Angels or Sinners? Exploring the halo effect in ESG investing in Indian equities

PurposeAssessing the performance and stability of financial institutions is crucial for investors, regulators and stakeholders. The primary purpose of this study was to examine the economic resilience and sustainability performance of banks operating in Türkiye through their capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk (CAMELS) and environmental, social and governance (ESG) scores. The research examined whether there was a significant relationship between the CAMELS and ESG scores of the banks in the sample and how they affected each other.Design/methodology/approachThis study analyzed the relationship between the CAMELS and ESG scores of five public and private banks operating in Türkiye. The study used statistical techniques such as correlation, regression and descriptive statistics to analyze the relationship between the CAMELS and the ESG score clusters. The data in the research cover the period 2008–2022 and were obtained from open sources disclosed to the public by the banks.FindingsThe study found a statistically significant relationship between the financial institutions’ CAMELS and ESG scores. Banks with higher CAMELS scores had a better ESG performance; however, this relationship was not linear. Regression analysis allowed for the identification of factors that had a significant impact on ESG scores within the CAMELS framework. No effect was detected on earnings (E), one of the CAMELS elements in the “economic, environmental, and governance elements” section of the banks' ESG scores. Management quality (M) positively affected only governance (G). Additionally, it was determined that the banks’ environmental performance (ENV) positively affected their CAMELS score.Practical implicationsThe positive relationship between the CAMELS and ESG dimensions shows that financial sustainability is essential. The findings are expected to enrich the understanding of financial institutions’ resilience in the context of Türkiye, which constitutes the research sample. In addition, the inferences that can be made from this Turkish sample are essential for informing investment decisions, regulatory frameworks and broader stakeholder engagement in similar markets.Social implicationsAlthough a significant and positive relationship was established between ESG and CAMELS scores, a substantial and positive relationship only sometimes emerged when the sub-elements of the variables in question were examined. Investing in environmental initiatives helps companies build sustainable business models for the long term, paving the way for future profits and improved capital adequacy and liquidity. However, new regulations and practices related to environmental activities may introduce additional costs, necessitating changes to existing business processes.Originality/valueThis study provides important information regarding the interaction in financial institutions between financial stability assessed by CAMELS scores and sustainability performance measured by ESG scores. The findings show that institutions with robust economic fundamentals demonstrate better ESG performance. This indicates that there is a positive relationship between financial stability and responsible business practices. This information will help investors, regulators and stakeholders to make informed decisions about financial institutions, decisions that focus on sustainability. The results also suggest that it is necessary to use dynamic models and analytical tools to address the link between CAMELS and ESG.

Purpose: To analyze the impact of the Covid-19 Pandemic on the relationship between ESG (Environmental, Social and Governance) scores and the financial performance of Brazilian publicly traded companies. Methodology: The sample of this study consists of 100 Brazilian non-financial companies listed on B3 (Brasil, Bolsa, Balcão) with information about ESG. The data collection spanned a time series from 2018 to 2021. ESG scores were collected from the Refinitiv Eikon® database, using ROA (Return on Assets) as a proxy for financial performance. Two research hypotheses were tested: the first regarding the association between ESG and financial performance, and the second examining the effect of Covid-19 on this relationship. The hypotheses were tested using the Ordinary Least Squares (OLS) regression model, with controls for time and sector. Results: The results show that the financial performance of firms with ESG Score, Combined, and Environmental classifications demonstrated a positive and significant relationship, meaning that firms with higher ESG scores offered better financial performance on average. However, the non-significant result for the relationship between financial performance and ESG during the Covid-19 period indicates that it cannot be said whether firms with higher ESG scores were more or less impacted by this pandemic period. Contributions of the Study: This study utilized three types of ESG scores (Score, Combined, and Controversies), as well as the ESG pillars: Social, Governance, and Environmental. This allowed for a more comprehensive examination of the ESG indicators available to investors in the selection of companies for resource allocation. This joint analysis also contributes to the advancement of recent literature by analyzing all available ESG indicators for publicly traded companies in Brazil.

Purpose – This paper aims to investigate if there is a significant relationship between corporate ESG (environmental, social, and governance) scores and firm profitability (ROA) and whether this relationship is positive, negative, or neutral. Methodology – The study examines all listed companies from the European tourism industry for which ESG scores are available. The final sample consists of 48 firms from 14 European countries and 258 firm-year observations, obtained through the Refinitiv database for the period from 2010 to 2019. Panel regression analysis was used to examine the relationship between ESG scores (independent variable) and ROA (dependent variable), including financial leverage and firm size as control variables as well. Findings – The results show that ESG scores are negatively related to firm performance as measured by ROA and such a relationship is statistically significant at 5%. Higher levels of ESG scores are associated with lower levels of ROA and vice-versa. Conclusion –The findings suggest that instead of just trying to give the appearance of being ESG-oriented, it is important for companies to actually implement proper ESG practices and standards. Also, in order to promote the adoption of environmental, social, and governance (ESG) practices by companies, it is crucial to educate the public about the long-term benefits of these practices and encourage support for companies that follow these standards. Keywords: ESG score, tourism, profitability, Europe. JEL Codes: G30, Q56, Z33.

ESG has become a hot topic in investment circles. In this article, we train the ESG lens on sovereign debt. We carry out an empirical analysis to assess whether environmental, social, and governance factors drive pricing and investment returns of sovereign external debt. Our major finding is that ESG considerations matter for sovereign bond investing, even after relevant macroeconomic and credit variables are taken into consideration. This is particularly the case for emerging markets, where we document evidence of an additional ESG risk premium relative to developed markets. Furthermore, by testing an ESG-focused investment strategy, we examine the hypothesis that ESG could potentially detract from investment returns. We find no evidence over our historical time frame that an ESG-focused investment strategy results in any investment disadvantage. In addition, our results suggest support for potential advantages of an active approach to ESG portfolio management. TOPICS:ESG investing, fixed income and structured finance, portfolio construction, performance measurement Key Findings ▪ Our research shows that ESG (environmental, social, and governance) scores are significant drivers of sovereign credit spreads. Debt issued by countries with high social and governance scores in particular, tend to have tighter credit spreads. ▪ The relationship between ESG scores and credit spreads is particularly strong for emerging market countries, where we find evidence of an additional ESG risk premium relative to developed markets. ▪ We find no evidence that investors are penalized for ESG-aware investment strategies in the form of lower returns, but our analysis does support the case for in-depth ESG analysis in the context of an active approach to portfolio management.

Purpose This study aims to examine the impact of sustainable practices as proxied by the environmental, social and governance (ESG) score on capital structure. It also investigates whether ESG performance influences the speed of adjustment (SOA) to target leverage in firms. Design/methodology/approach The sample covers 116 non-financial firms listed on the main stock exchanges from five Southeast ASEAN countries (Bursa Malaysia, Indonesia Stock Exchange, Philippines Stock Exchange, Singapore Stock Exchange and Stock Exchange of Thailand) over the period 2012–2019. The study adopts the OLS regression and system-GMM estimators to perform the data analysis. Findings The authors show that the ESG score is positively associated with book leverage, suggesting that firms increase their debt capital through sustainable practices. However, they find that the ESG score is negatively associated with market leverage across our model estimations. The authors also reveal that environmental, social and governance pillar scores produce about 7.82%, 2.88% and 0.47% SOAs, respectively, higher than the SOA of the traditional SOA without the ESG factor. The aggregate ESG score has about 3.41% SOA higher than the baseline SOA without the ESG factor. Practical implications This study is of interest to investors, corporate firms and policymakers. The study demonstrates that the ESG score increases the firm’s SOA to target leverage. By disaggregating the ESG score, the authors establish that ESG pillar scores produce higher SOAs than the traditional SOA (without ESG), with the environmental score inducing the fastest SOA. Practically, the study implies that environmentally sustainable activities reduce environmental transaction costs, benefit firms through better information transparency and enhance a trustful climate between the firm and suppliers of capital. Therefore, this study demonstrates that firms do not only incur the cost of disseminating ESG information but also benefit from lower information asymmetry and a higher SOA with better tax-deductible advantages. Social implications The findings have combined advantages for both stakeholders and directors who monitor and manage the firms’ resources to improve the quality of ESG practices and initiatives. Originality/value To the best of the authors’ knowledge, this study is among the first to establish that sustainable practices induce higher debt capital. Secondly, unlike prior research focusing on the cost of capital, the authors examine whether ESG performance affects capital structure patterns. Thirdly, it documents the extent to which sustainable practices influence the SOA towards target leverage in firms. The authors contribute to corporate finance literature that firms reach faster to their target leverage in the presence of ESG performance. Theoretically, through the notion of the stakeholder proposition, the study establishes that the firms’ pursuance of stakeholder goals further enhances the prediction of the trade-off theory.

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.

PurposeThis paper aims to examine the state of research on environmental, social and governance (ESG) performance in the context of multinational business research. This paper discusses research progress as well as various issues and complexities associated with using ESG ratings in cross-country studies and for assessing the performance of multinational enterprises (MNE) and emerging market multinationals (EMNEs).Design/methodology/approachThe paper identifies emerging literature that focuses on tracking the development and uptake of ESG ratings in the international context. It discusses three emerging research streams: Research examining the ESG-financial performance relationship in emerging markets, research tracking the ESG performance of multinationals in the various countries and regions they are operating, and frameworks for assessing ESG-related risks on a country level.FindingsWhile the emerging body of work adds an important dimension to the identification and awareness of ESG issues globally, numerous unresolved issues become evident. ESG frameworks have been built to assess corporate sustainability as it relates to firms in their “home” countries (typically with a focus on developed countries), with limited applicability and transferability to emerging markets. International firm activities are often not captured in detail and not comprehensively mapped across firm subsidiaries and a firm’s corporate supply chain where ESG issues are prone to happen, and ESG scores do not comprehensively integrate views and voices from various local stakeholders that are impacted by firm activities, particularly indigenous communities.Research limitations/implicationsResearch on ESG ratings in the context of multinational business research is generally sparse and fragmented, thus creating opportunities for future research to expand on existing and emerging findings.Practical implicationsThe paper creates awareness of issues to consider when using ESG ratings in cross-country studies and for assessing the ESG performance of MNEs and EMNEs: ESG scores can be subject to bias and are not weighted by materiality, which can be misleading for portfolio construction and performance measurement purposes. Managers need to be aware that ESG scores are often not capturing ESG issues occurring in supply chains and ESG issues affecting local communities.Originality/valueThis study enriches the understanding of ESG in the context of multinational business research practice.

PurposeThis article aims to analyse the relationship between the environmental, social and governance (ESG) score and the cost of capital of 600 large, mid and small capitalization companies across 17 countries that are component of the EURO STOXX 600 Index. By examining whether ESG has an impact on the cost of capital, this article contributes to the solutions to improve the impact of organizations and societies on sustainable development. The article further examines whether the effect is because of the environmental, social and/or governance components. In addition, the article analyses which WACC component (i.e. the cost of equity, the cost of debt, the beta or the leverage ratio) is affected. Furthermore, this article analyses whether a high ESG score can substitute for a weaker legal environment.Design/methodology/approachThe results were obtained by using ordinary least squares panel data modelling to analyse the relationship between the ESG score and the cost of capital. The sample consists of companies that are part of the STOXX Europe 600 Index over the period 2018–2021, which is composed of 600 companies, including large, mid and small capitalization firms listed across 17 countries. The sample finally includes 1,960 firm-year observations.FindingsCompanies with a higher ESG score tend to have a lower cost of capital, but this relationship holds only for firms domiciled in countries with a weaker legal environment. In addition, these firms should not only increase their ESG score to create a more sustainable environment but also to reduce their cost of debt. Environmental and social factors have a significantly negative impact on the cost of capital only in countries with a weaker legal environment, while the governance component positively impacts the cost of capital by allowing firms to borrow more.Research limitations/implicationsThere is not yet a standardized taxonomy to define ESG, making the study dependent on commercial data providers.Practical implicationsThe new insights can be used by companies domiciled in countries with weaker legal environments to reduce their cost of capital. The results also allow us to know on which components of the ESG score to focus. It can also help policymakers, specifically those in countries with a weaker legal environment, to provide incentives to further stimulate ESG investments and disclosure, thereby contributing to a more sustainable society.Social implicationsTo achieve the sustainable development goals put forward by the United Nations, it is important for firms to invest in ESG projects. It is nevertheless insightful to know whether these ESG investments, which are currently observed as a cost, also provide benefits to firms and in which countries. If firms clearly see the advantages of investing in ESG projects, they are likely to proactively engage in them.Originality/valueThis article is the first, to the best of the authors’ knowledge, to focus on 17 European countries, thereby capturing divergent legal environments. This setting allows us to answer the main novel research question, namely, whether the ESG score can act as a substitute for the legal environment in which the company is domiciled. The article also goes further than previous articles by examining whether the effect is because of the environmental, social and/or governance component and whether these impact the components of the weighted cost of capital, namely, the cost of equity, the cost of debt, the beta or the leverage ratio of the companies.

This study investigates the factors contributing to the growth of an organisation's ESG (Environmental, Social, and Governance) business scale using the Vector Error Correction Model (VECM). The research analyses Bank of America's ESG strategies and it has been found that the ESG benchmarks held by the bank have strengthened in recent times. The findings indicate a negative correlation between the ESG score and key profitability indicators for Bank of America, suggesting that increased spending on ESG activities decreases net profit. This result can be attributed to the non-commercial nature of ESG activities, which are primarily costs subtracted from the gross profit figure. The VECM analysis also reveals a statistically significant adjustment in the long-term equilibrium relationships between the ESG score and Bank of America's net profit. Additionally, short-term negative correlations between ESG and profitability benchmarks affect long-term relationships. On the basis of VECM model that has been adopted in this study, the research establishes statistically significant relationships between Bank of America's ESG score and net profit, demonstrating short-term adjustments towards long-term relations between ESG score and net profit. Overall, this paper highlights the importance of understanding the dynamics between ESG activities and profitability in the banking sector, stressing the need for maintaining an effective balance between ESG activities and financial performance to ensure long-term sustainability.

Purpose This study examines the impact of board gender diversity (BGD) on financial performance (FP) and environmental, social and governance (ESG) disclosures, as well as the impact of ESG disclosures on FP. Furthermore, this study investigates the moderating role of ESG disclosures in the relationship between BGD and FP. Design/methodology/approach The sample included data on 60 nonfinancial companies listed on the Abu Dhabi Securities Exchange and the Dubai Financial Market from 2012 to 2021. Data were collected from a Bloomberg Terminal. Dynamic panel data regression was used to study the impact of BGD and ESG on FP. Findings During the voluntary ESG reporting period, the impacts of ENV and GOV on FP were significant, whereas that of ESG was not. BGD improves the FP of listed nonfinancial companies when mandatory ESG disclosure is required. However, this relationship was negatively moderated by ESG during adherence to these requirements. Research limitations/implications It is recommended that nonfinancial companies listed in the United Arab Emirates (UAE) practice a more favorable mechanism to enhance BGD when their ESG scores become weaker. Improving BGD practices for nonfinance companies with strong or increasing ESG scores will not be effective as it may reduce the strength of the existing association between BGD and FP. Practical implications It is recommended that nonfinancial companies listed in the UAE practice a more favorable mechanism to enhance BGD when their ESG scores become weaker. Consequently, such companies can improve FP in terms of an increased market value of shares (Tobin’s Q) when their ESG scores decrease. However, improving BGD practices for nonfinance companies with strong or increasing ESG scores will not be effective because it may reduce the strength of the existing association between BGD and FP. Originality/value To the best of the authors’ knowledge, this is the first study to find a negative moderating role of ESG in the relationship between BGD and FP, particularly during mandatory ESG reporting requirements.

PurposeAs reporting environmental, social and governance (ESG) information is not yet mandatory in all countries, it is intriguing to understand ESG’s underlying driving mechanisms. This study aims to investigate ESG determinants in the banking sector of the Middle East and North Africa countries.Design/methodology/approachThe authors gather data for 38 listed banks for the period 2011–2019. The data used is threefold as follows: data related to ESG; firm-level; and country-level data. While ESG and firm’s level data are taken from Refinitiv, country-level data are extracted from the World Bank. Using panel regression, the authors test the effect of firm- and country-specific variables on the overall ESG score and its pillars.FindingsResults indicate that banks’ ESG scores are negatively affected by performance and positively affected by size. The level of economic development exerts a negative impact on the environmental pillar while the social development exerts a positive impact on ESG and governance pillar. Corruption is the only country-level that gathers a homogenous effect on ESG scores. Finally, the three pillars follow heterogeneous patterns.Originality/valueThis study extends the scope of previous studies by introducing new country-level independent variables to contribute to the understanding of ESG antecedents.

This study aims to explore whether ESG (Environmental, Social, and Governance) scores incentivize the compensation of general managers in publicly traded companies in Taiwan. We analyzed data from 2209 companies during the period from 2015 to 2020, ultimately selecting 2188 company samples with complete ESG evaluations and general manager compensation data for research. Our primary finding is that while there is a significant positive correlation between the number of Executive Compensation and ESG scores, there is no clear relationship between the compensation of the general manager and ESG scores. Additionally, we found that the size of the company and the debt ratio significantly affect ESG scores. Our research results provide preliminary empirical evidence for companies to formulate ESG-oriented compensation strategies and suggest future research to delve into the complex relationship between Executive Compensation and ESG performance.

In recent years, investors' increasing focus on sustainable investments and the sustainability orientation of companies has led to parallel growth in the market for environmental, social and governance (ESG) performance and ESG rating agencies. However, even though ESG rating agencies have become very influential institutions, the literature has found that ESG performance ratings provided by different agencies often differ from each other. This causes consequences that should be considered, such as complex evaluation of companies' ESG performance and uncertainty in ESG investment decisions. Therefore, it is necessary to identify which determinants influence ESG performance. This study aims to identify the internal determinants of an ESG score using bank-specific balance sheet indicators such as capital and risk ratios. The analysis focuses on the European banking sector from 2018 to 2022. Banks mainly foster the transition to a more inclusive and sustainable economy. Moreover, after the recent financial crises, banks have increased their social responsibility practices, strengthening their credibility, trust and reputation. Generalised estimating equations with standard error robust to heteroscedasticity were used. The results reveal that the factors that most influence the ESG score provided by ESG rating agencies are bank size and liquidity risk exposure. The larger the size of the bank and the lower the exposure to liquidity risk, the higher the ESG score assigned.

This research is motivated by corporate sustainability, where environmental, social and corporate governance issues are important in the company's annual report in addition to financial statements. The purpose of this study is to examine the relationship between ESG (Environmental, Social, and Governance) performance on Stock Return based on changes in stock prices at the beginning of the year and the end of the year on the Indonesia Stock Exchange (IDX). This study uses data on companies listed on the SRI-KEHATI Index. Of the 25 companies listed on the Indonesia Stock Exchange, 17 sample data were used, namely company data for the 2019-2023 period. Environmental, Social, and Governance performance is assessed through the ESG score by the Morningstar Sustainalytics assessment agency obtained from Refinitiv Eikon. The analysis technique uses panel data regression analysis random effect model (REM) with ESG score as the independent variable and Stock Return as the dependent variable assisted by using the Eviews 13 application. Partial test results (t-test) show that there is no relationship between ESG performance and Stock Returns of companies that join the SRI-KEHATI index. The results of the F test simultaneously show that there is a significant relationship between ESG performance on the stock returns of companies incorporated in the SRI-KEHATI index. Keywords: ESG; Sri Kehati; stock return. Penelitian ini dilatarbelakangi oleh keberlanjutan perusahaan, dimana isu lingkungan, sosial dan tata kelola perusahaan menjadi penting dalam laporan tahunan perusahaan selain laporan keuangan. Tujuan dari penelitian ini adalah menguji hubungan antara kinerja ESG (Environmental, Social, and Governance) terhadap return saham berdasarkan perubahan harga saham pembukaan awal tahun dengan penutupan akhir tahun pada Bursa Efek Indonesia (BEI). Penelitian ini menggunakan data perusahaan yang terdaftar pada Indeks SRI-KEHATI. Dari 25 peusahaan yang terdaftar di Bursa Efek Indonesia, sebanyak 17 data sampel yang digunakan yakni periode tahun 2019-2023. Kinerja Environmental, Social, dan Governance dinilai melalui ESG score oleh lembaga penilai Morningstar Sustainalytics diperoleh dari Refinitiv Eikon. Teknik analisis menggunakan analisis regresi data panel random effect model (REM) dengan ESG score sebagai variabel independen dan return saham sebagai variabel dependen yang dibantu dengan menggunakan aplikasi Eviews 13. Hasil pengujian secara parsial (uji t) menunjukkan bahwa tidak ada hubungan antara kinerja ESG terhadap return saham perusahaan yang bergabung dalam indeks SRI-KEHATI. Hasil uji F secara simultan menunjukkan ada hubungan signifikan antara kinerja ESG terhadap return saham perusahaan yang tergabung dalam indeks SRI-KEHATI. Kata kunci: ESG; Sri Kehati; return saham.

PurposeThis study aims to establish the effect of environmental, social and governance (ESG) practices on Australian energy and utility investment performance.Design/methodology/approachConventional and ESG-rated portfolios are constructed using monthly returns and ESG scores of S&P/ASX 300 listed energy and utility firms from 2014 to 2022. Portfolio performance is estimated using a four-factor regression model, controlling for any economic shocks associated with the COVID-19 pandemic.FindingsThe findings show that the lower the ESG score associated with the overall ESG and environmental portfolios, the greater the performance compared to the market (but not the conventional and other ESG portfolios). High ESG scores do not appear to influence the performance of the energy and utility portfolios, which contrasts expectations that the uptake of ESG should deliver superior risk-return outcomes for investors. The findings also indicate that a contrarian investment approach may be a reasonable performance indicator for high-rated ESG portfolios. ESG practices did not impact portfolio performance during the COVID-19 pandemic.Originality/valueThis research has contributed to the literature by offering ESG investment insights for policymakers, regulators, fund managers and investors. Consistent with the agency perspective on ESG practices and efficient market hypothesis, the evidence implies that, regardless of ESG scores (either high or low), investors should consider investing passively in diversified energy and utility portfolios or low-cost index fund equivalents.