Agency cost effects of ESG risk on working capital and cash conversion cycle: Evidence from Japan, France and United Kingdom

This study aims to investigate operational management determinants for ESG (Environment, Social, and Governance) management. Market expectations for companies now include not just financial responsibility but also environmental, social, and governance responsibilities, impacting investor and customer preferences. Thus, firms are increasingly investing effort into ESG activities for sustainable management. However, additional performance management regarding ESG activities may burden companies beyond traditional measures like productivity and profit. From this perspective, the study aims to show how firms’ operational slack resources in capacity and supply chain affects ESG performance indicators from 2011 to 2021 using the panel regression method. Based on our results, we can suggest that firms with surplus capacity resources tend to achieve better ESG performance as they can accommodate additional tasks. Conversely, a surplus cash conversion cycle in the supply chain, indicating liquidity for ESG activities, may hinder ESG performance. Overall, companies with capacity slack resources and faster cash conversion cycles generally have the capability to invest in ESG initiatives, highlighting the importance of resource management in sustainable business practices.

Environmental, social and governance (ESG) criteria mean investment in economic choices which, without interference with the environment, are intended to promote long-term economic and social well-being. Due to high environmental and social awareness, customers expect companies to devote time and efforts to such sustainable practices. This attitude has led to an overall rise in ESG disclosures and reporting instruments globally with a focus on influence of ESG disclosures on financial performance of companies. Many European countries have already introduced mandatory disclosure of non-financial information. This transition from voluntary to mandatory motivated other countries to adopt mandatory ESG disclosure practices for sustainable development. The practice of reporting non-financial disclosures has been rising due to several reasons, such as increasing visibility, informing customers, avoiding the risk associated with firm performance and achieving sustainability. Countries in the early stages of ESG disclosure need to understand the benchmark practices used by countries with a well-developed ESG system. For preparing the ESG disclosure index and benchmarking based on disclosure score, this study considers a set of developed and developing countries with their ESG disclosures. On the basis of ESG disclosures, the countries have been classified into four different categories. We found Norway, Sweden, Denmark, Finland, United Kingdom, Belgium and France, to have high ESG scores and have been classified as Countries with Well-Developed ESG Framework. Germany, Italy, USA, Australia, Switzerland, Canada, Japan, Brazil and South Africa have medium to high ESG scores and fall under the category Rapidly improving ESG framework. While Singapore, India, China, Philippines, Malaysia and Argentina are categorized as countries with ESG framework at developing stage, Russia, Indonesia, Thailand, Nigeria and Vietnam are classified as Countries with early-stage framework due to low ESG scores.

Purpose – This study examines the impact of environmental, social and governance (ESG) and ESG controversies on firm risk, and proposes the moderating roles of Shariah screening and legal systems over the relationship. Design/Methodology – The research data were 522 firms from 16 emerging markets over the period 2013-2021 (4689 observations). The data (i.e., ESG, financial data, etc.) obtained from the Refinitiv Eikon database. The panel regression model was used to examine the relationships of variables studies. Findings – We find that ESG is negatively related to risks while ESG controversy is positively related to risks. This suggests that when firms engage in more ESG activities, stakeholders’ relationships are reinforced, and lead to reduced firm risks. Further, this study also finds that both Shariah screening and legal environment play significant moderating roles in reducing risks via their influence on ESG and ESG controversies. The evidence is consistent with the stipulation that Shariah-compliant firms are more inclined to engage in ESG activities. Originality/Value – This study is unique as it is an attempt to examine the moderating role of Shariah screening and legal system in influencing the impact of ESG and ESG controversies on firm risk. Practical Implications – The findings suggest engaging more aggressively in ESG activities can benefit from their risk mitigating effect. Further, the present evidence of the positive impact of Shariah screening in mitigating risk via ESG and corporate controversies. This evidence lends credibility for firms to be considered as Shariah-compliant.

Environmental, social and governance (ESG) practices are imperative to all stakeholders in the financial institutions. Good ESG performance is vital in mitigating financial risk and encouraging financial institutions’ commitment towards good governance and environmental practices. It could reduce the financial uncertainty when the financial institutions are committed towards reducing the risks associated with ESG matters. The ESG factors and climate change are now being acknowledged as one of the major threats to the financial stability of the financial institutions and the countries. In response, the authorities are actively working towards establishment of robust regulatory frameworks and policies to strengthen the ESG adoption as well as its implementation in all financial institutions. In this paper, three countries have been selected namely Malaysia, United Arab Emirates (UAE) and the United Kingdom (UK) to examine their countries’ ESG policies for financial institutions and further provide comparative analysis on its adequacy. This comparative study between these countries is necessary to recognize and identify the differences and pinpoint the progression stage in each country. Based on the analysis, Malaysia and the United Kingdom have more comprehensive and exhaustive ESG policies as compared to the United Arab Emirates.

ESG (environmental, social and governance) and sustainability are increasingly common terms, often used interchangeably, though they have distinct meanings. This study examined the similarities and differences between ESG and sustainability disclosures in banks, focusing on whether banks acknowledged the distinction between these terms in 2019 and 2021 and how this affects reporting practices. A sample of 25 banks from South Africa, Japan, the United Kingdom, the United States, and France were analysed, as these countries use both integrated and sustainability reporting. Interpretative content analysis revealed that banks do not differentiate between ESG and sustainability. This lack of distinction is reinforced by authoritative frameworks and standards, resulting in combined reporting of ESG and sustainability matters. Consequently, disclosures related to ESG and sustainability are found together in more than one report, with shared purposes, target audiences, and materiality definitions across both types of reporting.

PurposeThe authors investigate the implications of environmental, social and governance (ESG) practices of firms for the pricing of their credit default swaps (CDS). In doing so, the authors compare European and US firms and consider nonlinear and indirect effects. This complements the previous literature focusing on linear and direct effects using bond yields and credit ratings of US firms.Design/methodology/approachFor this purpose, the authors apply fixed effects regressions on a comprehensive panel data set of US and European firms. Further, nonlinear and indirect effects are investigated utilizing quantile regressions and a path analysis.FindingsThe evidence indicates that higher ESG ratings mitigate credit risks of US and European firms from 2007 to 2019. The risk mitigation effect is U-shaped across ESG quantiles, which is consistent with opposing effects of growing stakeholder influence capacity and diminishing marginal returns on ESG investments. The authors further reveal a mediating indirect volatility channel that substantially amplifies the direct effect of ESG on credit risk. A one-standard-deviation improvement in ESG ratings is estimated to reduce CDS spreads of low, medium and high ESG firms by approximately 4%, 8% and 3%, respectively.Originality/valueThis is the first study to examine whether credit markets reflect regional differences between Europe and the US with regard to the ESG-CDS-relationship. In addition, this paper contributes to the existing literature by investigating differences in the response of CDS spreads across ESG quantiles and to study potential indirect channels connecting ESG and CDS spreads using structural credit risk variables.

In recent years, the socially responsible investing (SRI) industry has become an important segment of international capital markets by incorporating ESG (Environmental, Social and Governance) factors into investment selection and management processes. This study analyses whether SRI mutual funds are conventional funds in disguise or invest in line with their ESG objectives. In contrast to other studies, the analysis exclusively focuses on the non-financial performance of SRI vis-a-vis conventional funds and applies ESG corporate ratings of three rating agencies (Oekom, Sustainalytics and ASSET4) to a European and global fund universe. The SRI and non-SRI funds are analyzed with respect to differences in their Top 10 fund holdings, their average ESG rankings and the significance of rating differences by utilizing cross-sectional regressions. At a first glance, the top holdings of both fund types seem very similar, but the results of the ranking analysis show that SRI funds have on average higher ESG rankings. Additionally, the cross-sectional regressions show that the ESG rating differences between SRI funds and conventional funds are significantly positive, i.e. SRI funds exhibit higher ESG ratings than conventional funds. These findings are robust as they hold for every single ESG factor and total scores and as well as across the different ratings applied.

In recent years, the socially responsible investing (SRI) industry has become an important segment of international capital markets by incorporating ESG (Environmental, Social and Governance) factors into investment selection and management processes. This study analyses whether SRI mutual funds are conventional funds in disguise or invest in line with their ESG objectives. In contrast to other studies, the analysis exclusively focuses on the non-financial performance of SRI vis-a-vis conventional funds and applies ESG corporate ratings of three rating agencies (Oekom, Sustainalytics and ASSET4) to a European and global fund universe. The SRI and non-SRI funds are analyzed with respect to differences in their Top 10 fund holdings, their average ESG rankings and the significance of rating differences by utilizing cross-sectional regressions. At a first glance, the top holdings of both fund types seem very similar, but the results of the ranking analysis show that SRI funds have on average higher ESG rankings. Additionally, the cross-sectional regressions show that the ESG rating differences between SRI funds and conventional funds are significantly positive, i.e. SRI funds exhibit higher ESG ratings than conventional funds. These findings are robust as they hold for every single ESG factor and total scores and as well as across the different ratings applied.

PurposeThis research aims to determine the influence of environmental, social and governance (ESG) factors on market performance. The study shows the perspective of ESG on market performance. The study attempted to test the relationship between ESG and Tobin’s Q and the effect of control variables.Design/methodology/approachThe study used panel data from a sample covering 720 firms and ran a fixed-effects model regression during the 2007–2019 period for eight European countries’ listed companies.FindingsThe findings reveal that ESG positively impacts Tobin’s Q. According to the findings, high company ESG performance boosts market performance via the moderator effect of competitive advantage. The results indicate that all control variables are significant. The firm’s leverage has a negative relationship with ESG. The size of the firm impacts ESG positively. Also, the results prove that the firm’s size and industry positively affect Tobin’s Q.Research limitations/implicationsThe findings of this study suggest that managers, practitioners and authorities interested in learning about ESG scores (ESGSs), market performance and competitive advantage might draw intriguing conclusions from the data. Managers can identify the appropriate levels of competitive advantage that improve market performance. Practitioners must determine whether fit, size, growth, leverage and industry could enhance market performance. The findings also give authorities and the board of directors information on future growth opportunities for the company and the country.Originality/valueThe research presents a vision of how ESG factors affect market performance. This study aims to identify the positive link between ESGSs and European market performance.

Although ESG (Environmental, Social, and Governance) research on companies and investment portfolios is widespread, most of data and research is from established companies, driven by the increasing societal emphasis on sustainability and adherence to evolving compliance standards. However, there is a lack of ESG-focused studies on early-stage and venture capital. This study seeks to fill the gap in research on the ESG maturity of start-ups by surveying 225 start-ups in the portfolio of a UK-based venture capital, thereby providing a unique insight into the overall awareness of ESG among start-ups by presenting genuine samples. The findings provide implementation advice on optimal approaches to incorporate ESG issues into venture capital, and improve and leverage the dynamic between venture capital and start-ups to influence start-ups to adopt and comply with ESG integration. Keywords: ESG, Venture capital, Start-up, United Kingdom.

PurposeDrawing on financial slack resources theory, stakeholder theory and signaling theory, the purpose of this study is to explore the two-way causality between liquidity and corporate social responsibility (CSR) by using the cash conversion cycle (CCC) as liquidity proxy and composite and individual CSR metrics.Design/methodology/approachThe data were retrieved from the Thomson Reuters Eikon database covering the period between 2013 and 2019 and 20,016 firm-year observations affiliated with ten business sectors and 60 countries. The fixed-effects panel regression analysis is executed in the empirical part.FindingsThe results indicate that firms with greater liquidity proxied by shorter CCC engage with greater CSR initiatives. They also reveal that firms with greater liquidity proxied by CCC do not regard all the dimensions of environmental and social performance equivalently; they do discriminate them. In the environmental pillar, firms funnel their cash derived from shorter CCC toward eco-innovation and resource use, respectively, but not to emissions reduction. In the social pillar, higher liquidity fosters community and human rights dimensions, respectively, but not workforce and product quality. These outcomes are largely robust to alternative CSR measurement, alternative sampling and endogeneity concerns. The reverse causality confirmed that CSR promotes higher liquidity (shorter CCC). Thus, the bidirectional relationship between CSR and liquidity is confirmed.Research limitations/implicationsAlthough the authors wanted to consider a longer study period, they were obliged to choose 2013 as the starting period because particularly CCC data together with environmental, social and governance (ESG) data were not available in the earlier years.Practical implicationsAmong environmental indicators, fueling eco-innovation most with greater liquidity shows that firms make a strategic choice for their long-term growth and legitimacy. Besides, greater liquidity induces greater community development and more respect for human rights rather than investing in workforce and product quality. Although this might be an outcome of the realization of a deliberate strategy and good for the society, not investing in the workforce and product quality may impair the long-term survival and competitive position of the firm in the long-run in the marketplace. The implication of reverse causality is that customers purchase products and services of firms that do good for the ecology and the community and they pay faster to those companies.Social implicationsThis study highlights that liquidity management and CSR are closely interrelated confirming a chicken and egg story. Firms with better liquidity management are more likely to care environment and community. Besides, doing good for society pays back in the form of enhanced firm liquidity triggering customer sympathy.Originality/valueThis research provides new insight by examining the two-way causality of the relationship between CSR performance and liquidity, which helps highlight the impact of CSR performance on the company’s ability to manage its cash and the benefits of having high liquidity on enhancing the company’s concern about the society and environment.

This article focuses on the environmental, social and governance (ESG) dimension, exploring the monthly return and stock characteristics in different ESG groups and the corresponding investment strategies. Using monthly firm-level data, we cross-sectionally sort companies each year into five ESG groups (from high to low), compute weighted portfolio returns, and cumulative performance through compounding. We find that the low-ESG (brown) group delivers stronger short-term returns and has consistently outperformed the high-ESG group since 2015, with a monotonic pattern across the middle groups; however, the low-ESG advantage is subject to occasional style rotations. In cross-sectional regressions, ESG is positively related to firms profitability signals (ROA/ROE), while shows a significantly negative correlation with next-month stock returns---This negative relation becomes smaller at a 12-month horizon. Guided by these facts, we design a dynamic trading portfolio that long low ESG firms and short High-ESG firms. The study offers evidence on the short-run pricing of ESG and provides an implementable framework for portfolio construction under ESG grouping.

PurposeFrom a target perspective, this paper aims to examine the impact of environmental, social and governance (ESG) performance on mergers and acquisitions (M&A) transaction valuations.Design/methodology/approachThis paper uses a sample of 629 international transactions conducted between 2002 and 2020. Ordinary least squares (OLS) regression was applied by using ESG aggregate score and the three ESG pillars: environment, social and governance.FindingsThis paper finds that the ESG performance of targets has a negative and significant impact on acquisition premiums. However, this paper finds that targets receive lower premiums by increasing their ESG score, suggesting that targets would do better to focus on ESG to increase shareholder wealth. Thus, results of this paper support the view that ESG-focused firms create shareholder value through the M&A process. Furthermore, results of this paper indicate that environmental and social aspects of ESG drive the acquisition premium. The governance score does not seem to be related to acquisition premiums.Originality/valueTo the best of the authors’ knowledge, this study is the first study to assess whether ESG performance impacts the valuation of M&A transactions by decomposing ESG into its three components.

In light of the growing awareness of the importance of ESG (Environmental, Social, and Governance) in the tourism sector, this study addresses the lack of a universally accepted academic definition for ESG as well as limited research on its specific facets. Instead of using ambiguous benchmarks to evaluate ESG activities, we take an exploratory approach. We collect ESG, Corporate Social Responsibility(CSR), and sustainability reports from this sector's multinational conglomerates. We identify key topics in three major domains using network cluster analysis. Within the environmental domain, there are terms such as “waste management”, “renewable energy”, “water conservation”, “climate change”, “energy efficiency”, and “local environment protection”. Critical topics in the social domain included “team development”, “education and training”, “employee welfare”, “non-discrimination”, and “human resource management”. The governance framework included “management oversight”, “responsible gaming”, “risk management”, “stakeholder management”, “data security”, and “anti-bribery measures”. This study is the first to use text data analysis in ESG research and provides an exploratory overview of prevalent ESG activities in the tourism industry. In the environmental, social, and governance realms, our findings highlight the industry's emphasis on waste management, resource conservation, and employee welfare. It emphasizes the importance of maintaining corporate ethics and improving managerial capabilities in integrated resort settings.

Milton Friedman famously argued that the social responsibility of business is to maximize shareholder wealth. Friedman’s view is challenged by the proponents of corporate social responsibility who suggest that firms should consider the interests of all stakeholders, and not just shareholders. Following the stakeholder approach, BlackRock’s CEO Larry Fink has made the case that firms should use the ESG (environmental, social, and governance) metric to evaluate their performance as opposed to short-term profit maximization. Fink employs his annual “Dear CEO” letters as a platform to outline his views on ESG. While these letters focus on all three ESG dimensions, the media tends to portray Fink as a climate advocate. We examined the texts of the ten letters Fink has published since 2012 to assess the extent to which Fink focused on climate issues. We found that Fink emphasized the climate dimension over social and governance dimensions only in two letters (2020 and 2022), which suggests that the thrust of Fink’s letters differs from how the media frames them. Broadly, our paper suggests that norm advocates sometimes cannot fully control how their advocated norm is interpreted and framed. Limiting ESG to climate issues has implications for its business acceptability. Specifically, this framing links business incentives to adopt ESG to the policy salience of climate issues as well as the fortunes of both the fossil fuel industry and the renewable energy sector. Second, if businesses face a legitimacy crisis from governance shortfalls or inadequate social performance, ESG will serve as a less effective tool in alleviating stakeholder concerns.