Environmental, Social And Governance Criteria Research Articles

<p>The Effect of ESG Criteria on Company Valuation: A Quantitative Approach Applied to the O&G Sector</p>

The integration of Environmental, Social and Governance (ESG) criteria implies that they must be explicitly introduced into valuation models and investment decisions. Socially Responsible Investment (SRI) does not take into account this integration, so it is necessary to know the real impact that ESG criteria have on the valuation of actions to carry out effective investment decisions. The approach used is the Value – Drivers Adjustment (VDA) through the Discounted Cash Flow (DFC) method for Shell PLC as one of the most influential O&G companies in the energy transition. The results of the analysis reveal that the impact of ESG criteria on valuation translates into a reduction of 29.11% of its target price. The need for investment and the rising cost of capital explain these result. This results in a more comprehensive valuation method, where ESG criteria are no longer supplementary information and become indirect financial elements.

Доходность ESG-инвестирования на развитых и развивающихся рынках с учетом временного горизонта

The development of the ESG (Environmental, social, and governance) concept has led to the rapid spread of financial instruments for investing in sustainable development on all continents. The purpose of the article is to study the attractiveness of sustainable investing in the developed and emerging markets of America, Europe and Asia, in particular, to conduct a comparative analysis of the returns of market indices based on ESG criteria and those of indices that do not take them into account. Particular attention is paid to the duration of the investment period: the authors studied profitability on time intervals from one to five years. The object of the study is stock indices. The subject of the study is profitability of ESG-oriented and ESG-neutral indices. A comparative analysis of 28 market indices, 15 of which were formed with ESG indicators in the period from 2013 to 2022 led to the conclusion that it is advisable to invest in ESG index funds in both developed and emerging markets, since in more than 50% of cases, the return of ESG indices is higher than that of non-ESG indices. Investments in ESG indices over a longer time horizon tend to have higher returns on invested capital than traditional investments in non-sustainable indices. Analysis of European stock market returns has shown insufficient efficiency of ESG investments and requires additional analysis of the factors that have influenced this. A promising direction for further research is also the analysis of the mutual influence of stock markets of developed and developing countries on financial ESG instruments and indices. The applied value of the study lies in the possibility of using the results of the analysis in the reorientation of Russian investors in the face of sanctions pressure on stock markets in the Asia-Pacific region.

Role of Environmental, Social and Governance (ESG) in the Achieving Sustainable Development Goals: A Brief Review

The United Nations (UN) 2030 Agenda for the Development of Sustainability and the seventeen Sustainable Development Goals (SDGs) serve as a reminder that the achievement of sustainable development has become a worldwide necessity. The idea of ESG (environmental, social, and governance) has gained popularity as an organizational structure for incorporating sustainability issues into business processes and choices regarding investments as the globe struggles with urgent challenges including climate change, inequality, and resource depletion. Standardized measurements and criteria are missing from ESG reporting. It is difficult to evaluate the effect of ESG actions on certain SDGs in the absence of reliable data. Businesses frequently have to choose between several ESG criteria and SDGs. Prioritizing becomes challenging when financial resources that may be used for social projects are needed to solve environmental issues. ESG practices might not be in line with shortterm profit targets, which would cause the emphasis to shift from long-term sustainable development to immediate financial gains. The interconnectivity of social well-being, environmental preservation, and responsible governance is highlighted in this review article, which examines the varied roles that ESG principles play in accomplishing the SDGs.

Credence Attributes in the Forestry Sector and the Role of Environmental, Social and Governance (ESG) Factors

Credence or believability are paramount values in trade. The role of products’ credence attributes has been well-analysed in the agricultural and food sector. This study examined the application of credence attributes to forest management and forest products marketing for the first time. We describe specific credence attributes of forest products and highlight their values, benefits, and importance in international trade. We used Delphi interviews of experts and surveyed forest and trade experts to assess the perceived merits of credence attributes in the forestry sector. We also compared certification schemes and sustainable forest management (SFM) indicators against credence values. We found that credence attributes play an important role in the forestry sector for both timber forest products and non-timber forest products (NTFP). While some credence attributes, such as the legality of forest products, already form the basis for trade and certification and are standard practice, other credence attributes are rising in awareness and could potentially create new markets. This study revealed the potential value of health aspects of forest products, particularly regarding NTFP and recreational services. Certification schemes and SFM provide credence at a collective level, and must encompass the rising importance of individual credence attributes of these newer important values. Last, we summarized the emerging environmental, social, and governance (ESG) investment practices to assess how credence factors may help affect such investments. Awareness of credence attributes can inform ESG criteria, certification schemes, and sustainable forest management frameworks about present or potentially future market expectations. Sustaining and enhancing natural capital and the flow of ecosystem services they provide, as well as social and human capital, will play an increasingly important role for forestry companies in the next decade. A better understanding of forestry credence attributes can inform the management of ESG of forestry industries and markets more effectively.

The ripple effect of EU disclosures regulation in financial services sector

The UE Disclosure Regulation 2019/2088 of November 27, 2019 on Sustainability-related Disclosures in the Financial Services Sector (known as the Disclosure Regulation, Environmental, Social and Governance (ESG) Regulation or SFDR for Sustainable Finance Disclosure Regulation) sets out general rules for classifying and reporting on sustainability and ESG criteria. Its goal is to improve transparency and disclosures. The transparency requirement concerns particular concerns, especially sustainability risks and principal adverse sustainability impacts at the financial product level. It does also concern pre-contractual disclosures. This Regulation is part of a broader legislative package under the European ’Commission’s Sustainable Finance Action Plan, such as the EU Taxonomy Regulation 2020/852 of June 18, 2020

Opportunities to Increase Financial Well-Being by Investing in Environmental, Social and Governance with Respect to Improving Financial Literacy under COVID-19: The Case of Latvia

The latest studies reveal that the COVID-19 pandemic has pushed investors in developed economies to focus more on the value attached to environmental and social responsibilities. Unfortunately, socially responsible investment and compliance with environmental, social and governance criteria are not given enough priority in Latvia at present. The purpose of the study is to investigate how the COVID-19 pandemic has influenced the willingness of Latvians to invest in assets that meet environmental, social and governance (ESG) criteria and factors influencing investors’ choice based on their financial literacy. Different views on sustainable investments, socially responsible investments and the relevance of environmental, social and governance criteria from private investors’ perspectives were analyzed to identify factors influencing investment decisions in favour of sustainable investments. Quantitative analysis was carried out to reveal the regularities between financial literacy, the willingness to invest to meet the ESG criteria and the level of education and income of the Latvian population, as well as their savings/investment experience. Such statistical methods as descriptive statistics and hypothesis testing were applied to perform an analysis of the results. The authors’ findings include the importance of sustainable investing to Latvian society, changes of attitude towards ESG investing in different private investors’ groups under the COVID-19 crisis, and the effects of these changes on the financial well-being of the population and, on the basis of these findings, have come to the conclusion that the willingness to invest in the assets that follow environmental, social and governance criteria depends on the level of education, savings/investment experience and income level.

Sustainable and responsible investment funds in Europe

PurposeThe sustainable and responsible investing (SRI) is the part of sustainable investment which focusses on mutual funds. The purpose of this paper is to map and evaluate all the active European SRI funds, their performances and correlation with the national identity.Design/methodology/approachThe sample of the research was analysed with descriptive statistics, mainly the frequency, the mean and the correlation analysis. A well-known volatility is represented by the synthetic risk and reward indicator (SRRI). Other two ratings are the environmental, social and governance (ESG) funds score distribution and the ESG funds letter rating distribution.FindingsSRI investment may seem to be performing better than in the funds with a different focus. The segment of SRI funds will grow for the next decade.Research limitations/implicationsThere is a lack of definitions and clear metrics for sustainable investing. For better performance, it would be also appropriate to examine each country separately.Practical implicationsThis paper is part of the project targeting to design a model and methodology of SI evaluation taking into account ESG factors and risks, including profitability in a selected sector. This model can be used by investors for better decision-making.Social implicationsThe paper focusses on the funds selecting investments that fulfil ESG criteria, which are part of the social responsibility and sustainability.Originality/valueAn analysis of the current approaches to evaluating investments shows that the key barrier in the transitions to sustainable investment is not taking into account the ESG factors. The research in this paper includes the ESG factors in the evaluation.

The Ripple Effect of EU Disclosures Regulation in Financial Services Sector

The UE Disclosure Regulation 2019/2088 of November 27, 2019 on Sustainability-related Disclosures in the Financial Services Sector (known as the Disclosure Regulation, Environmental, Social and Governance (ESG) Regulation or SFDR for Sustainable Finance Disclosure Regulation) sets out general rules for classifying and reporting on sustainability and ESG criteria. Its goal is to improve transparency and disclosures. The transparency requirement concerns particular concerns, especially sustainability risks and principal adverse sustainability impacts at the financial product level. It does also concern precontractual disclosures. This Regulation is part of a broader legislative package under the European ’Commission’s Sustainable Finance Action Plan, such as the EU Taxonomy Regulation 2020/852 of June 18, 2020.

Do private German health insurers invest their capital reserves of €353 billion according to environmental, social and governance criteria?

BackgroundTo prevent the planet from catastrophic global warming a reduction of greenhouse gas emissions to net zero is required. Thus, divestment from fossil fuels must be a strategic interest for...

Non-Financial Information as a Driver of Transformation. Evidence from Italy (2019)

The progressive integration of Environmental, Social and Governance (ESG) issues into the corporate decision making is a cultural change process, which can be described, planned, measured. It speeds up sustainable transformation of governance, strategies and business models of companies. The first edition of this Report analysed the changes in some key behaviours of the company organisation and of the board of directors (BoDs) in the occasion of the first year of implementation of the Directive 2014/95/UE, transposed in Italy by the Legislative Decree no. 254/2016 (the Decree). This second edition of the Report measures the progression of behaviours analysed in 2019 and surveys additional actions considered important for the transformation. The first section focuses on non-financial reporting and on the abstracts of Strategic plans presented to investors in order to study the evolution of corporate culture and organisation towards ESG/multicapital integration. Subsequently, the Report explores whether companies consider non-financial issues relevant also at the board level, through both a documental analysis (based on the examination of the guidelines issued by companies prior to the 2019 board appointment and of the corporate governance reports; second section) and a Survey involving directors and statutory auditors that are members of Nedcommunity, the Italian Association of non-executive and independent directors, carried out for the fourth year by Nedcommunity and Methodos (third section). In order to track the progression of the cultural transformation, the information collected in this Report was clustered in three stages: Awareness, Capabilities and Engagement (see the chart below). Awareness is the precondition for change. It gathers behaviours of the company structure and the BoDs that are coherent with a first acknowledgement of the importance of ESG issues and that could kick-off the transformation process. Compared to 2018, the number of companies acting the different behaviours in the Awareness cluster is unchanged or has in some cases increased. The area Capabilities is intermediate in the transformation journey, when new skills, behaviours and mindsets are trained to accelerate the process. Compared to the previous year, this area records improvements, which in some cases are significant. This is the case of the behaviours linked to stakeholder engagement in the materiality analysis: external stakeholder engagement is indeed described in 70 cases (44 last year); engagement with the top management rose from 47 to 69 cases. There is also a slight increase in the number of companies integrating their reporting tools (from 9 to 11). With regards to boards, improvements are found in the integration of ESG into board renewal guidelines and in the board self-evaluation. The integration of remuneration packages with ESG criteria is also included in this intermediate phase because it is considered a driver towards change. The area Engagement is the most advanced in the ESG/multicapital transformation of strategies and business models. In this phase new behaviours are spontaneously carried out by the boards and the corporate organisation. This part of the analysis covers the abstracts of the Strategic plans presented to investors in the road shows, published in the Investor Relation section of the websites of the companies, in order to verify how and to what extent they describe a strategy that integrates financial and non-financial issues. Five companies (all in the Energy/Oil and Gas industry) fully integrate in their strategy issues that generate value in the short and long term and describe the connections between financial and non-financial matters. Among these companies, one mentions the materiality analysis as a pillar of its Strategic plan.

THE EFFECTS OF ENVIRONMENT, SOCIETY AND GOVERNANCE SCORES ON INVESTMENT RETURNS AND STOCK MARKET VOLATILITY

Sustainability reporting and disclosure in India have received a significant attention over the most recent few years propelled to a large extent by investors and policy makers. The Sustainable Business Leadership Forum (SBLF) has been closely working with many firms, owners of the companies and policy makers to single out the relationship between investment and environmental, social and governance (ESG) disclosure. Besides that, SBLF has had a coordinated conversation about the anticipations, concerns, difficulties and realities surrounding ESG estimation. This ESG criteria refers to three important elements which are considered by investors with regards to an ethical impact of firms and sustainable practices. As per the literature companies with higher ESG scores are better investment picks. This paper attempts to assess the volatility and returns of Indian companies and to measure the impact of ESG scores on returns and volatility with the help of panel regression.Keywords: ESG, ESG Scores, Sustainability, Panel Regression, Investment returns.JEL Classifications: D22, G11, G14, G32DOI: https://doi.org/10.32479/ijeep.9311

ESG Scores and the Credit Market

This study analyzes the relationship between Environmental, Social and Governance (ESG) scores and bond returns using the corporate bond data in Korea during the period of 2010 to 2015. We find that ESG scores include valuable information about the downside risk of firms. This effect is particularly salient for the firms with high information asymmetry such as small firms. Interestingly, of the three ESG criteria, only environmental scores show a significant impact on bond returns when interacted with the firm size, suggesting that high environmental scores lower the cost of debt financing for small firms. Finally, ESG is complementary to credit ratings in assessing credit quality as credit ratings cannot explain away ESG effects in predicting future bond returns. This result suggests that credit rating agencies should either integrate ESG scores into their current rating process or produce separate ESG scores which bond investors integrate with the existing credit ratings by themselves.

Perception of ESG criteria by mainstream investors: evidence from Tunisia

PurposeThe purpose of this paper is to explore the perception of environmental, social and governance (ESG) criteria by mainstream investors in an emerging financial market, that of Tunisia, country at the origin of the Arab Spring.Design/methodology/approachA series of focus groups and semi-structured interviews were conducted with financial professionals.FindingsDespite efforts by the Tunisian state to promote CSR and ESG criteria since the outbreak of the revolution of January 14th, 2011, the results show that these criteria are fairly well known by our interlocutors. As part of an investment allocation decision, the ESG criteria are considered as secondary to financial ones. The three criteria are classified as follows according to their usefulness in the investment choices of financial professionals: corporate governance, social and environmental.Research limitations/implicationsIn addition to the subjective nature of the data collected, this research is limited to the input of only financial professionals. It does not inform us about ESG indicators that may influence the investment decisions of financial professionals, and thus this issue deserves further reflection.Originality/valueThis exploratory study sheds light on a little-explored topic in Tunisia, country at the origin of the Arab Spring. It contributes to the existing literature in the areas of investor behavior toward ESG criteria and adds to the limited literature in the area of emerging countries.

Risk-mitigating effect of ESG on momentum portfolios

PurposeExisting empirical evidence on the impact of environmental, social and governance (ESG) integration on momentum portfolios is limited. The combination of the two is relevant given the risk-mitigating effect of ESG criteria, as well as the existence of momentum crashes. As such, ESG might lend itself to reduce crash risk for momentum investors.Design/methodology/approachIn this paper, the authors provide insight into the impact of an ESG-constrained investment universe on momentum returns. The overall investment universe is split into high and low ESG-rated segments to anylse the characteristics of momentum portfolios conditional on the ESG rating.FindingsThe authors document the existence of a momentum premium across European stocks and for a subset of high and lows ESG-rated stocks. However, absolute returns of momentum strategies are significantly lower if momentum strategies are pursued on a subset of high ESG stocks. Additionally, findings document a risk-mitigation effect of ESG for momentum portfolios with significantly lower returns for momentum portfolios based on low ESG stocks during periods of momentum crashes.Originality/valueResearch on momentum investing and the momentum premium is large and well established, yet many questions remain. A recent study by Daniel and Moskowitz (2016) has analyzed crash risk for momentum investors and identified periods of strong momentum crashes. On the other hand, the literature on ESG integration in standing investment approaches is still limited, but as demand for sustainable products is increasing, so is the demand for a better understanding of the impact of ESG integration. Consequently, the authors provide evidence on the benefits of ESG integration for momentum investors to reduce their exposure to momentum crash risk.

Towards a more ethical market: the impact of ESG rating on corporate financial performance

PurposeThis paper fits in a research field dealing with the impact of Corporate Ethics Assessment on Financial Performance. The authors argue how environmental, social and governance (ESG) paradigm, meant to measure corporate social performance by rating issuance, can impact on abnormal returns of Italian firms listed on Financial Times Stock Exchange Milano Indice di Borsa (FTSE MIB) Index, developing a panel data analysis which runs from 2007 to 2015.Design/methodology/approachThis study aims at exploring whether socially responsible investors outperform an excess market return on Italian Stock Exchange because of their investment behavior, testing statistically the relationship between the yearly ESG assessment issued by Standard Ethics Agency on FTSE MIB’s companies and their abnormal returns. To verify the impact of an ESG Rating on a company’s abnormal return, the authors developed a panel data analysis through a Fixed Effects Model. They measured abnormal returns via Fama–French approach, running a yearly Jensen’s Performance Index for each company under investigation.FindingsThe empirical results denote in Italy both a growing interest to corporate social responsibility (CSR) and sustainability by managers over the past decade, as well as an improving quality in ESG assessments because of a reliable corporate disclosure. Thus, despite investors have been applying ESG criteria in their stock – picking operations, the authors found a not positive and statistically significant impact in terms of market premium, when they have been undertaking a socially responsible investment (SRI).Practical implicationsThe findings described above show that ethics is not yet a reliable fundraising tool for Italian-listed companies, despite SRIs having a positive growth rate over past decade. Investors seem to be not pricing CSR on Stock Exchange Market; therefore, listed companies cannot be rewarded with a premium price because of their highly stakeholder oriented behavior.Originality/valueThis paper explores, for the first time in Italy, when market extra-returns (if any) are related to corporate social performance and how managers leverage ethics to build capital added value.

Why banks should consider ESG risk factors in bank lending?

Why banks should be concerned about incorporating environmental, social and governance (ESG) criteria in the lending process? What is the motivation? This study aims to find the motives for considering environmental, social and governance (ESG) criteria in bank lending process. A primary survey has been conducted to know the current status and motivation for incorporating ESG factors in investment decisions. Sample comprised 30 private commercial banks (PCBs) operating in Bangladesh. Data collected were analyzed with graphs, descriptive statistics, and regression analysis. Findings of the study indicate that banks are mostly considering basic environmental, social and governance factors set by regulators qualitatively. They are lagging behind in considering the advanced ESG criteria needed for sustainable and efficient credit risk management. Based on motivation for incorporating ESG factors, it was found that banks pioneering in incorporating ESG factors in lending decisions are compensated through better financial performance. Findings of the study are expected to encourage practitioners and policy-makers to take more pragmatic steps to incorporate ESG risk factors quantitatively in lending decision-making process.

Beyond Numbers: How Investment Managers Accommodate Societal Issues in Financial Decisions

Investment managers use financial numbers to assess the quality of their portfolios, which requires them to estimate the market value of their assets—i.e., the priced trading of such assets. Prior research has shown that investment managers tend to disregard information that does not easily integrate into financial numbers, such as environmental, social and governance (ESG) criteria. We argue that when investment managers use visuals to incarnate ESG criteria, they are more likely to accommodate societal issues in their financial decisions. We undertook a three-year ethnography of an asset management company to better understand how investment managers respond to ESG criteria. We found that fixed-income investment managers attempted to include ESG criteria in their financial models by financializing the data, so that ESG-related information could be commensurated with their existing models. Equity investment managers, on the other hand, did not financialize ESG issues, but introduced visuals, specifically emojis, to incarnate ESG issues. In this way, ESG criteria were juxtaposed against, rather than integrated into, financial criteria. In doing so, equity managers created a sense of dissonance between financial numbers and the visuals, which fostered creative friction. The visuals permitted equity managers to analyze the ESG criteria not only for their financial insights, but also for the social and environmental information that could not be financialized. We discuss the implications of these findings for prior research on financialization and calculative devices.

Is ESG an Equity Factor or Just an Investment Guide?

Environmental, Social and Governance (ESG) information demands attention within the asset management industry since it has become widely accepted that making an allowance for ESG criteria within an equity portfolio enhances returns. We test this proposition by incorporating ESG criteria into a worldwide market neutral portfolio using an 'off-the-shelf' third party database of individual securities' ratings. Our results show that incorporating ESG information into a worldwide equity market neutral portfolio yields no additional return, as any benefits from tilting towards a better rated ESG portfolio is already wholly captured by other well-known equity factors. Doing so, however, does not hurt returns. We conclude that ESG should not be considered as a unique equity factor.

Is It Costly to Introduce SRI into Islamic Portfolios ?

Could Environmental, Social and Governance (ESG) performance be a criterion for Islamic investment? The development of socially responsible investment (SRI) has challenged the ethical approaches associated with Islamic investment as a means to promote social achievements. Noting similarities with the positive screening approach, we investigate the integration of ESG criteria, into Islamic portfolios using KLD social ratings. This research seeks to determine the financial price of being both Sharī‘ahcompliant and socially responsible. We examine the financial performance of self-composed Islamic portfolios with varying ESG scoring. The results indicate no adverse effect on returns due to the application of Islamic and ESG screens, with a substantially higher performance for positive screening on governance during post subprime crisis’ period. Significant outperformance still arises for portfolios with bad records in community and human rights though. Performances are controlled for market sensitivity, investment style, momentum factor and sector exposure.

ESG Issues among Fund Managers—Factors and Motives

This paper investigates the motives, behavior, and characteristics shaping mutual fund managers’ willingness to incorporate Environmental, Social and Governance (ESG) issues into investment decision making. Using survey evidence from fund managers from five different countries, we demonstrate that this predisposition is the stronger, the shorter their average forecasting horizon and the higher their level of reliance on business risk in portfolio management is. We also find that the propensity to incorporate ESG factors is positively related to an increasing level of risk aversion, an increasing importance of salary change and senior management approval/disapproval as motivating factors as well as length of professional experience in current fund and increasing significance of assessment by superiors in remuneration. Overall, our evidence suggests that ESG diligence among fund managers serves mainly as a method for mitigating risk and is typically motivated by herding; it is much less important as a tool for additional value creation. The prevalent use of ESG criteria in mitigating risk is in contrast with traditional approach, but it is in line with behavioral finance theory. Additionally, our results also show a strong difference in the length of the forecasting horizon between continental European and Anglo-Saxon fund managers.