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The concept, sustainability, has developed throughout the years and has become an important part for different actors around the world. Due to many organizations like the United Nations acknowledging this aspect together with governments, initiatives and laws have been implemented for businesses to follow. This forms the basis of what is now called ESG which includes three individual aspects: environment, social responsibility and governance. One of the actors includes investors who have now started to shift their focus onto sustainable investments. In order for them to make decisions about the company's way of working towards a sustainable business, analytics began to measure both each individual aspect of ESG and as a whole. Therefore, ESG rating has become a well-known way of measuring how companies perform when it comes to environment, social responsibility and governance.

The pharmaceutical industry in Europe is the second largest in the world and has become acknowledged due to the covid-19 pandemic. It has not only faced criticism and uncertainties both during and after the pandemic, but also faces problems in each individual aspect of ESG. When it comes to environmental issues, the pharmaceutical industry stands for 55% more of carbon emissions than the automotive sector due to non-sustainable supply chains. For the aspect, social responsibility, their main problems include addiction, antibiotic resistance and accessibility of pharmaceuticals. Further, governance issues include illegal marketing and fraud. Due to this, governments and organizations have put pressure on businesses to work towards a sustainable industry. Therefore, ESG ratings have become an important measurement for investors.

The aim of the study is to analyze the relationship between ESG and financial performance in the pharmaceutical industry in Europe with a time period of 2018-2022. The results will indicate if the Shareholder’s theory or the Stakeholder’s theory is more applicable for this industry. The result shows a negative significant relationship between the overall rating of ESG and Tobin’s. When it comes to the individual aspect, governance is statically proved to have a negative significant relationship with Tobin’s Q. This concludes that the Shareholder’s theory is more aligned with the results meaning that the pharmaceutical industry may focus on profit maximization for shareholders. Since there was a non-statically proven relationship between ESG and ROA, the study suggests further research within this topic.