Do ESG Ratings Actually Predict Financial Performance? What the FTSE 100 Data Reveals
Rachael Otuah · 1 May 2025 · 8 min read
Why I Chose This Research Question
When I started my MSc dissertation, I wanted to look at something I could not find a clean answer to anywhere. The debate around ESG investing tends to split into two camps: people who argue it consistently improves returns, and people who say it is greenwashing that adds no financial value. I suspected the reality was more complicated, and I wanted to see what the data actually said.
My research focused on FTSE 100 companies over a five-year period, comparing ESG ratings against financial performance metrics including return on equity (ROE), return on assets (ROA), earnings per share (EPS), and market capitalisation. I also split the sample into two groups: carbon-intensive companies, covering oil and gas, mining, aviation, and chemicals, and low-carbon companies, covering technology, financial services, healthcare, and retail.
That split turned out to be the most important decision I made.
What the Data Showed
For low-carbon companies, higher ESG ratings correlated positively with stronger financial performance across most metrics. Technology and financial services firms with strong ESG profiles consistently showed higher market valuations relative to their peers. This broadly supports the argument that ESG quality signals good management and stakeholder trust, both of which compound into long-term value.
For carbon-intensive companies, the picture was different. Some high ESG-rated firms in oil and gas, particularly those investing heavily in energy transition, showed resilience in market valuation even as the sector faced significant headwinds. Others with lower ESG scores posted strong short-term profits that did not translate into sustained market confidence.
The blanket assumption that ESG ratings are either good or bad for financial performance does not hold. The relationship depends on the sector, and ignoring that distinction leads to bad analysis.
Why the Sector Divide Matters
For carbon-intensive firms, ESG ratings often reflect how well a company is managing transition risk, not how virtuous it is. A mining company with a strong ESG score may simply be one that has invested seriously in compliance, disclosure, and transition planning. Markets appear to reward that, even when current revenues remain tied to extractive activities.
For low-carbon companies, ESG ratings signal something different: governance quality, data transparency, and the strength of stakeholder relationships. These are operational characteristics that affect long-term performance in a more direct way.
If you apply a blanket ESG screen without adjusting for sector, you may be drawing a comparison that does not make sense. A carbon-intensive company with a moderate ESG score that is doing genuine transition work may be a more interesting case than a low-carbon firm with a high score that earns it partly by sector classification alone.
The Bigger Picture
ESG ratings are not standardised tools. Different providers weight factors differently, use different data sources, and reach different conclusions about the same company. My research held the rating provider constant throughout, which is the only honest approach for comparative work, but it means the findings are specific to that methodology.
What I take away from this research is that ESG analysis needs to be done carefully, with explicit assumptions about sector, methodology, and what you are actually trying to measure. The directional signal is real. The execution, as with most things in finance, requires more rigour than the headline numbers suggest.