THE EFFECT OF ESG SCORES ON FIRM PROFITABILITY: CASE OF BORSA ISTANBUL

Abstract

In recent years, corporate social responsibility and sustainability have become popular areas of study. In this context, this study aims to fill a gap in the literature by analyzing the effect of ESG (Environmental, Social, Governance) scores on firm profitability and firm value of companies operating in Borsa Istanbul (BIST) and disclosing their ESG sustainability scores. The analysis covered the years 2013-2021 using the panel data method. Companies operating in the financial sector were excluded from the study due to differences in their financial structures, leaving a total of 15 companies for analysis. Return on assets (ROA) was used as the indicator of firm profitability, and firm size and leverage ratio were taken as control variables. According to the results, the average ESG total score for BIST firms from 2013 to 2021 is 60.91. Additionally, the lowest average ESG total score obtained during this period was 15.36, while the highest was 94.18. According to panel data results, there is a significant and positive relationship between the ESG scores of the analyzed firms and their profitability. In other words, an increase in environmental, social, and governance scores leads to an increase in the profitability ratio per asset. Among the control variables, there is a negative relationship between ROA and the leverage ratio, whereas a positive relationship exists between firm size and ROA.