Environmental, Social And Governance Scores Research Articles

The Impact of ESG on the Financial Performance of Listed Companies: Empirical Analysis Based on A-share Listed Companies

As China’s ecological civilization advances, ESG (Environmental, Social, and Governance) has emerged as a focal point for market participants and investors. Based on the data of Shanghai and Shenzhen A-share listed companies from 2014 to 2022 and Bloomberg ESG score, this paper explores the impact of ESG performance on corporate value and its mechanism through multiple regression analysis. The results indicate that an enhancement in ESG performance significantly boosts the financial performance of listed companies, particularly in non-polluting industries, enterprises with low information transparency, and foreign-controlled enterprises. In response to these conclusions, the article makes recommendations for policy formulation and business management aimed at promoting sustainable development of enterprises, enhancing market competitiveness, and responding to the growing concern of investors about ESG.

Probabilities of transitions among endogenous regimes in asset returns and Environmental, Social and Governance scores

AbstractAssets' returns can be efficiently clustered in regimes, that are suitably defined non‐overlapping intervals creating a partition of the real numbers. This paper explores the relationship between the transition probabilities from one regime to another in assets' returns and the assets' MSCI Environmental, Social and Governance (ESG) scores. We apply the proposed methodology to the relevant empirical instance of the assets in the STOXX® Global 1800 Index. We consider three regimes—low, medium and high, on the basis of the variation range of the considered returns. Regimes are endogenous, in that their identification comes out from an entropy‐based optimization problem over the possible ranges of variation of the returns. We specifically investigate the possible linear relationship between transition probabilities among regimes and the ESG scores for different geographic regions, namely, America, Europe and Asia Pacific. The reference empirical period is the quadrennium 2018–2021. Results suggest that assets that are low ranked in ESG tend to remain in the low state of returns, if they are in the low state, while they tend to switch from higher to lower return states when the initial state is higher. On the other hand, assets that are highly ranked in the ESG dimensions, are likely to switch from a lower to a higher return state, when they are in a lower state or to remain in the same state when they are in a higher state. Results are more evident for America and Asia Pacific regions rather than Europe where regulation on ESG integration is at a more developed stage with respect to the other regions.

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.

Textual analysis of corporate sustainability reporting and corporate ESG scores

This paper examines the evolution of environmental, social and governance (ESG) reporting by analysing a ten-year corpus of annual reports from FTSE 350 companies. Using BERTopic, an advanced topic modelling technique, we identify and subsequently cluster the most important ESG topics, providing significant insights into the reporting landscape. Our findings show how regulatory changes, such as the Non-Financial Reporting Directive, and major events like Covid-19, influence ESG topic prominence. The disclosure of ESG information is primarily determined by regulatory requirements. This is particularly evident in the fact that companies only disclose the diversity on the board, which is mandatory, but not the diversity and inclusion at other levels of the reporting organisation. Furthermore, our study examines the correlation between ESG scores and topic proportions, showing that extensive disclosure on topics like climate risk and stakeholder engagement is positively associated with higher ESG scores, whereas topics like executive remuneration show negative correlations. Our research contributes to the literature by offering a novel methodological approach to ESG analysis and provides insights into the gaps between reporting standards and practices, relevant for standard-setting bodies and regulators.

The Link Effect of ESG Score, Stock Price Volatility, and Tax Payment: Doing Well while Doing Good

This study aims to identify how environmental, social and governance (ESG) performance influences stock price volatility, explicitly focusing on the moderating role of tax engagement. ESG performance is measured by an ESG Score calculated from the weighting of three dimensions: environmental, social and governance. Stock price volatility is measured by the degree of price variations over 12 months based on the last 52 weeks’ prices. A sample of Indonesia-listed firms is used, with 770 observations from 2023. The results show that the ESG Score negatively impacts stock price volatility, which is more significant in the social dimension than in the environmental and governance dimensions. In addition, the tax payment variable moderates the relationship and increases the effect of the ESG Score on stock price volatility. These findings suggest that ESG practices and tax transparency are ethical elements and critical components for financial stability, promoting the high-quality development of listed firms. This study is significant for firms, regulators, policymakers and investors. Overall, it underrates the importance of firms adopting ESG activities and engaging in tax management to mitigate risks and maintain viability in the contemporary business environment. This study provides new empirical evidence regarding the factors driving corporate stock price volatility. In addition, it offers pertinent policy recommendations for businesses and governments regarding the significance of ESG investments.

Taking ESG strategies for achieving profits: a dynamic panel data analysis

PurposeThe goal is to investigate the relationship between financial performance and environmental, social and governance (ESG) indicators and disclosures for a sample of Latin American firms.Design/methodology/approachDynamic panel data regressions are used to analyze a sample of 114 companies listed on the Latin American Integrated Market, MILA (Chile, Colombia, Mexico and Peru) for the period 2011–2020. The Altman Z-score and Piotroski F-score are used as indicators of the probability of default and comprehensive financial strength. Models are developed in which the relationship between economic value added (EVA) and Jensen’s alpha are evaluated against firms’ ESG practices.FindingsA direct relationship between ESG strategies and financial performance was found. Better practices and transparency in ESG are related to lower probability of bankruptcy, greater financial strength, greater EVA and superior risk-adjusted returns.Research limitations/implicationsESG data were obtained from the Bloomberg system based on a methodology that may differ from other sources. The sample covers four Latin American countries and large corporations. Independent variables were selected for their perceived validity, given their frequent use in previous studies.Practical implicationsEvidence for company management regarding the importance of strengthening ESG practices and reporting should be part of their balanced scorecards. For investors, the results support the importance of evaluating ESG practices in asset selection.Originality/valueThe present study is the first research to present empirical evidence on the relationship between ESG scores and disclosures for MILA countries, using a comprehensive set of financial performance indicators (Altman Z-scores, Piotroski F-scores, EVA and Jensen’s alpha).

Board gender equality and ESG performance. Evidence from European banking sector

PurposeThe purpose of this paper is to investigate the relationship between board gender equality and environmental, social and governance (ESG) performance in the European banking sector. The study examines whether and how the presence of women on the board of directors (BoD) influences ESG dimensions.Design/methodology/approachThe authors analyzed a sample of 72 European Union banks for the period 2015–2021 and developed an econometric model applying unbalanced panel data regression with firm fixed effects and controls per year. To test the research hypotheses, the authors considered gender equality in terms of female participation on the BoD and measured ESG dimensions by using the ESG score provided by Refinitiv.FindingsThe findings suggest a significant positive relationship between the number of women on BoD and the ESG performance of European banks only up to a certain threshold of female directors (at least three women). The study also explores how the proportion of women on BoD influences the individual ESG pillars. The results show that the percentage of female directors has a positive and statistically significant impact on the social dimension of the ESG framework.Research limitations/implicationsThe investigation is highly relevant to investors considering ESG issues in their decision-making process. The overall findings support policymakers and regulators on how to improve ESG performance through the design and the application of corporate governance (CG) mechanisms. From a managerial perspective, the study suggests that managers and CEOs should focus their efforts on establishing the right gender combination of directors on bank BoDs.Originality/valueThis paper offers an in-depth examination of the CG practices of banks, and it attempts to bridge the gap in prior literature on the determinants of ESG issues in the European banking industry. To the best of the authors’ knowledge, this study is the first that investigates the relationship between the representation of women on BoDs and the ESG dimensions measured by the Refinitiv Eikon score. The use of critical mass theory adds a fresh perspective to the literature on ESG in Europe since the influence of board gender diversity on ESG performance of the European banks is still unaccounted for. This study addresses this pressing research issue drawing on resource dependence, agency and legitimacy theories.

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.

Stopgap or sustainable strategy? The impact of China’s green credit guidelines policy on corporate ESG performance

Purpose This paper aims to investigate the impact of China’s Green Credit Guidelines (GCG) policy on the environmental, social and governance (ESG) scores of restricted enterprises and examine firm’s speculative behavior in response to the policy. Design/methodology/approach This paper views the GCG policy proposed in 2012 as a quasinatural experiment and uses difference-in-differences (DID) model to evaluate its influence on the ESG scores of Chinese nonfinancial A-share listed enterprises from 2007 to 2019. Robustness tests include the propensity score matching (PSM)–DID method and permutation tests. Findings The GCG policy significantly increases the ESG scores of restricted enterprises, particularly enhancing environmental (E) performance. However, it only improves the social (S) and governance (G) performance of firms heavily reliant on bank credit, indicating speculative behavior by enterprises. Increased Government attention, a higher proportion of female executives and more developed local green finance reduce speculative behavior, while executives with financial backgrounds promote it. Practical implications Governments should mandate standardized ESG reporting and monitor restricted enterprises, banks should monitor speculative behavior and firms should integrate ESG into their long-term strategies to support sustainable development. Social implications The results provide evidence of the effectiveness of implementing the GCG policy in China and offer guidance for better promoting green credit policy in developing countries, contributing to the transition toward a more sustainable future. Originality/value To the best of the authors’ knowledge, this paper is the first to explore if the GCG policy’s asymmetric effects on ESG components are due to enterprise speculative behavior and examines the factors influencing this behavior, providing insights for regulators to better implement the GCG policy to promote sustainable development.

The Use of IPO Fund, Underpricing, and Survival: ESG-Driven Insights from Indonesian Firms

The IPO prospectus should disclose information on the use of IPO proceeds, which can be a reference for investors in making investment decisions. Companies conduct IPOs for investment, working capital, and debt repayment purposes. The use of IPO fund for investment and working capital gives a positive signal, while debt repayment gives a negative signal. Some companies also implement ESG (Environmental, Social, and Governance) policies after conducting an IPO. This research aims to test whether companies with ESG scores have different underpricing and survival phenomena compared to companies in general. This research was conducted on 148 Indonesian companies that conducted IPOs in the period 2008-2021. The results suggest that the use of IPO proceeds for investment and working capital has a positive effect on underpricing and survival. However, the use of IPO proceeds for debt repayment has no effect on underpricing. Moreover, the use of IPO proceeds for debt repayment in companies that obtain ESG scores has a positive effect on underpricing. Underpricing strengthens the effect of the use of IPO fund for investment on survival occurs in the sample of companies in general as well as companies that obtain ESG scores. The implication of this research suggests that investors do not consider IPOs as a return on debt in companies that obtain ESG scores as a negative signal to invest.

Is national economic growth associated with environmental social and governance performance of firms?

AbstractThis study delves into the effect of environmental, social and governance (ESG) indicators on economic growth trajectory of an emerging economy. A sample of firms listed on the ESG index of the National Stock Exchange (NSE) was examined. The findings reveal a positive and statistically significant relationship between ESG performance indicators and economic growth represented as gross domestic product (GDP) per capita. The sample is further segregated into energy and non‐energy sectors, where the aggregate ESG scores exhibited a statistically significant influence on economic growth in both sectors. However, upon a closer examination of the individual ESG pillars, the governance pillar is observed to exert a negative influence on economic performance in non‐energy firms. In contrast, the environment and social pillars show no significant influence. The analysis then employs a unique approach by applying a Difference‐in‐differences estimator to assess the impact of Business Responsibility and Sustainability Reporting (BRSR) regulations, which confirms a positive impact on economic growth after regulations but exclusively within the non‐energy sector. This study underscores the substantial impact of ESG aggregate and individual scores on GDP per capita, which translates to economic growth.

ESG performance and cost of debt

We analyze China Securities Index Co., Ltd. (CSI) environmental, social and governance (ESG) scoring data, which incorporate Chinese characteristics, to assess the impact of ESG performance on corporate debt financing costs. Our findings indicate that better CSI ESG scores are correlated with lower debt financing costs. Additionally, improvements in local environmental execution enhance the effect of CSI ESG scores on debt financing costs. However, this effect diminishes with increased internal control quality and marketization. Governance has the greatest impact on reducing debt financing costs, followed by social and environmental factors. Superior CSI ESG scores reduce corporate debt financing costs by enhancing debt repayment capacity and reducing information asymmetry. Economic consequence analysis confirms that lower financing costs, driven by improved ESG performance, significantly enhance total factor productivity and firm value. CSI ESG scores also significantly impact bank loans but not corporate bond financing.

The effect of ESG scores on bank stability: Islamic vs. conventional banks

ABSTRACT This paper examines the impact of ESG (Environmental, Social, and Governance) factors on the stability of banks across different continents, focusing on both conventional and Islamic banking institutions. The empirical analysis indicates a positive influence of ESG activities on the stability of these financial institutions. Notably, the study finds that ESG scores significantly enhance the stability of both conventional and Islamic banks. The environmental pillar score, especially within the conventional banking sector, shows highly positive and statistically significant results, highlighting the benefits of environmentally responsible practices. In contrast, the social pillar is positively correlated with stability in the Islamic banking sector, suggesting that active involvement in community service and social responsibility initiatives leads to improved stability. Overall, the study emphasizes the transformative potential of ESG activities in enhancing the stability and valuation of banks by positively influencing both their external perception and internal operations.

Environmental Social And Governance (ESG) And Corporate Governance in ASEAN A Threshold Effects of Corporate Strategy 1

Sustainable development goals (SDGs) constitute 17 sets of goals to be achieved by the end of the said year. The SDGs prioritize problems associated with hunger, inequality, climate change, environmental destruction, peace, and justice for a better global future (United Nations, 2018). This study has two objectives, first, to examine the relationship between corporate governance mechanisms and corporate sustainability performance across ASEAN-listed companies. Second, to explore the threshold effect of corporate strategy in a nexus relationship between corporate governance mechanisms and corporate sustainability performance. This study uses 118 companies in ASEAN-5 countries as study’s sample. The period covers from 2011-2020. Both fixed effect model and fixed effect threshold regression are employed to capture linear and nonlinear estimation, respectively. The study validates the female directors and the independent directors on ASEAN boards positively impacts corporate sustainability. Intriguingly, the intervention of corporate strategy will mitigate the low company’s ESG score while strengthening the link between corporate governance and ESG score. This study has practical implications for companies, investors, and regulators looking to in incorporate ESG factors into capital expenditure decisions and reporting.

Sustainability and firm value: A multivariate regression analysis in the clothing industry

Firms, recognizing their Corporate Social Responsibility (CSR), are becoming catalysts for societal change by integrating Environmental, Social and Governance (ESG) criteria into their activities. The fashion industry exemplifies this effort, with an increasing number of companies embracing sustainability and ethical practices. In this context, our purpose is to provide a clear and comprehensive picture of the link between sustainability and business performance in the fashion industry. This work presents a Multivariate Regression Analysis, scrutinizing both external perspectives through stock prices and internal perspectives via profitability indices. Our aim is to discern the intricate relationship between sustainability practices and financial performance within the fashion industry, aligning ESG criteria with long-term economic success. Our regression analysis reveals a significant positive correlation between ESG scores and stock prices, indicating investor recognition of ESG performance as a crucial investment criterion. However, when focusing internally on profitability, the ESG score does not exhibit statistical significance, suggesting a yet-to-be-established connection between ESG policies and corporate profitability. This study underscores the evolving role of companies as sustainability promoters, emphasizing the crucial role of ESG performance in shaping investor perceptions. Nevertheless, it also highlights the need for further exploration into the intricate relationship between sustainable policies and corporate profitability. As businesses increasingly embrace sustainability, in fact, it could become paramount for informed decision-making and fostering ethical societal and environmental progress.

Impact of environmental, social and governance (ESG) on foreign institutional investments in India: a machine learning perspective

PurposeThis study thoroughly examines the relationship between environmental, social and governance (ESG) scores and their subcategories with the investment decisions made by foreign institutional investors (FII). These subcategories include resource use, emission reduction and innovation under the environmental pillar, workforce, human rights, community and product responsibility under the social pillar and management, shareholders and CSR strategy under the governance pillar.Design/methodology/approachA machine learning technique known as “topic modeling” is used to analyse the current literature on ESG. To investigate the correlation between ESG scores and their subcategories with the investment decisions made by FII and to address concerns regarding multicollinearity and overfitting, a penalty-based regression model is employed.FindingsThe findings indicate that FIIs invest in firms with higher emission reduction and innovation scores under the environmental indicator. Additionally, firms with high human rights, community and product responsibility scores under the social indicator category have a positive relationship with FII investors. All subcategories of governance indicators, such as corporate social responsibility (CSR), strategy, shareholders and management scores, also positively impact FII investment. Of the three indicators, i.e. ESG, non-promoter FIIs give maximum weightage to governance indicators.Research limitations/implicationsSince ESG is a contemporary topic, the findings on the relationship between different categories of ESG on FII investment will support managers in their FII investment. Also, the study will help the government frame policy decisions on ESG.Originality/valuePrevious studies have explored the impact of the overall ESG indicators on FII investments, but they have not specifically studied the influence of sub-indicators within these categories on investment decisions. By addressing this gap, the study enhances stakeholder theory by identifying and prioritizing the various subcategories of ESG indicators that impact FII investment decisions.

Relationship of ESG scores on firm performance: Moderating roles of board size and CEO duality

The aim of this study is to examine the relationship between Environmental, Social and Governance (ESG) activities and the performance of Thai listed firms. The moderating roles of board size and CEO duality on this relationship are also assessed. The ESG score provided by LSEG (formerly Refinitiv) is chosen to measure ESG activities, both as an overall ESG combined scores and as Environment, Social, and Governance pillar scores. Multiple regression analysis is used to test the impact of ESG on firm performance while the PROCESS macro is used to test the moderating effects. Results reveal that the overall ESG combined score demonstrates no statistically significant effect on firm market-based performance. However, it shows the significant effects on firm performance for both the ESG combined score and the Environmental and Social pillar scores when moderated by board size and CEO duality; Governance pillar score exhibits no significant effect. Additionally, it is found that when the CEO operates only as the managing director and small board size and average board size are evident, higher ESG disclosure scores enhance firm performance. However, when the CEO serves as both managing director and chairman of the board of directors, and where there is a large board size, higher ESG disclosure scores diminish firm performance. This study contributes to the ESG literature and encourages companies to enhance their performance by implementing ESG combined activities with good governance policies.

Can green finance improve the ESG performance? Evidence from green credit policy in China

Green finance, as a crucial policy instrument for achieving environmental and social objectives, has gradually become a focal point of reform in many countries. This study employs the comprehensive ESG (Environmental, Social, and Governance) score of enterprises as a proxy variable for environmental and social responsibility, utilizes difference-in-difference (DID) method and micro-level data from Chinese listed companies spanning the period from 2011 to 2021, reveals that green credit policy significantly enhances the environmental and social performance of relevant enterprises. Further research indicates that green credit policy, through optimizing the allocation of credit resources, fostering environmental awareness among management, and increasing investment in research and development, contribute to the improvement of enterprise ESG performance. Additionally, the degree of regional marketization and the level of financial constraints on enterprises act as moderating factors in the policy's effectiveness, with the enhancing effect of the policy being more pronounced for enterprises with initially top and bottom ESG performance.

Do responsible practices lead to higher firm productivity? Evidence from Europe

AbstractThis study examines the impact of corporate social responsibility (CSR) in its environmental, social and governance (ESG) dimensions on firm productivity. We analyze a data set comprising 448 non‐financial firms operating in 15 European countries during the period 2002–2018 and find compelling evidence indicating that both the overall ESG scores and their individual sub‐pillars, are positively associated with total factor productivity (TFP). To ensure the robustness of our findings, we employ multiple analytical approaches to address potential endogeneity and selection biases. Our evidence demonstrates that the link between ESG and TFP link becomes more pronounced during economic slowdowns, particularly in the aftermath of the financial crisis. Furthermore, our investigation reveals that firms' environmental performance plays a pivotal role in driving this relationship. To validate this outcome, we employ a quasi‐natural experiment, focused on the adoption of the international climate change treaty, the 2015 ‘Paris Agreement’. Overall, our results offer valuable insights for policymakers and regulators and confirm that involvement in sustainability practices within the non‐financial sector not only yields societal benefits but also bolsters firm‐level productivity.

Role of Audit Committees and Internal Audit in the Context of the Evolution of ESG Indicators

Abstract The purpose of this research is to analyze the role and correlation between audit committees and internal audit within companies, in the context of environmental, social and governance (ESG) evolution of indicators in the information industry. Design/methodology/approach - This paper aims to understand whether there is a correlation between these 3 indicators (audit committee, internal audit and ESG indicators) and what is the impact on ESG score. The reported data is collected from a sample of companies included in the Refinitiv Eikon database and analyzed using a panel data analysis at both regional and industry levels. The sample is composed of the number 889 companies, from Europe, most of them members of the European Union and covers a period of 4 years, from 2019 to 2022. The results of this study show that AC and internal audit have a significant positive impact on sustainability disclosure, highlighting the positive impact of reporting according to GRI guidelines, the efficiency of internal audit and the independence of the audit committee. This research contributes to the literature on sustainability reporting by information industry companies, in which regulators do not play a dominant role in determining the degree of disclosure. In the future, it will be necessary to have more involvement in determining these companies to have a greater responsibility regarding the transparency of reporting.