Relationship between Profitability and Sustainability through a Difference-in-differences Approach using The Paris Agreement as a Shock to ESG Ratings

This paper explores the relationship between sustainability through the ESG metrics and profitability through stock price and return on assets (ROA). Data is collected for 312 companies divided into two sectors: financial and energy. After the Paris Agreement there was a change in sustainable indexes parameters due to changes in government goals and expectations. By using the MSCI sustainable index a Difference-in-differences (DID) analysis is done taking into account this shock to see from which side the relation is coming from. The results suggest that for the energy market, firms who were rated sustainable during the agreement grew 5% more than firms who were rated non-sustainable. For the financial market no significant differences were found. These results are important for corporate strategies and investors regarding sustainability. They show that in some markets increasing sustainable ratings has a positive effect on a company’s profitability measures.