Environmental, Social And Governance Ratings Research Articles

Real Earnings Management and ESG Performance in China: The Mediating Role of Corporate Innovations

ABSTRACTThis study addresses whether the positive consequences of corporate innovation can mitigate the negative repercussions of earning management practices on corporate sustainability. Specifically, it investigates the impact of real earning management (REM) practices on corporate environmental, social and governance (ESG) performance. Likewise, it explores the mediating role of corporate innovation inputs and outputs in this relationship. The study uses a sample of the A‐share listed firms in the Chinese stock market from 2011 to 2021. We measure REM activities as a comprehensive index of corporate abnormal cash flows, abnormal production costs and abnormal discretionary expenses. The Chinese firms' ESG performance is based on Huazheng's ESG rating. Corporate innovation is categorised into innovation input (i.e., R&D expenditure) and innovation output (i.e., patent applications). The study finds that REM practices inversely affect corporate ESG performance and its various pillars. Likewise, firms that engage in higher REM practices are less likely to allocate resources to innovation (i.e., lower R&D expenditure) and have a low innovation output (i.e., fewer patent applications). Nevertheless, firms with higher innovation input and/or higher innovation output exhibit higher ESG performance. Finally, the corporate innovation input and output mediate the relationship between REM practices and ESG performance, suggesting that the positive influence of innovation on ESG performance helps to mitigate the negative consequences of earnings management practices. These results underscore the significance of ethical financial practices and innovation‐driven strategies in enhancing corporate ESG performance.

Corporate Governance, ESG, Audit Committee and Financial Performance in European Investment Holding Companies

The purpose of this research paper is to explore the connection between Corporate Governance, Environmental, Social and Governance (ESG), Audit Committee (AC) and Financial Performance in European Investment Holding Companies. This paper aims to understand whether there is a correlation between these elements. The study answers the following research question: "What is the impact of corporate governance indicators, ESG and financial performance on investments in public holding companies in Europe?" Our findings reveal significant correlations between corporate governance structures and financial performance metrics, as well as the influence of ESG ratings on financial performance and corporate governance. Additionally, we identify the effects of audit committee characteristics on financial performance and ESG outcomes. The reported data is collected from a sample of companies included in the Refinitiv Eikon Database and analysed using a panel data analysis at both regional and industry level. The sample is composed of 228 European Companies, covering a period of 4 years, from 2019-2022. I chose this because it includes the impact of the pandemic and the post-pandemic recovery period, providing insight into the adaptability and resilience of companies in the face of major economic challenges.This research contributes to a deeper understanding of the dynamics between corporate governance, ESG practices and financial performance, providing valuable insights for investors, managers and regulators aiming to navigate sustainable investment strategies in the European market. This sample is considered large enough to provide meaningful data and draw relevant conclusions. Companies from various European countries were included to reflect the diversity of the market and to analyse variations in governance and ESG practices in different national contexts. The focus on public holding companies provides a specific perspective on how these entities manage corporate governance and ESG, given their importance in the European economy. The selection of the sample was based on the availability of financial and corporate governance data to ensure the reliability and validity of the analysis. This data will be used to investigate how governance and ESG practices influence companies' financial performance, thus providing important insights for understanding the relationship between these aspects within the European market.

ESG disclosure and financial performance in debt market: evidence from the oil and gas industry

PurposeThis study aims to analyze the relationship between environmental, social and governance (ESG) ratings and corporate bond credit spreads within the oil and gas (O&G) industry. Given the sector’s significant environmental impact and the current energy transition, it is crucial to understand how ESG disclosure affects financial performance, particularly in terms of debt market dynamics. This research aims to provide empirical evidence on whether ESG efforts by O&G companies influence their cost of borrowing.Design/methodology/approachThis study employs a quantitative approach using secondary data from Refinitiv for the period 2018–2022. To address potential endogeneity issues, we utilize two-stage-least-squares regressions. The analysis focuses on corporate bond spreads as the dependent variable and ESG as the key independent variable.FindingsOur findings indicate a negative association between ESG disclosure and corporate bond spreads. Specifically, companies with higher ESG ratings tend to experience lower credit spreads, suggesting that improved ESG practices may lead to reduced borrowing costs. Additionally, the results show that non-state-owned companies (SOC) benefit more from ESG in terms of financial performance compared to state-owned counterparts.Research limitations/implicationsThe study is limited by its reliance on secondary data from Refinitiv, which may not capture all nuances of ESG practices and financial performance. Additionally, the analysis is confined to the O&G industry, potentially limiting the generalizability of the findings to other sectors. Future research could expand the scope to include other industries and incorporate primary data to provide a more comprehensive understanding of the ESG–financial performance relationship.Practical implicationsThe study’s findings suggest that O&G companies can potentially reduce their borrowing costs by improving their ESG ratings. This insight is valuable for corporate managers and investors, as it highlights the financial benefits of sustainable practices. Additionally, policymakers could use these findings to encourage better ESG disclosure and practices within the industry, ultimately promoting a more sustainable energy sector.Social implicationsBy demonstrating the financial advantages of ESG disclosure, this study underscores the broader social benefits of sustainable business practices. Improved ESG ratings not only contribute to environmental and social well-being but also enhance a company’s financial performance. This dual benefit can motivate more companies to adopt sustainable practices, leading to positive societal impacts such as reduced environmental damage and improved community relations.Originality/valueThis study contributes to the existing literature by providing empirical evidence on the relationship between ESG ratings and corporate bond credit spreads specifically within the O&G industry. By highlighting the differential impact of ESG disclosure on state-owned versus non-SOC, the research offers unique insights that can inform corporate strategies in the context of sustainability and financial performance.

Does Flood Risk Affect the Implied Cost of Equity Capital?

Utilizing monthly city level precipitation data across China from 2006 to 2019, this paper constructs an objective flood risk index and investigates the impact of flood risk on the implied cost of equity capital for A-share listed companies. First, our study finds a positive correlation between the flood risk and the implied cost of equity capital and this result holds when we use instrumental variables for flood risk. Second, empirical results reveal that flood risk influences the implied cost of equity capital through two channels: physical risk premium and investor sentiment. Third, we discover that companies with higher ESG (Environmental, Social, and Governance) ratings, higher information disclosure quality and better city infrastructure, are capable of mitigating the adverse impact of flood risk on their implied cost of equity capital. These findings have important implications for investors, policymakers, and corporate stakeholders in understanding and mitigating the financial risks associated with climate change in a rapidly developing economy.

The relationship between ESG ratings and digital technological innovation in manufacturing: Insights via dual machine learning models

In the era of the current scientific and technological revolution and industrial transformation, digital technology innovation serves as a critical driver for the high-quality development of manufacturing enterprises. The dual attributes of ESG (Environmental, Social, and Governance) ratings, encompassing "internal governance" and "external support," play a pivotal role in propelling digital technology innovation within these enterprises. This study utilizes a dual machine learning approach to empirically investigate the influence of ESG ratings on the digital technology innovation of manufacturing enterprises and explores the underlying mechanisms. Findings indicate that ESG ratings significantly boost digital technology innovation by alleviating financial market constraints, enhancing customer stability in the product market, elevating human resource levels, and increasing innovation awareness and efficiency. These improvements occur through the mechanisms of "external support" and "internal governance." Moreover, the study reveals that ESG ratings substantially enhance digital technology innovation in state-owned and high-tech manufacturing enterprises, in contrast to their limited impact on non-state-owned and non-high-tech counterparts. Conclusively, the paper proposes policy recommendations focused on heightening enterprise and societal awareness of ESG importance, intensifying supervision and enforcement, and refining the ESG rating system.

Navigating the Nexus: A Comprehensive Analysis of the Evolving Interplay Between Environmental, Social and Governance (ESG) and Sustainability in Contemporary Business

This research, based on an in-depth review of 67 papers, explores the intersection of environmental, social and governance (ESG) and sustainability practices in modern business. The study underlines the distinction between these concepts and their evolving significance in the global business landscape. With a methodology anchored in the PRISM framework, the systematic literature review reveals key insights. Notably, it identifies the global adoption of ESG and sustainability strategies, driven by stakeholder demands for transparency. The systematic literature review methodology ensures a comprehensive analysis, providing actionable insights for businesses navigating responsible and resilient strategies. The study also points to future research avenues, emphasising areas such as social origins and consumer behaviour, alternative ESG ratings, ESG failures and challenges, ESG integration into valuation models, sustainable investment strategies in specific sectors and the impact of ESG during crises like COVID-19. The research contributes to a comprehensive understanding of the relationship between ESG and sustainability. The findings offer practical implications for organisations aligning with ethical practices, meeting stakeholder expectations and securing a sustainable future.

Are ESG scores driven by financial information? Evidence from European banks

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.

Acquirer ESG, Home Country Policy Enforcement, Country Distance, and Cross-Border Mergers and Acquisitions: Evidence from Chinese Firms

This paper examines the impact of ESG (Environmental, Social, and Governance) on cross-border M&A activities and outcomes from the perspective of emerging economy firms. Using cross-border M&A events of Chinese acquirers between 2009 and 2021 as a sample, we employ logistic regression and multiple linear regression for analysis and conduct robustness tests. The study finds that: (1) Acquirers with lower ESG ratings are more likely to choose other developing countries for M&A, and the home country’s policy enforcement significantly positively moderates this relationship; (2) Lower ESG ratings of acquirers have a significant negative impact on their M&A performance, while the country distance between China and the host country does not have a significant moderating effect on this relationship. These results suggest that under strong home country policy enforcement, emerging economy firms are pressured by their home country’s ESG ratings to choose host countries with lower ESG requirements for M&A. However, this approach is like “drinking poison to quench thirst”; while selecting an “ESG haven” can temporarily reduce ESG rating pressure, low ESG ratings ultimately result in lower M&A performance.

The impact of ESG rating changes on fund shareholding

This study examines the impact of environmental, social and governance (ESG) rating changes on fund shareholding based on rating data from five agencies. Using a sample of Shanghai and Shenzhen A-share listed companies in China spanning from 2019 to 2021, we find robust evidence that the mean value of ESG ratings by agencies positively impact the number of fund holdings, while the standard deviation of ESG ratings by agencies have no impact on the number of fund holdings. Additionally, the mean value of ESG ratings by agencies have a greater impact on the number of fund holdings among state-owned and industrial companies, and the mean value of ESG ratings by agencies has a larger impact on the number of fund holdings in a one-year window than in a six-month window. Moreover, we find that the mean value of ESG ratings by agencies negatively impact the stock price volatility. The results show that ESG rating changes play a positive role in the decision-making of fund shareholding and in promoting the sustainable development of firms.

Sustainable investing and ownership structure in international shipping companies

ABSTRACT Sustainable investing has been gaining momentum in recent years. This paper investigates the relationship between ownership structure, sustainability performance, and financial performance using a structural equation modelling (SEM) approach in the shipping sector by utilizing 56 listed shipping companies’ financial and Environmental, Social and Governance (ESG) ratings information. The results provide evidence that institutional ownership is positively associated with ESG scores, particularly from firms listed in the U.S. suggesting these investors’ consciousness in ESG investments in shipping stocks. Conversely, family ownership is negatively related to ESG ratings, while public ownership is more financially performance-driven, but not ESG-conscious. Additionally, firms with larger market capitalization tend to achieve higher ESG scores. However, this study finds no statistically significant relation between sustainability and financial performance. This research enhances the understanding of the investment behavior in the international shipping sector and has implications for investment strategy, investor relationship and policy development.

Understanding the Effect of Climate Risk on Banking Business—A Panel Data Analysis of Indian Firms

The enormous phenomenon of climate change, which is affecting many organisations of different sectors today, has a special impact on the financial sector in terms of credit risk. Awareness and action on environmental, social and governance (ESG) goals and climate change impacts have been rapidly increasing worldwide. In this article, we present a firm-level panel data analysis to link ESG ratings and CO2 emissions with the default risk and solvency position of selected companies. We perform various univariate and multivariate analyses on selected top Bombay Stock Exchange (BSE) top 200 companies that have disclosures in Carbon Disclosure Project (CDP) reports over 5 years (2017–2021). We find strong empirical evidence that a firm’s risk of default is linked to its environmental performance along with the level of carbon emission. Our findings will enable banks to establish a linkage between credit risk and climate change risk. This will assist banks as well as policymakers to adjust borrower-level ratings and align their lending and investments with net zero emissions. JEL Codes: G32, G33, Q2, Q5

Environmental, Social and Governance (ESG) Phases and Circulation

With the increasing impact of environmental, social and governance (ESG) on the world, this paper aims to discuss the current situation of ESG applications in China and abroad, as well as the corresponding impact of ESG disclosure, rating and investment. Furthermore, the paper adopts a systematic review method to sort out related literatures in the field of ESG, and then discusses the interaction of the three parts and the cyclical role of the components. The discussion found that investors attach great importance to the ESG disclosure and rating, and more and more mainstream investors are incorporating ESG factors into their investment decision-making process. Moreover, ESG disclosure, rating and investment are complementary to each other. If an enterprise discloses ESG information well, it will receive a relatively impressive ESG rating, which will ultimately attract more investors. Subsequently, as investment increases, companies will pay more attention to ESG disclosure, creating a virtuous circle.

A Study of LYFEN's ESG Disclosure and Its Impact on Corporate Performance

Environmental, social and governance (ESG) is an important criterion for evaluating non-financial indicators of corporate performance, which provides substantial support for promoting corporate’s green transformation. This paper investigates the impact of ESG disclosure on corporate performance by using the social responsibility report issued by Shanghai Laiyifen Co., Ltd and the company’s financial data from 2019 to 2022, as well as data up to the end of September 2023 as the basis for analysis. The results show that there is a high correlation between ESG rating scores and corporate performance. Companies that score higher on ESG indicators tend to perform better financially, indicating that a focus on sustainability and responsible business practices can drive value creation. In addition, detailed and in-depth disclosure of ESG information helps to enhance corporate value. These findings deepen the understanding of how ESG disclosure affects corporate performance and provide theoretical support for companies and investors who seek valuable guidance.

ESG rating disagreement and corporate green innovation bubbles: Evidence from Chinese A-share listed firms

Environmental, social and governance (ESG) plays a significant role in environmental governance of enterprises, while the sustainability of this function is uncertain in the absence of unified disclosure and scoring standards. Based on a set of data from Chinese A-share listed firms over the period 2015-2021, this paper describes how ESG rating disagreement affects the green innovation bubbles of corporations. The empirical result implies that ESG divergence significantly aggravates corporate green innovation bubbles. Our finding indicates that the managerial myopia is the potential influential mechanism. In addition, from the perspective of external pressure and internal governance, this study concludes that industry competition, media attention and internal control effectiveness would attenuate the positive relationship between ESG disagreement and green innovation bubbles of companies. This study investigates the economic consequences of ESG disagreement from the perspective of corporate green innovation bubbles, expanding the nascent stream of research on the relationship between ESG disagreement and corporate behaviors.

Exploration of Competitive Intensity, ESG, and Operational Performance in the Banking Industry

Based on previous literature on the impact of ESG (Environmental, Social, and Governance) on corporate operations, it is evident that the effects of corporate ESG investments on operational performance are not easily reflected in performance-related variables or indicators. Jung and Yoo (2023) also pointed out that in a competitive market, companies might overlook the implementation of ESG, resulting in an insignificant relationship between ESG and performance. Therefore, this study, from this perspective, constructs a panel data set of Taiwan's financial industry from 2010 to 2023 to explore the influence of competition level, ESG, and banking industry operational efficiency. In addition to including multiple performance variables, the study also considers various ESG ratings and scoring systems, and CommonWealth Magazine’s Sustainable Citizen Award. The sample is divided into pre-pandemic and post-pandemic sub-samples to further examine the differences in influencing factors across these periods.

Environmental, Social, and Governance Information Rating and Firm Uncertainty Perception, Evidence from China Listed Firms

Measuring firm value from an environmental, social, and governance perspective is a core concept of ESG (Environmental, Social, and Governance), which contributes to the sustainable growth of firms. This paper aims to investigate the relationship between firms’ ESG performance and perceived economic uncertainty. Using a database of Chinese listed firms from 2011 to 2020, we find that firms with a good ESG performance are better able to resist changes in the external economic environment in the ESG rating system which still holds after a series of robustness tests and a discussion of endogeneity. The reason for this is that the ESG rating system better reduces information uncertainty between firms and the market, which allows firms to better focus on improving their technological and profit levels. In addition, companies with good ESG performance can provide more returns to investors. Our results highlight the necessity of aligning the interests between superior and subordinate governments and the importance of the supervision of superior governments in environmental decentralization. Our findings highlight the role of information communication in the market, especially in developing countries with imperfect information disclosure. It is all the more important to reduce information uncertainty between firms and other market players through mechanism building to achieve the long-term survival of quality firms.

Learning Dynamic Multimodal Network Slot Concepts from the Web for Forecasting Environmental, Social and Governance Ratings

Dynamic multimodal networks are networks with node attributes from different modalities where the attributes and network relationships evolve across time, i.e., both networks and multimodal attributes are dynamic; for example, dynamic relationship networks between companies that evolve across time due to changes in business strategies and alliances, which are associated with dynamic company attributes from multiple modalities such as textual online news, categorical events, and numerical financial-related data. Such information can be useful in predictive tasks involving companies. Environmental, social, and governance (ESG) ratings of companies are important for assessing the sustainability risks of companies. The process of generating ESG ratings by expert analysts is, however, laborious and time-intensive. We thus explore the use of dynamic multimodal networks extracted from the web for forecasting ESG ratings. Learning such dynamic multimodal networks from the web for forecasting ESG ratings is, however, challenging due to its heterogeneity and the low signal-to-noise ratios and non-stationary distributions of web information. Human analysts cope with such issues by learning concepts from past experience through relational thinking and scanning for such concepts when analyzing new information about a company. In this article, we propose the Dynamic Multimodal Slot Concept Attention-based Network (DynScan) model. DynScan utilizes slot attention mechanisms together with slot concept alignment and disentanglement loss functions to learn latent slot concepts from dynamic multimodal networks to improve performance on ESG rating forecasting tasks. DynScan is evaluated on forecasting tasks on six datasets, comprising three ESG ratings across two sets of companies. Our experiments show that DynScan outperforms other state-of-the-art models on these forecasting tasks. We also visualize the slot concepts learned by DynScan on five synthetic datasets and three real-world datasets and observe distinct and meaningful slot concepts being learned by DynScan across both synthetic and real-world datasets.

Relationship Between Environmental, Social and Governance and Corporate Financial Performance: A Systematic Literature Review

This study conducts a systematic literature review to examine the relationship between Environmental, Social and Governance (ESG) and Corporate Financial Performance (CFP). ESG represents the non-financial performance of a business, while CFP reflects its financial performance. Achieving long-term success requires firms to find a balance between ESG performance and CFP. The Preferred Reporting Items for Systematic Review and Meta-Analysis (PRISMA) statement is employed to analyze the systematic literature review in this investigation. Data for the article were collected from Scopus and Web of Science databases spanning from 2000 to 2022. Both databases show consistent growth rates, with India being their top setting. This study reveals that quantitative techniques have been predominantly used in conducting investigations on this topic. With global emphasis on sustainable development and green economy, expectations of governments, regulators, corporations, and investment organizations have evolved beyond economic sustainability towards considering the well-being and responsibility of enterprises towards various stakeholders. Few scholars have utilized the PRISMA approach to analyze the impact of ESG on CFP; therefore, this study employs it to summarize how ESG ratings influence CFP as a reference for current research stage. Limitations are discussed along with recommendations for future research.

Do environmental and climate scores for financial institutions reflect lending and underwriting activity? A case study of global banks

AbstractAchieving international climate targets may require more than $8 trillion in annual investments to 2030. We investigate the extent to which third‐party environmental scores for banks reflect lending and underwriting in fossil‐fuel and low‐carbon industries, and how ratings are influenced by outward signals of commitment to climate action. We provide empirical evidence on the performance of leading Environmental, Social and Governance (ESG) ratings providers and offer actionable guidance as to how ESG ratings may be improved in this context. We find that banks' environmental scores are most strongly influenced by signals of future intention regarding climate action, rather than by prior and current lending and underwriting behaviour. Our analysis highlights the need for rating providers, when constructing environmental scores for banks, to place more weight on key capital allocation decisions, and less on future intentions. We recommend that banks disclose breakdowns of their financing activities in key carbon‐intensive and low‐carbon industries.

Correlation between Earnings Management Behavior and Corporate Performance Based on ESG Rating

The purpose of this study is to deeply explore how ESG (Environmental, Social and Governance) rating affects the earnings management behavior of enterprises, and further analyze the impact of this behavior on corporate performance. By constructing theoretical framework and research hypothesis, this paper makes an empirical analysis of the correlation between ESG rating, earnings management and corporate performance by using multiple linear regression model. The results show that enterprises with high ESG rating often show more standardized earnings management behavior, which has a significant positive impact on corporate performance. This discovery provides a new idea for enterprises to improve their performance, and also provides an important reference for investors to evaluate the value of enterprises. This study not only enriches the theoretical system of the relationship between ESG rating and earnings management, but also provides useful guidance for enterprise management practice and investment decision.