Impact of Environmental, Social, and Governance Scores on Stock Market Valuation: Panel Data Analysis of S&P 500 Firms

Environmental, Social, and Governance (ESG) disclosure is increasingly becoming a mandatory component of the corporate governance framework. This study explores the relationship between ESG scores and stock market valuation using panel data of 333 S&P 500 firms. Data has been collected for the year 2015-2023 which are recorded annually. Market capitalisation is the dependent variable, analysed using fixed-effects panel regression with Driscoll-Kraay and two-way clustered standard errors. The overall ESG Score and its three sub-scores (Environmental, Social, and Governance) are estimated separately. The results show that the overall ESG Score is not reliably related to market valuation once year-to-year market-wide trends are accounted for, suggesting that its apparent relationship with valuation largely reflects the fact that both ESG scores and stock valuations rose together over the sample period, rather than a genuine firm-level effect. When the three pillars are examined separately, a more informative pattern appears: the Environmental score is associated with lower market valuation and the Social score with higher market valuation, a pattern that holds under two different measures of firm value. The Governance score is positively related to market capitalisation but not to Tobin's Q, suggesting this result may partly reflect firm size rather than governance quality on its own. These findings suggest that combining ESG performance into a single composite score can conceal differences between its underlying components, with implications for how ESG data is reported and used in investment decisions.