Assessing the Impact of ESG Factors on Financial Performance Using an AI-Enabled Predictive Model

Abstract

Abstract

This study looks at how ESG factors, environmental, social, and governance, relate to the financial performance of U.S. companies, using a machine learning approach built in three parts. We started by looking at each ESG pillar on its own. Using several regression models, we measured how well each one could predict basic financial outcomes. That gave us a sense of their individual signals. Then we shifted gears. In the second phase, we combined all the ESG features into a single model. The goal was to see how a unified view compares to looking at each piece separately. The final phase took a different angle: we used unsupervised clustering to group firms into ESG profiles based on how they behave across all three pillars. These profiles were then used as inputs in our predictive models. What stood out is that governance metrics tended to offer the most consistent signal on their own. But the models improved noticeably when we included all ESG factors together, and even more so when we added the ESG profiles from the clustering step. Those profiles captured deeper, often hidden, patterns that individual metrics couldn’t. Here’s the thing: looking at ESG factors one by one can give you some insight, but it doesn’t really tell the whole story. These elements, environmental, social, and governance, don’t operate on their own. They bump into each other, influence outcomes in ways that aren't always obvious at first glance. What we found is that when you step back and treat ESG as a connected system, the relationship to financial performance becomes a lot clearer. It’s less about ticking boxes and more about understanding how a company functions. The three-part approach we used isn’t some abstract model for the sake of theory. It’s a way to get practical answers. For investors, it can help show where a company stands today and how ready it might be for what’s coming. For companies, it’s a way to see how their decisions in one area might ripple across others. Especially now, as ESG standards keep evolving, having that kind of perspective matters.