ESG impact on financial corporate performance and portfolio returns: evidence of Australia and Japan

Margarita Chrissanthi Kazakakou Powaski,Carolina Daza Ordoñez,Laura Jáuregui Sánchez

doi:10.29105/vtga7.2-5

Margarita Chrissanthi Kazakakou Powaski, Carolina Daza Ordoñez + Show 1 more

Open Access

https://doi.org/10.29105/vtga7.2-5

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Abstract

Environmental, Social, and Governance investing has undergone a radical shift; companies and investors have focused on the impact of the disclosure of the practices and policies related to the environment, social responsibility, and governance in their operational strategies and investment. The purpose of this paper is to demonstrate the impact that the ESG policies have on public companies' stock returns in Australia and Japan. Accounting and market-based measures are used to determine the impact ESG practices have on stock market index returns. The annual data used is of companies from Australia's S&P/ASX Index and Japan's Nikkei 225 Index, covering the period from 2005 to 2019. Fixed effect model regression was used to test the significant relationship between companies' stock returns and ESG score, accounting, and market-based measures. Portfolios were created to analyze the risk/return relationship between companies with and without ESG across countries. The findings indicate mixed results. Australia´s non-ESG portfolios outperform the S&P500 and ESG portfolios. Japan´s portfolio has positive returns but underperforms the benchmark. Low market capitalization portfolios with and without ESG outperform the higher capitalization portfolios.

Highlights

Over the last years, an increasing number of investors search for better long-term financial value rather than shareholder profit maximization as it has been for the last century
Regression results per country Each country consists of two fixed effect regressions: the significant cumulative results for each year of the period established for companies with and without ESG and the significant results for the entire period for companies with and without ESG for each country
The results demonstrate that the weighted average cost of capital (WACC) has a negative relationship, with a 99% confidence level with the market return, which implies that investors who consider companies with Environmental Disclosure Score (EDS) in their portfolios tend to mitigate risk

Summary

Introduction

An increasing number of investors search for better long-term financial value rather than shareholder profit maximization as it has been for the last century. Investors demand trust, transparency, ethics, respect for the environment, and greater social responsibility (Boffo & Patalano, 2020). The incorporation of Environmental, Social, and Governance (ESG) factors in evaluating firm corporate performance, profitability, and returns in the investment decisionmaking process. To satisfy the investors' need for information, given the environmental and social risk factors that have arisen over time, various metrics methodologies (qualitative and quantitative) are developed by different firms that provide a company assessment and an ESG disclosure score (Boffo & Patalano, 2020). ESG refers to the central factors for measuring a company's environmental, social responsibility, and governance impact. The environmental factor is how a company's behavior affects the environment, which entails resources, innovation, and carbon emissions. The governance factor is how the company operates internally, which entails transparency and anticorruption, employee and executives' compensation, and the board of directors' composition, among others (MSCI, 2020)

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