Author: IVAN QUEROL ZAMORA
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ABSTRACT
This paper investigates whether Spanish companies with higher ESG ratings have outperformed in the stock market from 2019 to 2024. Using Refinitiv’s ESG classification, we compare the financial performance of firms with high and low ESG ratings. Our findings indicate that high-ESG companies generally achieve higher market valuations and superior stock returns, consistent with recent research.
However, we observe that this relative advantage is procyclical, narrowing during crises or periods of market stress. This challenges the notion that ESG provides an ”insurance effect” and instead supports the argument put forth by Demers et al., suggesting that investment in intangible assets, rather than ESG factors, shielded stocks during the COVID-19 pandemic. While this study does not establish causality, it offers empirical insights into the relationship between ESG engagement and financial performance in the Spanish market.
1. INTRODUCTION
The notion that businesses should prioritize more than just profits has gained substantial momentum in recent years. This shift, encapsulated by the ESG (Environmental, Social, and Governance) framework, reflects evolving expectations about corporate responsibility. Milton Friedman’s assertion that “the social responsibility of business is to increase its profits”—suggesting that profit maximization ultimately benefits society—appears to have lost ground in contemporary discourse.
Despite criticism, particularly regarding transparency issues and accusations of “greenwashing,” ESG has become an increasingly influential factor among consumers, investors, and policymakers. Companies are recognizing that long-term success extends beyond financial performance; it requires a commitment to sustainable and responsible business practices.
However, Milton Friedman’s perspective may not be entirely at odds with the rise of ESG. Investors may view ESG initiatives as a means to drive higher future profits by attracting more loyal customers and securing potential subsidies. In this context, ESG adoption could be seen as a strategic investment rather than a purely altruistic endeavor.
Recent research has sought to clarify the relationship between ESG engagement and financial performance. Whelan, Atz, and Clark (2021)[1] conducted a meta-analysis of over 1,000 studies published between 2015 and 2020, finding that the majority reported a positive or neutral relationship between ESG and financial returns. Similarly, Lins, Servaes, and Tamayo (2017)[2] provided evidence that firms with strong corporate social responsibility (CSR) practices benefited from greater investor trust during the financial crisis, leading to higher stock valuations. However, this optimistic view has been challenged. Demers et al. (2021)[3] argue that ESG did not shield stocks during the COVID-19 crisis, and instead, investments in intangible assets played a more significant role in mitigating losses.
The objective of this paper is to assess whether Spanish companies most committed to ESG practices have delivered superior stock market performance. However, this study does not aim to establish a causal relationship. The observed correlation may reflect a self-selection effect, whereby more successful or financially robust firms are better positioned to invest in ESG initiatives. In this view, ESG engagement could be a consequence of strong performance, rather than its cause.
To explore this, we divided the largest publicly listed Spanish companies into two groups based on their
level of ESG engagement, and we examined the performance evolution of each group the last 5 years (April 2019-April 2024). Finally, these results were compared with current findings from the literature on this topic.
2. DATA
The classification of companies in this study is based on Refinitiv’s ESG scoring system[4]. This methodology evaluates companies using more than 450 ESG-related indicators, covering environmental impact (such as carbon emissions and resource efficiency), social aspects (including labor practices and diversity policies), and governance factors (such as executive compensation and shareholder rights). The data are sourced from company disclosures, publicly available reports, and third-party providers, ensuring a comprehensive and standardized evaluation.
Although the scoring method has evolved over time, as of 2024 each company is assigned an ESG rating on a scale from 0 (lowest) to 100 (highest). These numerical scores are subsequently converted into letter grades ranging from D– (lowest) to A+ (highest) to facilitate easier interpretation. For analytical purposes, we have classified Spanish companies into two groups according to their ESG rating:
- High ESG Standards Group (G0): Companies rated between A+ and A- that demonstrate strong ESG engagement and are considered leaders in sustainability and corporate responsibility.
- Low ESG Standards Group (G1): Companies rated between B– and D–, indicating relatively weaker ESG performance and significant room for improvement.
Finally, we present the classification of firms within G0 and G1:
G0 Group (26 companies): BBVA, NH Hotels, Amadeus IT Group, Redeia, Grenergy Renovables, Ferrovial, Caixabank, Enagás, Grupo Prisa, Naturgy, Acerinox, Applus, Repsol, Indra Sistemas, Inditex, Bankinter, Técnicas Reunidas, Mapfre, Gestamp Automoci´on, Neinor Homes, Lar Espa˜na, Aena, CAF, Cellnex Telecom, Grifols, Melià Hotels International.
G1 Group (19 companies): Miquel y Costas, Acciona Energía, Azkoyen, ACS, Obrascón Huarte Lain, Ercros, Telefónica, Tubacex, Talgo, FCC, Acciona, Merlin Properties, Catalana Occidente, Grupo San José, Unicaja, Endesa, Oryzon Genomics, Llorente & Cuenca, Corporación Financiera Alba.
3. ANALYSIS
3.1. RELATION BETWEEN ESG MARK AND THE MARKET CAPITALIZATION
Note that Inditex was excluded from this analysis due to its status as an outlier; this exclusion helps preserve the readability of the box plot and does not alter our overall findings. As depicted in Figure 1, companies in Group G0 typically display higher market capitalization values. In addition, the wider spread of observations within G0 indicates greater variability among these firms. By contrast, Group G1 exhibits lower market capitalizations overall, with a narrower range of values.
To formally test whether the mean market capitalization differs between the two groups, we conducted a statistical test (with the alternative hypothesis that the mean of G0 exceeds that of G1). The resulting p-value of 0.03665 suggests a statistically significant difference at the 5% level. Thus, we reject the null hypothesis of equal means and conclude that companies in the higher-ESG group (G0) tend to have significantly larger market capitalizations than those in the lower-ESG group (G1).
Moreover, this result aligns with the view that ESG initiatives may function as a strategic investment: larger firms can leverage their scale, visibility, and resources to generate more tangible returns on sustainability efforts, enhancing their market presence and reinforcing the value of responsible business practices.
3.2. RELATION BETWEEN ESG MARK AND BUSINESS ADDRESS
Regarding business addresses, we define: B2B as business-to-business, B2C as business-to-consumer, and Both as companies that operate in both B2B and B2C spheres.
From a visual inspection, all purely B2C companies fall under G0 —exhibits a notable concentration of companies operating in the hotel sector—, whereas B2B and Both are distributed similarly across both groups.
To test whether these differences are statistically significant, we conducted a chi-squared test on these proportions within each group. The resulting p-value of 0.1279 indicates no statistically significant difference at the 5% level. Consequently, we cannot reject the null hypothesis that the distribution of business addresses is the same across both ESG groups.
Even so, the fact that all B2C companies appear in G0 is an interesting observation. One possible interpretation is that companies catering directly to consumers might prioritize ESG initiatives as part of their branding or marketing strategies. In contrast, B2B-focused firms, with less direct consumer interaction, may face weaker external pressures to invest heavily in ESG. Nonetheless, the relatively small sample size advises caution in drawing definitive conclusions from these findings.
3.3. EARNINGS PER SHARE GROWTH IN EACH GROUP
To accurately compare the evolution of earnings per share (EPS) in both groups over the five-year period (2019 – 2024), the median (solid line) serves as a more reliable indicator. Unlike the mean (dashed line), which is highly sensitive to extreme variations and can sometimes distort the overall trend, the median provides a clearer representation of the general movement of each group.
As shown in Figure 3, the outbreak of the COVID-19 pandemic in 2020 led to a decline in earnings for both groups. However, Group G0 companies experienced a significantly sharper drop (-60.23%) compared to those in Group G1 (-32.11%). One contributing factor, as previously mentioned, is the higher concentration of hotel companies in G0, a sector that was particularly impacted by lockdown measures and travel restrictions.
Nevertheless, this alone does not fully account for the extent of the decline in G0’s median EPS, suggesting that additional factors may have amplified the disparity.
Moreover, although both groups experienced a rebound in EPS in 2021, G1 recovered at a faster pace in the short term. In absolute terms, G1 saw a 67.53% increase from its 2020 low, whereas G0 rebounded by 47.33%. Despite this recovery, G0’s EPS remained below its 2019 levels.
However, from 2021 onward, the trend reverses, with G0 surpassing G1 in EPS growth. In 2022, G1 experiences a decline, bringing both groups to similar EPS levels. However, while G0 continues on a steady upward trajectory, G1 stagnates and eventually declines. By the end of the study in 2024, G0 achieves a median EPS level 42.55% higher than in 2019, whereas G1 drops to -1.92%, showing no sustained growth over the five-year period. This divergence underscores the contrasting long-term performance of the two groups.
This analysis shows that while G0 companies ultimately achieved stronger long-term growth, their earnings appeared more volatile throughout the period. In contrast, G1 companies performed better during the initial impact of the COVID-19 crisis and experienced a sharper short-term rebound, but that recovery was shortlived, as earnings stagnated and declined in subsequent years. Meanwhile, G0’s more gradual progression translated into sustained long-term gains, suggesting a more resilient performance over time despite initial vulnerability.
3.4. P/B OF EACH GROUP AND ITS EVOLUTION
The Price-to-Book (P/B) ratio is a key indicator of how the market values a company’s assets in relation to their book value. In this analysis, we compare the evolution of the mean P/B ratio for each group over the five-year period, allowing us to examine how the market’s perception of each group’s asset value has changed over time.
At first glance, it is clear that G0 consistently exhibits a significantly higher P/B ratio than G1. Over the five-year period, the average P/B ratio for G0 companies is 2.26, compared to 1.37 for G1.
Interestingly, both groups follow similar trends in the evolution of this metric. For example, during the 2020 crisis, the P/B ratio declined by –26.56% in G0 and –29.83% in G1. This is particularly striking considering that G1 maintained better earnings performance during the pandemic, yet the market continued to assign it a relatively lower valuation.
Following the initial pandemic shock, the valuation of both groups rebounded, reaching a new peak in 2021. However, subsequent monetary policy tightening—driven by central banks raising interest rates to combat rising inflation—had a negative impact on asset valuation metrics. Between the peak in early 2021 and the trough at the end of 2022, G0’s P/B ratio declined by –31.24%, while G1’s fell by a comparatively smaller –18.25%. Once again, this indicates that despite G1’s weaker earnings performance during this period, its market valuation proved more resilient, suggesting a lower sensitivity to broader macroeconomic shifts or possibly more conservative prior valuations.
Over the five-year period, G0 maintained higher P/B ratios than G1 but also exhibited greater volatility. Despite this, the overall decline in G0’s P/B ratio was smaller (–19.80%) compared to the –27.56% drop observed in G1. This suggests that, while market valuations of G0 companies fluctuated more sharply, they remained relatively more valued by investors in the long term.
3.5. STOCK MARKET PRICE PERFORMANCE COMPARISON
When analyzing the stock price trends of both groups during the five years period, we observe that their movements closely mirror those of the IBEX-35 index. However, what differentiates the groups is not the direction of the movements, but their magnitude—each group responds to market cycles with varying intensity.
Visually, the G0 (blue line) appears to outperform G1 (red line) throughout all the observed period, indicating a higher cumulative return for companies with stronger ESG ratings. This observation is supported by the Welch Two Sample t-test, which yields a p-value below 2.2e-16 (strong evidence of a statistically significant difference in performance between the two groups).
This finding reinforces the idea of a possible convergence between Milton Friedman’s profit-maximization view and the rise of ESG principles: companies striving to increase shareholder value—reflected in their stock market performance, as Friedman emphasized—may simultaneously recognize that strong ESG practices can support sustainable growth and enhance market valuation over the long term.
Potential Explanations:
- ESG as a Growth Driver: Firms with solid ESG frameworks may gain competitive advantages through stronger brand loyalty, improved operational efficiency, or more favorable regulatory treatment.
- Attracting ESG-Focused Capital: The increasing relevance of responsible investing may boost demand for shares of high-ESG companies, exerting upward pressure on their stock prices.
- Self-Selection Effect: It is also possible that firms already enjoying financial success are more likely to invest in ESG initiatives, suggesting that ESG may be a consequence rather than a cause of strong performance.
3.6. PRICE GAP EVOLUTION
Beyond stock price levels themselves, a particularly insightful angle is the evolution of the price gap between the two groups—measured as the difference between G0 and G1—and how this gap correlates over time with changes in EPS and P/B ratio. Examining this dynamic provides a deeper understanding of how the market differentiates between the two groups under the various market conditions experienced over the five-year period.
The Figure 6 illustrates the evolution of the price gap (as a percentage) between the stock market level of the two groups (G0-G1). The difference in stock performance is plotted against time in weeks. Over the long run, the price gap between G0 and G1 has been increasing, as can be seen in the regression line.
The slope of the regression line indicates that, on average, the price gap between G0 and G1 is expected to increase by approximately 2.86% points per year. This suggests a consistent and widening divergence in stock performance between the two groups over the five-year period.
An interesting pattern emerges during periods of crisis or economic turbulence. Notably, the 2020 COVID-19 crisis and the 2022 monetary tightening—driven by inflation and the war in Ukraine—coincide with visible reductions in the price gap between G0 and G1. These observations suggest that the gap may behave in a procyclical manner: during phases of economic expansion, companies with stronger ESG practices (G0) tend to outperform more clearly, while in periods of economic stress, the gap narrows.
This behavior aligns with the dynamics observed in EPS and P/B ratios. G1 companies navigated the pandemic more effectively in terms of earnings, and although their EPS has underperformed G0 since then, their P/B ratio proved more resilient during the 2022 interest rate hikes. In contrast, G0 showed more volatility in its price, but stronger long-term growth. These trends converge with the final widening of the price gap by 2024, consistent with G0’s superior performance in both earnings and valuation metrics by the end of the period.
3.7. BETA ANALYSIS
The calculation of the mean beta for both groups further supports the procyclical nature of the price gap between the high ESG group (G0) and the low ESG group (G1). Specifically, the average beta of G0 is 1.04, while G1’s is lower at 0.89. This difference indicates that, on average, companies in the high ESG group are more responsive to overall market movements than those in the low ESG group. This greater sensitivity reinforces the idea that G0 tends to outperform more clearly in periods of market expansion, while being more exposed during downturns.
3.8. INTANGIBLE ASSETS COMPARISON
To assess whether our results align with the perspective proposed by Demers, E., Hendrikse J., Joos, P., & Lev, B. (2021)[3], we examined the role of intangible assets in both groups at the beginning of the period, focusing on data from 2019. Specifically, we calculated the average relative weight of intangible assets in each group.
For the high ESG group (G0), the mean proportion of intangible assets was 9.95%. However, this figure is skewed by outliers, notably the case of Grifols, which later became involved in a data-reporting scandal.
The median for G0 was substantially lower, at just 1.78%, indicating that only a few companies in the group hold a disproportionately high level of intangible assets.
In contrast, the low ESG group (G1) showed a higher and more consistent presence of intangible assets, with a mean of 12% and a median of 5.77%. This suggests that G1 companies, on average, relied more heavily on intangible assets than their G0 counterparts, and with fewer extreme cases distorting the data.
These findings serve as a crucial reference point for the upcoming analysis and help assess whether our results are consistent with Demers’ hypothesis concerning the role of intangible assets during the pandemic crisis.
4. TESTING HYPOTHESIS
The results of this analysis on Spanish companies reinforce several key insights highlighted by Whelan, T., Atz, U., & Clark, C. (2021)[1]. Specifically, firms with higher ESG scores tend to outperform those with lower scores over time, and the financial benefits of ESG become more evident over a longer horizon, as shown by the progressively widening price gap between the high-ESG (G0) and low-ESG (G1) groups throughout the five-year period. However, the findings also reveal a procyclical nature in this gap: during periods of market stress—such as the COVID-19 crisis in 2020 and the monetary tightening of 2022—G0 companies tend to underperform G1. This observation contrasts with the conclusions of Whelan et al., who argue that ESG investing provides downside protection during crises. Similarly, Lins, K., Servaes, H., & Tamayo, A. (2017)[2] found that firms with high social capital outperformed during the 2008 financial crisis, reinforcing the idea that ESG may offer resilience in turbulent markets.
Several factors may help explain this discrepancy. First, the existing literature is based on large global datasets, while the current analysis focuses exclusively on the Spanish stock market. This national scope introduces specific features—such as sectoral composition, differences in valuation levels between groups, and structural characteristics of Spanish firms—that may influence the results. For instance, Spanish companies invest significantly less in intangible assets than the European average—nearly half as much—with the gap widening since the global financial crisis (Maudos, J., 2024)[5]. In 2019, just before the COVID-19 shock, G1 companies displayed a higher relative weight of intangible assets than G0, suggesting a potential factor of resilience unrelated to ESG scores.
These results are more in line with the findings of Demers, E., Hendrikse, J., Joos, P., & Lev, B. (2021)[3], who argue that ESG ratings did not provide meaningful explanatory power for returns during the COVID-19 crisis, whereas investment in intangible assets did.
5. CONCLUSIONS
This study provides several relevant insights into the relationship between ESG ratings and financial performance among Spanish listed companies:
- Market Capitalization and Valuation: G0 companies exhibit higher market capitalization and maintained stronger Price-to-Book ratios during all the study period, even if in the 2022 interest rates hikes, fell more than G1.
- Stock Market Price Performance: The overall stock performance of G0 companies significantly exceeds that of G1, supported by statistical evidence. This indicates that sustainable practices are linked with better returns and coincidates in this point with Whelan, T., Atz, U. & Clark, C. (2021)[1].
- G0’s earnings per share growth is stronger in the long-run but more volatile: While G0 companies show higher EPS growth over the long term, their earnings fluctuate more. In contrast, G1 companies were more resilient during the COVID-19 shock and recovered faster in the short term.
- The price gap between G0 and G1 exhibits a procyclical behavior: The gap tends to widen in periods of economic stability and contract during crises—such as the 2020 pandemic and the 2022 monetary tightening. This pattern is consistent with the findings of Demers, E., Hendrikse, J., Joos, P., & Lev, B. (2021)[3], or may also reflect external factors disproportionately affecting high-ESG companies during turbulent times.
Overall, these findings reinforce the idea that pursuing strong ESG practices is not at odds with profit maximization. Instead, they appear to complement traditional business goals, aligning with the notion that long-term success can be driven by both responsible behavior and financial performance.
In addition, while a broader study covering a larger sample of Spanish companies, sectors, and longer time periods would offer a more comprehensive view of ESG impacts, the relatively recent emergence of ESG metrics means that historical data is still limited in this country. Expanding the dataset would have significantly increased the complexity of data management in this research. Future studies on the Spanish stock market could build on these findings as more extensive ESG data becomes available.
REFERENCES
[1] Whelan, T., Atz, U., & Clark, C. (2021). ESG and financial performance: Uncovering the relationship by aggregating evidence from 1,000 plus studies published between 2015–2020. New York University Stern School of Business. https://www.stern.nyu.edu/sites/default/files/assets/documents/ESG%20Paper%20Aug%202021.pdf
[2] Lins, K., Servaes, H., & Tamayo, A. (2017). Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis. The Journal of the American Finance Association. https://onlinelibrary.wiley.com/doi/epdf/10.1111/jofi.12505
[3] Demers, E., Hendrikse, J., Joos, P., & Lev, B. (2021). ESG did not immunize stocks during the COVID19 crisis, but investments in intangible assets did. Journal of Business Finance & Accounting. https://onlinelibrary.wiley.com/doi/epdf/10.1111/jbfa.12523
[4] Refinitiv. (2024). Refinitiv’s Spanish Companies ESG Classification. Available at: marketscreener.com/ranking/ESG
[5] Maudos, J. (2024). Intangible assets and competitiveness of Spain’s manufacturing industry: An international comparison. Funcas SEFO, vol. 13. https://www.sefofuncas.com/pdf/Maudos_13-1_1.pdf