Whatkind of ESGis profitable? Connecting company performance to ESG terms in financial reports

In this paper, we examine the relationship between the discussion of Environmental, Social and Governance (ESG) in companies’ annual financial reports and their financial performance. Specifically, we analyse the companies’ use of specific ESG terms alongside the performance metric, sector-normalized Return on Assets (ROA). Our motivation is to determine whether companies frequently mentioning terms such as “gender”, “equality”, “talent”, and “innovation” in their reports demonstrate a higher annual ROAcompared to those that rarely used these terms. To explore this, we used existing datasets with reports and performance metrics from 348 companies, covering the years from 2009 to 2021. In order to better examine differences, we then selected companies whose ROAsignificantly differed from the average (either higher or lower), allowing for a more pronounced examination of the impact of ESG term usage on financial performance. The filtered dataset consisted of 107 companies, with a total of 427 reports; split into two sections representing higher and lower performing companies. We then used an existing list of ESG terms derived from a range of separate data sources, and applied a basic statistical n-gram language model to extract the probabilities of each ESG term’s occurrence in each of the higher- and lowerperforming dataset sections. Results show that while certain sets of ESG concepts correlate with higher financial performance, others do the opposite, and give some initial interpretation into the light this sheds on company reporting behaviour.