Why Go Industry-Specific with ESG Indicators? Testing their Validity and Explanatory Power for Financial Performance

This study examines environmental indicators’ validity by testing whether the disaggregated environmental metrics outperform the aggregated score in explaining financial solvency. We extracted ESG data of pharmaceutical and chemical companies from the MSCI and Orbis BvD databases in the period from 2013 to 2022. We employed fixed-effects panel regressions to analyse the relationship between environmental performance measures and financial measures of corporate solvency. Our results suggest that while aggregate environmental scores do not predict financial solvency, while measures of management efforts to address material environmental risks positively influence solvency. However, the influence varies across industries, with significant and consistent associations observed in the pharmaceutical sector but not in the chemical sector. These findings highlight the importance of industry-specific sustainability metrics in understanding the complex relationship between ESG issues and financial performance.