Do responsible practices lead to higher firm productivity? Evidence from Europe

Abstract

This study examines the impact of corporate social responsibility (CSR) in its environmental, social and governance (ESG) dimensions on firm productivity. We analyze a data set comprising 448 non‐financial firms operating in 15 European countries during the period 2002–2018 and find compelling evidence indicating that both the overall ESG scores and their individual sub‐pillars, are positively associated with total factor productivity (TFP). To ensure the robustness of our findings, we employ multiple analytical approaches to address potential endogeneity and selection biases. Our evidence demonstrates that the link between ESG and TFP link becomes more pronounced during economic slowdowns, particularly in the aftermath of the financial crisis. Furthermore, our investigation reveals that firms' environmental performance plays a pivotal role in driving this relationship. To validate this outcome, we employ a quasi‐natural experiment, focused on the adoption of the international climate change treaty, the 2015 ‘Paris Agreement’. Overall, our results offer valuable insights for policymakers and regulators and confirm that involvement in sustainability practices within the non‐financial sector not only yields societal benefits but also bolsters firm‐level productivity.