The paper has
identified that empirical evidence regarding this topic is scarce and yet to be fully researched.
They conducted the study by a structural equation modeling (SEM) approach on 131listed
companies from around the world with the time period being six years. When conducting the
SEM, the authors investigated each ESG factor separately but used a combined score as well.
The findings from the SEM were diverse, with environmental factors only showing a
significant positive influence from 2015-2016. Governance as a separate factor showed a
significant negative effect in the years between 2016-2017 and 2019-2020. It also showed a
significant positive influence in the years between 2017-2019. Regarding the Social factor,
the study could not find any positive or negative significant effects. None of the study’s initial
hypotheses of a positive significant relationship in the years 2015-2020 was fulfilled (Dincă
et al., 2022, p. 5). The combined ESG score did show mixed significant effects in the first
three years the study was meant to investigate but failed to find a significant effect in the last
two years. The authors also mention that the financial market neglected to react to ESG-score
changes in relation to firm valuation. The authors believe investors in the automotive sector
to be motivated by other factors than ESG, partly because of the lack of distinction on ESG
rating standardization.
2.5 SUMMARY OF PREVIOUS STUDIES
Previous studies on ESG and financial performance have shown contradictory results, partly
due to differences in sample, geographic location, and time periods. This thesis aims to
address this gap by using ROA and Tobin's Q as financial measurements for financial
performance. Previous studies have focused on specific industries or regions, but the
automotive sector has not been investigated in this context. The only previous research paper
on ESG and financial performance within the automotive sector is by Dincá et al (2022),
which only included data from 2015 to 2020. This research gap is further strengthened by the
inconsistent results from previous studies, which have created confusion on the topic. Further
research on the automotive industry is needed to further explore this relationship.
Authors Selection Time Observation Database Financial Conclusion

22
 period performance
measurement
Granered & industrial 2009-2018 93 Thomson ROA & ROE 0 (ESG and
Sankala companies in Reuters Eikon ROA/ROE)
(2018) the US 0 (E, S and
ROA/ROE)
+ (G and
ROE)
Arnou & Large Cap 2011-2020 244 Thomson P/E, P/B, 0 (ESG and
Hammarsted Nordics Reuters Eikon Cost of EV/EBIT)
t (2021) and Bloomberg Equity and + (ESG and
EV/EBIT P/E)
+ (ESG and
P/B)
0 (ESG and
cost of
equity)
Esmail & Large Cap 2016-2020 147 Refinitiv AT, NPM, - (ESG and
Mattson Sweden Eikon's OPM AT)
(2022) and Stock 0 (ESG and
Return NPM)
+ (ESG and
OPM)
- (ESG and
stock
return)
Bouallay Financial 2007 - 342 Bloomberg ROA, ROE - (ESG and
(2019) Institutions 2016 & Tobin's Q ROA/ROE)
- (ESG and
Tobin's
Q)
Velte (2017) German 2010- 412 Asset4 ROA & 0 (ESG and
Prime 2014 Tobin's Tobin's
Standard Q Q)
+ (ESG and
ROA)
Dincá et al Automotive 2015- 131 Sustainalytics Enterprise +/0 (E and
(2022) Industry 2020 Value firm
worldwide value)
0 (S and firm
value)
+/- (G and
firm
value)
+/- (ESG and
firm
value)
Choi & S&P 400, 1991- 518 KLD Research ROA & N/A
Wang (2009) DSI 2001 & Analytics Tobin's

23
 400 Inc. Q
Falk & Energy 2009 - 68 Thomson ROA & - (ESG and
Stenlund sector 2018 Reuters Eikon Tobin's ROA)
(2019) in the US Q 0 (ESG and
Tobin's
Q)
0 (E, S, G
and
ROA/Tobin's
Q)

TABLE 1 SUMMARY OF PREVIOUS RESEARCH

+ = Positive significant relationship
- = Negative significant relationship
0 = No significant relationship

24
 Chapter- 3
IMPLICATIONS OF PROJECT
The theoretical framework of this study will present relevant theories and concepts that
contribute to the foundation of this study. The study aims to discuss its findings in
conjunction with the supported theories. Specifically, this study seeks to demonstrate how
ESG factors impact financial performance in the automotive sector. ESG theory is included in
this chapter due to its significance and relevance to the research topic
3.1 CHOICE OF THEORIES
This study discusses the Shareholder and Stakeholder Theory, CSR, and ESG criteria in
automotive companies. It aims to assess profitability, CSR benefits, and differentiate ESG
ratings based on sector. These theories are crucial for understanding and assessing the
activities an automotive company should undertake.
3.2 SHAREHOLDER THEORY
The foundation of the Shareholder Theory was presented by Friedman (1970). Prior to this
Friedman had published a book that initiated a discussion about how companies should act,
and Friedman determined that the focus shall lay on maximizing shareholder profit.
Companies that maximize shareholder profits have thus fulfilled their social responsibility.
Friedman also argues that engagements in social responsibility activities are funded by the
capital from the shareholders.Friedman (1970) distinguishes when corporate leaders should
take social responsibility, and he argues that managers should conduct those activities as an
individual and not use company resources. Friedman says that a corporate leader should not
act in a way that contradicts the interests of shareholders or employees, even if the activities
benefit the society. Furthermore, Friedman suggests that if shareholders, employees, or other
parties want to be socially responsible, they should do so themselves with their own money
and time (Friedman, 1970, p. 2-4). Brown et al. (2006, p. 856) discussed in relation to
Friedman’s publications, about agency costs. Agency costs arise when corporate leaders
engage in charitable activities and then justify their involvement by claiming that it benefits
shareholders in the form of increased customer loyalty and an improved reputation. This
improved reputation can, in some cases, lead to perks for a corporate leader such as event
tickets. In these cases where the cost of the charity is not offset by reduced compensation,
becomes a cost for the company, and thus the agency cost arises (Brown et al., 2006, p. 856).
However, this also incurs an opportunity loss from the shareholders’ perspective, since as

25
Friedman (1962, p. 112) mentioned, capital that could have been invested to maximize profits
is instead allocated to charitable purposes (Brown et al., 2006, p. 856).
Mansell (2013, p. 11) explains that the original Shareholder Theory means that if any trade-
offs between stakeholders need to be made, the management should prioritize the choices that
are most beneficial to the shareholders. However, Mansell (2013, p. 11) suggests that the
view of social responsibility has changed since Friedman’s publication of the Shareholder
Theory and that companies may need to act more socially responsible than before to
maximize profits. Companies that fail in taking social responsibility may lead to compliance
requirements and sustainability reporting, which result in a cost and is thus in line with the
traditional shareholder theory (Mansell, 2013, p. 11). Magill et al. (2013, p. 2) argue that
companies with the sole purpose of creating returns for shareholders will miss out on
potential benefits that may arise for other stakeholders. Having a sole focus on profits on the
company will have a negative impact on the company’s relationship with customers,
employees, and suppliers in the long run. This will result in the company not succeeding in
making sufficient investments (Magill et al., 2013, p. 2). However, by focusing on
investments that will benefit stakeholders other than just shareholders, the company will
benefit from that (Magill et al., 2013, p. 2).
3.3 STAKEHOLDER THEORY
Freeman’s (2007) thoughts, which formed the foundation for Stakeholder Theory, grew out
of Friedman’s Shareholder Theory. Freeman's thoughts assert that companies should act in
the interest of all stakeholders, not just shareholders, with a focus on maximizing their profit.
The theory further argues that companies cannot create value solely for shareholders, but that
value is created for shareholders when the interests of all stakeholders are considered.
Therefore, when discussing the creation of value for stakeholders, this includes not only
suppliers, customers, and employees, but also society. Acting in a fashion that makes a
difference, and acting and operating sustainably, are emphasized (Freeman, 2007, p. 3-6).
Freeman’s study (1984) describes the significance of interactions and relationships between
parties such as suppliers, customers, banks, and employees in creating value. Furthermore, it
is argued that companies that prioritize value for their shareholders over other stakeholders
cannot maintain the same long-term financial performance, which speaks in favor of
stakeholder theory. Other benefits of Stakeholder Theory, regarding its focus on good
relationships with the company’s stakeholders, are also discussed by Choi and Wang (2009).

26
Choi and Wang argue that customers are more likely to pay more for goods or services
offered by the company, employees are more motivated, and suppliers are more likely to
engage in activities where they trade knowledge with the company (Choi and Wang, 2009, p.
904).
In order to act in the interest of stakeholders, the stakeholders must first be identified.
Freeman (1984, p.54) highlights the phenomenon of the stakeholder map as a useful tool in
this context. Freeman draws a comparison between this stakeholder map and the view of a
halved onion, which reveals multiple layers. In the context of stakeholders, the outermost
layer comprises of secondary stakeholders such as the government and competitors, while the
middle layer comprises primary stakeholders including customers, society, employees, and
shareholders. Lastly, the company itself finds itself as the center of the onion (Freeman, 1984,
p. 25).
3.4 CORPORATE SOCIAL RESPONSIBILITY
Corporate Social Responsibility (CSR) is a concept that refers to non-profitable actions taken
by companies to address social, environmental, and economic topics. According to Carroll
(1991), CSR can be categorized into four core responsibilities: economic, legal, ethical, and
philanthropic. The economic responsibility involves maximizing profits whilst the long-term
sustainability of the company is ensured. Legal responsibility is the requirement to comply
with laws and regulations. Ethical responsibility is the responsibility to do what is right and
fair. Lastly, philanthropic responsibility is the obligation to engage in charitable activities that
benefit society (Carroll, 1991). CSR has become increasingly important in today’s business,
as companies have expectations to go beyond their traditional economic role and contribute
to society in a positive way (Porter & Kramer,2006). This is partly due to growing awareness
of social and environmental issues, as well as the previously mentioned Stakeholder Theory.
In recent years, there has been a trend of CSR being a part of business strategy, instead of
addressing it as a separate operation (Porter & Kramer, 2011). This is due to the positive
effects CSR can have on a company’s reputation, customer loyalty, and financial performance
(Chen & Bouvain, 2009).
Refinitiv Eikon is one of the most comprehensive databases on the topic of ESG today.
Refinitiv Eikon has over 700 content research analysts gathering data on 10,000 companies
going back as far as 2002. The analysis is based on 186 comparable metrics, which has then
been scaled down to ten categories to describe each of the ESG pillars . When deciding upon

27
the final ESG score, Eikon uses the “Refinitiv Magnitude Matrix” as the basis for
calculations.
The concluded ESG score is then derived from mentioned ten metric points, and their rating
is based on the industry in which the company operates. Among these sectors, the automobile
is categorized as “Automobiles & Auto Parts”. The sector is weighted as follows:
environmental is weighted as emissions (0.10), innovation (0.16), and resource use (0.08);
social is weighted as human rights (0.15), product responsibility (0.09), workforce (0.10), and
community (0.08); and lastly, governance is weighted as management (0.16), shareholders
(0.05), and CSR strategy (0.03).
3.5 FINANCIAL PERFORMANCE MEASUREMENT
This study will use two financial performance measurement which has been commonly used
in former studies within the same field. The first financial ratio is Tobin’s Q which is a
market-based financial performance measurement. The second financial performance ratio is
Return on Assets (ROA) which represents the accounting-based financial performance
measurement. These measurements cover different types of financial performance and are the
most commonly used in previous research, hence making this study comparable to previous
studies.
3.5.1 TOBIN’S Q
Tobin’s Q is a financial ratio that compares companies' market capitalization in relation to
their total assets. The ratio was introduced when James Tobin introduces the theory behind
the ratio in his article “A General Equilibrium Approach to Monetary Theory” (Tobin, 1969).
The original definition of Tobin’s Q is a ratio that compares the market value of the company
with the company’s replacement cost of its assets. It is calculated by dividing the company’s
market value by the replacement cost of its assets. If the ratio is higher than 1 it indicates that
the market value of the company’s assets is at a premium to their book value which could be
an indicator that the company is undervalued. On the other hand, if the ratio I below 1, it
suggests that the market values the assets at a discount to their book value which could
indicate that the company is overvalued. The original calculation has been criticized for being
too complex and requiring difficult-to-access information (Chung & Pruitt, 1994). Because of
the reason that Tobin’s Q usually requires difficult and rather complex calculations, former
research has calculated Tobin’s Q by calculating the ratio by taking a company's market value
divided by the book value of its total assets (Velte, 2017: Choi & Wang, 2009: Längert

28
Edlund & Vik, 2022). For example, Choi & Pruitt argues that Tobin’s Q is usually calculated
in line with this because of the difficulties connected to estimating the replacement value of
the assets (Chung & Pruitt, 1994). Based on the complexity and the criticism of the original
calculation of Tobin’s Q, this study will be calculating Tobin’s Q by dividing the market value
of the company by the book value of the assets.
𝑇𝑜𝑏𝑖𝑛′𝑠 𝑄 = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒
𝐸𝑞𝑢𝑖𝑡𝑦 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒
3.5.2 ROA
In order to measure financial performance from two different points of view this thesis will
also use an accounting-based ratio, Return on Assets. Like Tobin’s Q, many former studies
have also used ROA as a financial ratio to represent a company’s accounting-based
performance (Velte, 2017: 2009: Längert Edlund & Vik, 2022). The ratio is an indication of
how profitable a company is in relation to its total assets, from an accounting-based
perspective. Return on Assets is calculated by dividing the company’s net income by its total
assets (CFI, 2023).
𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
4. SCIENTIFIC METHOD This chapter will present the methodological and philosophical
aspects that the study relies on. Initially, the chapter will present and discuss the scientific
theoretical choices which have been made for the approach to the research question. This will
be followed by the research design of the study and literature search. The concluding section
will discuss the ethical considerations of the study.
3.6 RESEARCH PHILOSOPHY
When conducting a study, it is important to in an early stage identify and explain which
research paradigm the study will be based on. A research paradigm is a philosophical
framework that works to control how a scientific study should be constructed to effectively
answer the research questions. The research paradigm is based on people's philosophies and
assumptions regarding knowledge and how they perceive reality (Collis & Hussey, 2014,
p.10). The two main paradigms are Interpretivism and Positivism which relies on several
different assumptions. Later in this chapter follows a review of the two research philosophical
paradigm which are known as ontological assumption and epistemological assumption which
will be reviewed more thoroughly in the next sections. Later on, will also assumptions

29
regarding collecting and analyzing data be presented as well. The choice of which paradigm
will guide how the research will be executed, for instance how the data will be collected and
analyzed (Collis & Hussey, 2014, p.10).
3.6.1 ONTOLOGICAL ASSUMPTION
The study aims to investigate the relationship between ESG ratings and a company's financial
performance in the automotive sector. It will use an Objective perspective, which views
reality as separate, independent, and measurable. The objective perspective is based on the
Positivist paradigm and is structured and controlled, while the subjective perspective is based
on the perception and actions of living objects. The study will use secondary data to
objectively measure, statistically test, and draw conclusions. The results will be considered
independent of the authors, and a subjective perspective would not be appropriate for this
study.
3.6.2 EPISTEMOLOGICAL ASSUMPTION
The Epistemological assumption is a philosophical perspective that focuses on knowledge
and its validity based on reality. It includes two perspectives: positivism and interpretivism. A
positivist approach is suitable for this thesis, as it focuses on what knowledge is trustworthy
and acceptable sources. Positivism argues that knowledge comes from objective evidence and
is observable, while interpretivism views knowledge as subjective and customized to specific
situations. Both perspectives aim to minimize the gap between researchers and the researched
topic, ensuring a comprehensive understanding of the phenomenon.
3.7 RESEARCH DESIGN
The choice of method stands between a quantitative and qualitative approach. Saunders et al
(2019, p. 175) describe the differences between these two approaches as distinguishing
between numerical data and non-numerical data. Because of the structure and purpose of this
study, it will adopt a quantitative research design. Where numerical data tends to include
numbers and non-numerical data focuses more on words, images, and other similar material.
Saunders et al emphasize that in reality, the differentiation is more problematic, because of
the reason that grey zones exist where both quantitative and qualitative data analysis. For
example, in qualitative research, the data may have to be analyzed in a quantitative way. A
research design could therefore use a combination of the two methods in several different
ways Saunders et al (2019, p. 175) Quantitative research is mainly associated with the
positivist approach with a more structural data collection and is used to investigate the

30
relationship between different variables. The variables are then analyzed in a statical way and
put a lot of emphasis on the validation of data material (Saunders et al., 2019, p. 176-178).
Qualitative research tends to be associated with the interpretive philosophy due to the fact
that research makes sense of subjective and socially constructed meanings in regard to the
phenomenon that is being studied (Saunders et al., 2019, p. 179)
Saunders et al. (2019, p. 186) continue to argue that research can be designed with a different
purpose in mind. Research can be designed to achieve exploratory, descriptive, explanatory,
and evaluation purposes. Exploratory studies seek to discover what is happening and expand
the understanding of a specific topic or phenomenon. Descriptive studies seek to explain and
clarify existing phenomena and can be seen as an extension or continuation of an exploratory
study. The purpose of an explanatory study is to explain phenomena or situations and
discover relationships between variables to explain them. The last research design is
evaluative studies which aim to investigate how well something works. Evaluation studies in
business and management are likely to assess the effectiveness of an organization or a
business strategy (Saunders et al., 2019, p. 186- 188)
It exists two clearly defined approaches when it comes to a conceptual and theoretical
structure. Namely a Deductive approach and an Inductive approach. Deductive studies aim to
move from the general to the particular. A Deductive study usually describes an approach
where a concept or theory is first developed in the form of a hypothesis and then tested by
empirical observation, where particular instances are derived from general conclusions
(Collis & Hussey, 2014, p. 7). The hypotheses can then be accepted or rejected and based on
the results of the hypothesis tests, specific conclusions can be drawn and applied to the
investigated target population (Saunders et al., 2019, p. 153–154).
3.8 RESEARCH METHOD
In the following section, the methodology of the study will be presented. The section will
include a description of the study’s sample, population, and statistical hypotheses. The section
will also present the regression analysis and model that will be used. Lastly, the section will
present variables included in the model. This section will be of use when conducting the
regression analysis, and also when presenting the results.
3.8.1 POPULATION AND SAMPLE
This thesis intends to investigate the relationship between ESG and financial performance in
the automotive industry. As described in previous sections, the existing research on the topic

31
has shown contradictory results which gives feasibility to further research. As previous
studies have focused on specific sectors or regions, this study intends to investigate the
automotive industry which is responsible for a tremendous share of the world’s CO2
pollution (Granered & Sankala, 2018; Falk & Stenlund, 2019; Vik & Längert Edlund, 2022).
The most commonly used time period in similar studies has been 12 years. This study plans
to conduct a time span of 10 years, from the years 2012- 2023. This is to investigate as recent
data as possible to establish updated and valuable results for the research community.
In order to collect data on ESG and financial performance in the automotive industry this
thesis has used the database Refinitiv Eikon. It has limited the data collection to only include
companies within the automotive and auto components sector which resulted in a sample of
229 companies in the first selection. Companies that did not have ESG ratings in Eikon were
filtered out along with companies that did not have sufficient data from the entire time period
2012 to 2023. After this delimitation, 79 companies remained included in the sample. In
section 6. the collection of data which be discussed more thoroughly.
3.9 STATISTICAL HYPOTHESES
Hypothesis tests are modelled from a sample of a population, it shows whether the specific
sample is in consensus with the hypothesis. The hypothesis should be made prior to the
conduction of the test to ensure that the hypothesis is not tampered with in order to match the
results from the methodological test (Studenmund et al., 2014, p. 127-128). When modelling
the hypothesis, there should always be one or several null hypotheses formulated. If there is a
null hypothesis, there should also be an alternative hypothesis. The difference between those
two is that the alternative hypothesis suggests that there is a significant difference in the topic
it means to investigate, in contrast to the null hypothesis, which suggests that there is no
difference in the topic (Macintosh & O’Gorman, 2015, p. 179). In this study, the primary
purpose is to investigate whether ESG-factor has an impact on the financial performance of
automotive companies. This study also has a secondary purpose, which is to investigate the
individual E, S, and G factors and whether they affect financial performance among
automotive companies. With the previously mentioned purpose, this study expect to
contribute to how investors value automotive companies, and ideally, give insight into
automotive companies whose activities result in the highest financial performance. This study
will, as mentioned in previous sections, use Tobin’s Q and ROA as measurements for

32
financial performance, and ESG-factor as the variable which we will compare with. The
hypotheses will be modelled using mentioned variables.
3.9.1 HYPOTHESES IN REGARD TO THE STUDY’S PRIMARY
RESEARCH QUESTION.
This study's primary purpose is to “Investigate the relationship between ESG rating and
financial performance within the automobile sector.” This study will reject the null hypothesis
if p-value is below 0,05, which then indicates a significant relationship. In order to answer the
primary research question, the following statistical hypotheses have been modelled:
H01: There is no significant relationship between ESG and Tobin’s Q
HA1: There is a significant relationship between ESG and Tobin’s Q
H02: There is no significant relationship between ESG and ROA
HA2: There is a significant relationship between ESG and ROA
3.9.2 HYPOTHESES IN REGARD TO THE STUDY’S SECONDARY
RESEARCH QUESTION.
This study's secondary purpose is to “Investigate the relationship between the separate E-, S-
and G- ratings and financial performance within the automobile sector.” This study will reject
the null hypothesis if p-value is below 0,05, which then indicates a significant relationship. In
order to answer the second research question, the following statistical hypotheses have been
modeled:
H03: There is no significant relationship between the E-factor and Tobin’s Q
HA3: There is a significant relationship between the E-factor and Tobin’s Q
H04: There is no significant relationship between the S-factor and Tobin’s Q
HA4: There is a significant relationship between the S-factor and Tobin’s Q
H05: There is no significant relationship between the G-factor and Tobin’s Q
HA5: There is a significant relationship between the G-factor and Tobin’s Q
H06: There is no significant relationship between the E-factor and ROA
HA6: There is a significant relationship between the E-factor and ROA
H07: There is no significant relationship between the S-factor and ROA
HA7: There is a significant relationship between the S-factor and ROA
H08: There is no significant relationship between the G-factor and ROA
HA8: There is a significant relationship between the G-factor and ROA

33
3.10 REGRESSION ANALYSIS
Regression analysis is a tool used to describe trends in a dependent variable, which is a
function of independent variables. This study will use regression analysis to investigate the
relationship between ESG-rating and financial performance. To ensure accuracy, a
multivariate panel data regression model will be conducted using either Fixed Effects (FE-
model) or Random Effects (RE-model). The variables will include control variables from
previous studies, allowing comparisons to previous research on the same topics in different
sectors. Ordinary Least Squares (OLS) is the most common technique for regression
estimates, as it minimizes the sum of the squared residuals to estimate coefficients. The
support of coefficients helps identify the extent to which the dependent variable affects by a
change in an independent variable. To function properly, the assumptions in Table 2 must be
fulfilled.
TABLE 2 OLS ASSUMPTION
1. The regression model is linear in the coefficients and error term.
2. The error term has a population mean of zero.
3. All independent variables are uncorrelated with error term.
4. Observations of the error term are uncorrelated with each other.
5. The error term has a constant variance.
6. No independent variable is perfect linear function of the other explanatory variables.
7. The error term is normally distributed.
3.11 VARIABLES
The following section will present the variables chosen for this study. These variables include
the independent variables, dependent variables, and control variables. Since this study
investigates the relationship between ESG and financial performance. This study’s financial
performance measurements will be the dependent variables and ESG being the independent
variable.
3.11.1 INDEPENDENT VARIABLES
As mentioned, the purpose of this study is to investigate the relationship between ESG and
financial performance along with the separate factors E, S, and G. This analysis will later be
used to draw conclusions on how investors and managers in the automotive sector value ESG
factors. The ESG rating will therefore be this study’s independent variable. The
characterization of an independent variable is that it and its value is independent and

34
therefore not affected by other variables (Collins & Hussey, 2021, p. 189). Refinitiv Eikon's
rating on each company is constant and will therefore not be changed by other variables.
Other independent variables will also be included in the study but will be presented in the
form of control variables. The ESG rating is classified as independent because of the
importance of the variable as the study means to investigate its relationship with financial
performance.
3.11.2 DEPENDENT VARIABLES
In this study, the dependent variables will be Return of Assets (ROA) and Tobin’s Q. The
characterization of a dependent variable is that its value is affected by the value of the
independent variables. ROA and Tobin’s Q will represent the financial performance, and they
together cover both market-based but also accounting-based financial measurements. ROA
and Tobin’s Q are the two most commonly used variables to describe financial performance
in this type of study (Boullay, 2019; Falk & Stenlund, 2019; Vik & Längert Edlund, 2022).
The accounting-based financial measurement ROA is calculated as:
Return on Assets (ROA) = 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
The market-based financial measurement of Tobin’s Q is calculated as:
Tobin’s Q = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
3.11.3 CONTROL VARIABLES
This study uses control variables from previous research to conduct regression analysis,
including systemic risk (Beta), unsystematic risk (Financial Leverage), and market cap
(Market Cap). These variables are chosen for their relevance and potential to achieve
comparable results. The study also includes geographic location as a dummy variable,
dividing geographical locations by continent for a larger sample. The authors aim to achieve
comparable results with previous research on ESG and financial performance.
3.12 DATA
This section will present how the collection of data has been carried out and what choices
have been considered. Later on, this chapter will present descriptive statistics in order to
summarize the data that has been included in this study. The chapter ends with a regression
diagnostic and the final regression model.
3.12.1 DATA COLLECTION

35
This project collects data from Refinitiv Eikon, a comprehensive database in the automotive
and auto-parts sector, to examine ESG in relation to ROA and Tobin's Q over a 10-year
period. The data was gathered from 229 companies within the automotive and auto-parts
sector. After excluding companies without an ESG rating for all 10 years, 79 companies were
selected. These companies were primarily based in Asia, Europe, the Americas, Oceania, and
Africa. The study is heavily weighted against Asia, Europe, and the Americas, so geographic
location was included as a control variable in the regression model to account for skewness
towards certain continents. The combined ESG rating and separated E, S, and G ratings were
collected for the chosen companies. The study aims to provide a comprehensive
understanding of ESG and financial performance in the automotive and auto-parts sector..
3.12.2 DESCRIPTIVE STATISTICS
Table 3 presents descriptive statistics for independent and dependent variables in a regression
model. The ESG rating has a mean of 50.42, with 790 observations, indicating significant
differences among companies within the same sector. The Environmental rating has the
highest mean of 52.68, while the Social rating has the lowest at 48.14. Financial leverage has
a mean of 23.22%, while the Beta value has a mean of 1.28. The company size has a mean of
24,4 billion USD, with Tesla being an outliner with a high Tobin's Q ratio. ROA and Tobin's
Q have a mean of 5.9%, -16%, 27%, and a standard deviation of 5.4%. Tesla's high Tobin's Q
ratio during the last decade indicates a skewed distribution, as it has a remarkably high
Tobin's Q ratio.
TABLE 3 DESCRIPTIVE STATISTICS
Variable Observation Mean Standard Min Max
Deviation
ESG 790 50.43 21.53 3.86 94.57
Environment 790 52.69 27.69 000 98.90
Social 790 48.15 26.13 0.31 97.99
Government 790 50.65 22.15 3.91 97.77
ROA 790 0.06 0.05 -0.16 0.27
Tobin’s Q 790 1.54 9.85 0.02 245.74
FinLev 790 0.23 0.16 000 0.75
MarketCap 790 2.4E+10 6.9E+10 1.0E+08 5.9E +11
Beta 631 1.29 0.37 0.30 2.60

Table 4 shows the correlation between the variables used in this study. The correlation matrix
shows that each of the separated ESG variables has a high correlation with the combined

36
ESG score. The highest correlation is between the combined ESG score and the Social rating
score, followed by the Environmental and Government scores. This was expected because all
three variables are a part of the combined ESG score. Apart from for the ESG factors,
financial leverage has the highest correlation, with a correlation of 0,38 to the combined ESG
score. Overall, the correlation in the table tends to be low and the financial measurement
variables both have negative correlations with the other variables. Because of the reason that
correlation only measures how two specific variables correlate with each other without any
other parameters, it is difficult to draw any conclusions. It is worth noticing that in
contradictory to former studies our statistics show a rather low correlation between ESG and
the size of the company with a correlation of 0,12. Past studies have shown a correlation
pending around 0,30 (Granered & Sankala, 2018; Vik & Längert Edlund, 2022).
TABLE 4 CORRELATION MATRIX
ESG E S G ROA Tobin’s FinLev Market Beta Geogra
Q Cap phic
ESG 1.00
E 0.84 1.00
S 0.92 0.68 1.00
G 0.63 0.31 0.45 1.00
ROA 0.24 -0.29 -0.23 -0.02 1.00
Tobin’s 0.15 -0.12 -0.14 -0.11 0.00 1.00
Q
FinLev 0.38 0.32 0.34 0.29 -0.42 -0.03 1.00
Market 0.13 0.16 0.09 0.07 -0.16 0.63 0.15 1.00
Cap
Beta 0.17 0.17 0.19 0.02 -0.21 -0.12 0.09 0.00 1.00
Geogra 0.13 0.11 0.12 0.07 -0.03 -0.08 -0.31 -0.12 0.04 1.00
phic

37
 Chapter- 4
Results & Discussions
This section will present the study's empirical results. Lastly, a table with all the results be
provided, and then will each individual hypothesis be presented in more detail in regard to
whether or not the hypothesis can be accepted or not.
4.1 PRESENTATION OF THE HYPOTHESES
Section aims to present the results of this study's hypothesis tests. The presentation of the
results in this section will consist of whether the null hypothesis is rejected or not and with
what level of significance. The thesis's two main primary hypotheses are H01 and H02 which
are connected with the research questions “What is the relationship between ESG rating and
financial performance within the automotive sector?”. Where the remaining hypothesis, H03
to H08 are linked with the secondary research question, what is the relationship between the
separate E-, S-, and G- ratings and financial performance within the automobile sector ?
4.2 ESG & MARKET-BASED RESULT
In the following section, the result of the relationship between ESG and the marked-based
financial measurement of Tobin’s Q as this study is meant to investigate will be presented. As
the previous section mentions, this study has chosen to conduct the regression model with a
logarithmic value of Tobin’s Q partly to achieve normal distribution. When a dependent
variable is logarithmic and the rest of the variables are non-logarithmic, a relation called
semi-log is created. That means, coefficients, that are in the regression model along with
logarithmic Tobin’s Q as the dependent variable, will be multiplied by 100 to be interpreted
accurately (Studenmund, 2014, p. 230). That method does not apply to variables that are
connected to logarithmic Tobin’s Q or already written in percentage. Following that
reasoning, this study will only apply the multiplication of 100 to coefficients of ESG and
Beta, and the rest of the variables will not be changed (Studenmund, 2014, p. 230).
4.2.1 ESG & TOBIN’S Q
The main purpose of the first regression test is to investigate whether the first null hypothesis
is true or not. A rejection of the null hypothesis would show a significant relationship
between ESG and the logarithmic Tobin’s Q. As discussed in the previous section, ESG and
Beta must be multiplied by 100 in order to receive an accurate estimation. The first null
hypothesis can be rejected with a significance level of 0,001%, and can therefore conclude

38
that there exists a significant negative relationship between the ESG rating and logarithmic
Tobin’s Q. An increase with one ESG unit will lead to a decrease of logarithmic Tobin’s Q
with -1,29% (100 x 0,0129). Regarding the remaining variables which were included in the
regression model, each one indicates a significant negative relationship between themselves
and logarithmic Tobin’s Q. For example, an increase in financial leverage by one unit will
lead to a decrease in logarithmic Tobin’s Q with -0,57%. Further, the results showed a
significant negative relationship between Beta as well as 43 logarithmic market capitalization
to logarithmic Tobin’s Q. The only control variable that did not show a significant
relationship was the geographic location
TABLE 5 REGRESSION MODEL FOR ESG & TOBIN”S Q
Logarithmic Tobin’s Q Coefficient Std. Err. Confidence level
ESG -0.0129432 0.000964 ***
FinLev -0.5708846 0.156705 ***
Beta -0.0953238 0.139813 **
Geographic -0.0667812 0.139813 -
Logarithmic 0.4252987 0.061623 ***
MarketCap
Adjusted R-squared : 0.2601
* = p<0.05 ** = p<0.01 *** = P<0.001 - =P>0.05
4.2.2 ENVIRONMENT & TOBIN’S Q
The purpose of this regression model is to determine whether or not the Environment as a
factor has a significant relationship to logarithmic Tobin’s Q, as represented by the third null
hypothesis, H03. As this study has mentioned, to have accurate estimations, the
Environmental factor along with the Beta factor must be multiplied by 100. In order to
determine the relationship, a rejection of the null hypothesis would show a significant
relationship between Environment and logarithmic Tobin’s Q. From the regression model,
this study can reject the null hypothesis of the relationship between the environment and
logarithmic Tobin’s Q. This indicates a significant negative relationship between the
Environment and logarithmic Tobin’s Q by 1,059% (-0,0105943 x 100) with a significance
level of 0,001%. This negative relationship means that every unit increase in the environment
gives a decrease of -1,059% of logarithmic Tobin’s Q. The Beta variable also had a
significant negative relationship with logarithmic Tobin’s Q of - 9,757% (0,095753 x 100)
with a confidence level of 0,01%. That result indicates that every unit increase in Beta results

39
in a decrease of 9,757% in logarithmic Tobin’s Q. In this regression model, Financial
Leverage also has a significant negative relationship to logarithmic Tobin’s Q whilst the
logarithmic market cap has a significant positive relationship to logarithmic Tobin’s Q .
TABLE 6 REGRESSION MODEL FOR E & TOBIN”S Q
Logarithmic Tobin’s Q Coefficient Std. Err. Confidence Level
Environment -0.0105943 0.000744 ***
FinLev -0.5681411 0.154075 ***
Beta -0.0975753 0.032686 **
Geographic -0.0736002 0.141392 -
Logarithmic 0.4429502 0.062199 ***
MarketCap
Adjusted R-squared
* = p<0.05 ** = p<0.01 *** = p<0.001 - = p>0.05

4.2.3 SOCIAL & TOBIN’S Q

The regression test in Table 7 aimed to test the thesis's fourth null hypothesis, H04, which
showed a significant relationship between social rating and logarithmic Tobin's Q. The results
showed a negative relationship between social rating and logarithmic Tobin's Q, with an
increase in one rating unit causing a decrease of -0.93%. Control variables, financial leverage
and Beta, also showed a negative relationship with logarithmic Tobin's Q, suggesting that an
increase in risk level negatively affects logarithmic Tobin's Q. Geographic location did not
show a significant relationship.
TABLE7 REGRESSION MODEL FOR S & TOBIN”S Q
Logarithmic Tobin’s Q Coefficient Std. Err. Confidence Level
Social -0.0093276 0.000798 ***
FinLev -0.6070586 0.161123 ***
Beta -0.1218668 0.034008 ***
Geographic -0.0764539 0.144004 -
Logarithmic 0.4273066 0.063471 ***
MarketCap
Adjusted R-squared
* = p<0.05 ** = p<0.01 *** = p<0.001 - = p>0.05

4.2.4 GOVERNANCE & TOBIN’S Q

The regression test in Table 8 tested the fifth null hypothesis, H05, which found a significant
relationship between Governance rating and logarithmic Tobin's Q. The results showed a

40
negative relationship between the two variables, with an increase in Governance rating unit
causing a decrease in logarithmic Tobin's Q by -0.31%. Other significant relationships
included financial leverage, Beta, and market capitalization, with market capitalization
having a positive impact on logarithmic Tobin's Q. Geographic location showed a non-
significant relationship with logarithmic Tobin's Q.
TABLE 8 REGRESSION MODEL FOR G & TOBIN’S Q
Logarithmic Tobin's Q Coefficient Standard Error Confidence – level
Governance -0,0031484 0,000848 ***
Finlev -0,8846103 0,173545 ***
Beta -0,1669726 0,036916 ***
Geographic -0,1146944 0,159113 -
Logarithmic 0,4462775 0,070079 ***
MarketCap
Adjusted R-squared: 0,1590
* = p < 0,05
** = p < 0,01
*** = p < 0,001 -= p > 0,05

4.3 ESG & ACCOUNTING-BASED RESULT

In the following section is the second null hypothesis presented, H02. The result from the
regression model with ESG and the account-based financial measurement Return on Assets
(ROA) will be presented. In contradiction to the previous section, there will be no changes in
the variables as ROA has not been altered due to it already being normally distributed and
containing several negative values.
The regression model investigates the relationship between ESG factors and ROA, as well as
the relationship between ROA and other independent variables. The study finds no significant
relationship between ESG and ROA, and the null hypothesis is not rejected. Financial
Leverage and Beta have a significant relationship, with a 0.05 significance level for Financial
Leverage and 0.01% for Beta respectively. Both have a negative relationship with ROA, with
every unit of Financial Leverage resulting in a 0.199% decrease and every unit of Beta
resulting in a 0.0132% decrease.
TABLE 9 REGRESSION MODEL FOR ESG & ROA
ROA Coefficient Standard Error Confidence – level
ESG -0,002737 0,0001465 -
FinLev -0,1992942 0,0207464 ***

41
Beta -0,0132189 0,0055148 *
Geographic -0,0024679 0,0061468 -
Logarithmic 0,0051659 0,0029171 -
MarketCap
Adjusted R-squared: 0,2092
* = p < 0,05
** = p < 0,01
*** = p < 0,001 - = p > 0,05
4.3.1 ENVIRONMENT & ROA
The regression model investigates the relationship between Environmental and ROA,
rejecting the null hypothesis H06. The results show a significant negative relationship
between Environmental rating and ROA, with an increase in Environmental rating causing a
slight decrease of 0.0003%. Financial leverages showed a negative relationship of 0,001%,
while Beta and Market Capitalization showed a lower significant relationship of 0.05%.
Market capitalization has a limited positive effect on ROA, with an increase in company size
resulting in only 0.005% increase.
TABLE 10 REGRESSION MODEL FOR E & ROA
ROA Coefficient Standard Error Confidence – level
Environment -0,0003038 0,0001123 **
FinLev -0,1948694 0,0203017 ***
Beta -0,0127109 0,0054855 *
Geographic -0,0022171 0,0059536 -
Logarithmic 0,0056446 0,0028293 *
MarketCap
Adjusted R-squared: 0,2281
* = p < 0,05
** = p < 0,01
*** = p < 0,001 -= p > 0,05

4.3.2 SOCIAL & ROA

The regression model examined the relationship between Social rating and ROA, rejecting
the null hypothesis. A significant negative relationship was found, with an increase in Social
rating causing a slight decrease in ROA. Control variables Beta and Market capitalization
showed no significant relationship with ROA. Financial leverage showed a significant

42
relationship, with an increase in debt slightly reducing ROA by 0.19%. Beta also showed a
slight negative relationship.
TABLE 11 REGRESSION MODEL FOR S & ROA
ROA Coefficient Standard Error Confidence – level
Social -0,002515 0,0001161 *
FinLev -0,1989018 0,0206815 ***
Beta -0,0131884 0,0054853 *
Geographic -0,0023999 0,0061596 -
Logarithmic 0,0049988 0,0028819 -
MarketCap
Adjusted R-squared: 0,2087
* = p < 0,05
** = p < 0,01
*** = p < 0,001 -= p > 0,05
4.3.3 GOVERNANCE & ROA
The regression model investigates the relationship between Governance factor and ROA,
H08, and the relationship between ROA and other independent variables. The test results
show that Governance has no significant relationship with ROA, and the null hypothesis is
not rejected. Financial Leverage and Beta have a negative relationship with ROA, with every
unit of Financial Leverage resulting in a 0.21% decrease in ROA and every unit of Beta
resulting in a 0.0156% decrease. Geographic and Logarithmic Market Cap have no
significant relationship with ROA.
Table 12 Regression Model For G & Roa
ROA Coefficient Standard Error Confidence – level
Governance 0,0001223 0,0001174 -
FinLev -0,2111279 0,020332 ***
Beta -0,0156539 0,0054468 **
Geographic -0,0040744 0,0061146 -
Logarithmic 0,003289 0,0028439 -
MarketCap
Adjusted R-squared: 0,2089
* = p < 0,05
** = p < 0,01
*** = p < 0,001 -= p > 0,05
4.4 RESULTS OF HYPOTHESES

43
All hypotheses have been tested with the selected model. Of the eight hypotheses that were
tested, six hypotheses could be rejected. The results from the regression analysis can be seen
in Table 13 below along with the decision to reject or not reject the hypothesis. To clearly
show different levels of significance, if a higher degree of significance is found it will be
marked out with an asterisk. In the following parts of this chapter, a more detailed analysis of
each performed regression will be presented.
Table 13 Results From Hypothesis Tests
Hypothesis Results
H01 : There is no significant relationship between Reject ***
ESG & Tobin’s Q
H02 : There is no significant relationship between Can’t Reject
ESG & ROA
H03 : There is no significant relationship between Reject ***
E- Factor & Tobin’s Q
H04 : There is no significant relationship between Reject ***
S- Factor & Tobin’s Q
H05 : There is no significant relationship between Reject ***
G- Factor & Tobin’s Q
H06 : There is no significant relationship between Reject ***
E- Factor & ROA
H07 : There is no significant relationship between Reject ***
S- Factor & ROA
H08 : There is no significant relationship between Can’t Reject
G- Factor & ROA
* = p < 0,05
** = p < 0,01
*** = p < 0,001

4.5 ANALYSIS
The following section will discuss the empirical results and connect them to the theoretical
framework. The purpose of the following chapter is to connect the theoretical framework,
previous research, and empirical results. The purpose of the study is to investigate the
relationship between ESG ratings and financial performance, where both accounting-based
performance and market-based performance are included. In order to answer the thesis' research
questions, eight hypotheses were formulated and then tested with a panel-data regression test.
Where the relationship between the ESG rating and the accounting-based financial performance
measurement ROA and the market-based measurement of Tobin’s Q is examined. The secondary
purpose is to analyse how the separated ratings of E, S, and G are affecting ROA and Tobin’s Q.

44
The results from the hypothesis test will be discussed and compared to previous research. The
analysis will try to establish whether the Shareholder Theory or the Stakeholder Theory is more
present within the Automotive industry. A positive significant relationship between ESG and
financial performance would indicate that the Stakeholder Theory is more present within the
industry. While a neutral or significant negative relationship would support the Shareholder
Theory that a company's activities within social responsibility imply that the shareholder's
capital in spent on activities that do not maximize profit.
4.5.1 ESG & FINANCIAL PERFORMANCE
This study investigates the relationship between ESG ratings and financial performance,
including market-based and accounting-based measurements. Two regression analyses were
conducted to test the main hypotheses, which were rejected. The results showed a negative
significant correlation between ESG ratings and Tobin's Q, with an increase of one ESG unit
decreasing logarithmic Tobin's Q by -1,29%. The regression model for ROA and ESG
resulted in a p-value of 0,06, rejecting the null hypothesis. The results contradict previous
research in the same field, such as Boullay (2019)'s findings, which found a significant
negative relationship between ESG ratings and Tobin's Q. Granered and Sankala (2018) also
did not find a significant relationship between ESG and ROA. Velte (2017) and Falk &
Stenlund (2019) also found a non-significant link between ESG and Tobin's Q. The study's
findings indicate that the relationship between ESG and financial performance differs
between countries and industries, highlighting the importance of industry and country-level
studies.
The study analyzed companies across five continents, with Asia, Europe, and the Americas
having the highest number. The control variable showed non-significant results. Financial
performance in the automotive industry is influenced by factors like technological innovation,
CO2 emissions reduction, and electric vehicles. However, R&D ratios could have different
results due to data skew.

Authors Selec Time period Observation Database Financial Conclusion

tion performance
measurement
Granelli & Auto 2012-2021 79 Thomson Reuters ROA & - (ESG &
Radestrom motiv Eikon Tobin’s Q Tobin’s Q)
(2023) e 0 (ESG &
Indus ROA)
try - (E & ROA)

45
 world - (S & ROA)
wide - (E &
Tobin’s Q)
- (S &
Tobin’s Q)
- (G &
Tobin’s Q)
- (G & ROA)

Esmail & Large 2016-2020 244 Thomson Reuters P/E , P/B, 0 (ESG &
Mattson Cap Eikon & Bloomberg Cost of EV/EBIT)
(2022) Swed Equity and + (ESG &
en EV/EBIT P/E)
+ (ESG &
P/B)
0 ( ESG &
cost of
Equity)
Bouallny FIs 2007-2016 342 Bloomberg ROA, ROE - (ESG &
(2019) & Tobin’s Q ROA/ROE)
- (ESG &
Tobin’s Q)

SUMMARY OF PREVIOUS RESEARCH

+ = Positive significant relationship
- = Negative significant relationship
0 = No significant relationship
4.5.2 ENVIRONMENT, SOCIAL AND GOVERNMENT
The study found a significant negative relationship between Tobin's Q and E, S, and G factors
and ROA, with social and environmental factors also influencing ROA. However, the null
hypothesis for ESG and Governance could not be rejected. The study suggests a difference
between sectors and provides insights for companies to consider when deciding on ESG
activities.
4.5.3 VALUE CREATION
The study examines the correlation between Environmental, Social, and Governance (ESG)
and Tobin's Q (Tobin's Q) in the automotive industry. It finds a negative correlation,
suggesting companies with higher ESG tend to perform worse in financial performance. The
findings align with the Shareholder Theory, suggesting companies maximize profits.
However, the study's findings cannot be definitively linked to any theory.

46
 Chapter- 5
CONCLUSION
In the final section, the purpose of the study will be discussed, and how the research question
has been answered from the regression analysis. Furthermore, the study's social, practical,
and theoretical contributions will also be described. Finally, the authors will provide
suggestions for further research in the area.
5.1 CONCLUSION
This study investigates the relationship between ESG rating and financial performance in the
automotive industry, focusing on the Shareholder Theory and Stakeholder Theory. The
research aims to identify the most relevant theory for the automotive industry, given the
challenges posed by climate change, corruption, and social issues. The study found a
significant negative relationship in six out of eight hypotheses, contradicting initial
expectations. The results align with past research showing contradictory results in the area of
ESG and financial performance. The study found a significant negative relationship between
sustainability work and market-based financial performance measurement, Tobin's Q, and a
neutral relationship between ESG rating and accounting-based financial performance
measurement, ROA. This supports the Shareholder Theory, which suggests companies should
focus on activities that maximize shareholder profit. The study aims to encourage sustainable
behaviour, despite the negative results.
5.2 IMPLICATIONS FOR AUTOMOTIVE COMPANIES
The study reveals that ESG-rating has a negative impact on financial performance in the
automotive sector, with a Tobin's Q and ROA score being neutral. This suggests that
companies should avoid increasing their ESG score, as it could negatively affect profitability
or remain neutral. However, the study recommends that automotive companies engage in
positive activities related to the environment, social work, and corporate governance. These
activities can be seen as good acts against society, the environment, and stakeholders,
resulting in good public relations. The financial performance variable lagged with one year,
and some ESG activities may impact financial performance over time. The automotive
industry's dependence on government subsidies and state regulation makes it crucial for
companies to work proactively with ESG matters to reduce the risk of negative impacts from
government interaction. Therefore, the study recommends automotive companies to continue
investing in ESG activities to work proactively.

47
5.3 THEORETICAL AND PRACTICAL CONTRIBUTION
This study aims to explore the relationship between Environmental, Social, and Governance
(ESG) and financial performance in the automotive industry. The Stakeholder Theory, which
suggests a positive relationship between ESG and financial measurements, is applied to
automotive companies. However, the study found a significant negative relationship,
indicating that ESG activities in automotive companies have a negative impact on their
financial results. This suggests that ESG activities are less important than other factors in
creating value for automotive companies. The study aims to fill the research gap in
automotive companies and understand the presence of either the Stakeholder Theory or the
Shareholder Theory in the industry. The study aims to show a positive relationship between
ESG and financial performance, as it would encourage automotive companies to work more
sustainably. However, the study fulfilled its expectations, with a negative relationship.
5.4 DELIMITATIONS AND FUTURE RESEARCH
This study examines the relationship between ESG rating and financial performance in the
automotive sector. It used a one-year time lag to compare results, but a wider time
perspective would be beneficial. The quantitative method was used, but a qualitative
approach could provide more insight and knowledge. Tobin's Q was used as a market-based
measure, while ROA was an accounting-based measure. A qualitative study would provide a
deeper understanding of investors' expectations in the automotive sector. Future research
could include more variables in models for Tobin's Q and ROA, including R&D and
volatility. Additionally, using another database or supplementing data from other databases
could help improve the understanding of the relationship between ESG rating and financial
performance. Future research should consider incorporating more variables and using
different databases for better results.

Publication details
This was a general project. It’s purpose is to improve the knowledge base. Therefore this
project has been published on the website called “ scribd” on 5th of July 2024.

48
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