Environmental, Social And Governance Scores Research Articles

Impact of ESG on Bank Performance and Risk Around the COVID-19 Pandemic

Financial institutions’ focus on using ESG (environmental, social, and governance) criteria in decisions has grown significantly over time despite growing controversy over its use. Prior papers have not solved the controversy as they have found mixed results of the benefits of ESG activity. Further, there may have been structural changes that accompanied the pandemic’s period of economic stress. The paper examines the relation between ESG scores and financial institutions’ risk and performance measures. Pre-pandemic changes to ESG and its components are regressed on pandemic-period changes in ROA, ROE, and Tobin’s Q for performance and the loan-to-deposit ratio for risk. Changes to ESG are negatively related to the subsequent performance of ROA. However there appears to be no significant relation between changes in ESG and changes to other measures of performance. Finally, when looking at the loan-to-deposit ratio, there is evidence that changes in the environmental factor, the social factor, and the overall ESG score has a significant and negative relation. That suggests ESG score improvement is associated with lower risk. Although financial institutions improving their ESG scores is associated with subsequent risk reduction, that does not appear to have a positive performance impact.

Ensuring the Efficiency of Regulation and Development of Esg Rating Methodology for Russian Companies

Objective: This article discusses the assessment model used to evaluate the ESG (Environmental, Social, and Governance) performance of companies. The purpose of this article is to present a new ESG (Environmental, Social, and Governance) rating methodology developed in accordance with the recommendations of the Bank of Russia and explain its benefits for sustainable investment in the context of the Russian market.
 
 Methods: The data structure, preprocessing, and scoring methodology have been elaborated. The scoring algorithm considers the intrinsic value of each criterion and evaluates the relative performance of a company within an industry. The methodology discussed here can provide a basis for investors to select companies based on ESG performance.
 
 Results: The authors accomplished several tasks in this study, including introducing the concept of ESG and discussing its importance, describing sources of data and criteria used to evaluate sustainable development, and developing a methodology for assessing ESG scores. They also discussed the benefits of this methodology for the Russian market and created a consolidated rating of companies based on ESG factors.
 
 Conclusion: The authors have developed a comprehensive and objective assessment model for evaluating the Environmental, Social and Governance (ESG) factors of companies in Russia. The model's approach to data collection, preprocessing, and scoring provides investors with reliable and informative data for making responsible investment decisions.

An Improved TOPSIS Model Based on Cumulative Prospect Theory: Application to ESG Performance Evaluation of State-Owned Mining Enterprises

The aim of this study is to provide a comprehensive decision-making method that can be applied to investment decisions based on the Environmental, Social and Governance (ESG) performance. The study contributes to the existing literature by introducing the CPT-TOPSIS model, a pioneering approach that incorporates the effect of non-rational factors on decision-making results in uncertain conditions by combining cumulative prospect theory (CPT) with the classic TOPSIS model. Moreover, by conducting an application to ESG evaluation on five state-owned mining enterprises in China, the study provides evidence of the effectiveness and improvement offered by the new model in comparison with the classic TOPSISI model and prospect theory TOPSIS (PT-TOPSIS) model. The results suggest that the CPT-TOPSIS model considers risk preferences and probability distortion in the decision-making process, narrows the gap between ESG scores, and makes ESG performance evaluation more realistic.

How to combine ESG scores? A proposal based on credit rating prediction

AbstractThe diffusion of Environmental, Social and Governance (ESG) metrics is increasingly affecting corporates behaviour and their ability to attract investors. Corporate ESG practices are nowadays considered as a key element in evaluating creditworthiness and the cost of capital, to direct funds to the best‐performing companies that limit the harmful impact on the planet and the societies. Due to this increased interest in ESG by companies, investors and policymakers, a high number of ESG scores and metrics have been developed, each with different methodologies and scopes. Because of this variety, it could be therefore challenging for investors to understand and compare ESG measures. In this paper, we address this issue by proposing a method to combine the information provided by different ESG scores into a single aggregate measure of company sustainability and link this combined score to the credit rating of companies. The proposed methodology can help investors to improve their investment decisions by combining more diverse information on company sustainability as a driver of companies' credit rating, thereby reducing information asymmetries.

Developing the Esg Rating Methodology for Russian Companies

Objective: This article discusses the assessment model used to evaluate the ESG (Environmental, Social, and Governance) performance of companies. The purpose of this article is to present a new ESG (Environmental, Social, and Governance) rating methodology developed in accordance with the recommendations of the Bank of Russia and explain its benefits for sustainable investment in the context of the Russian market.
 
 Methods: The data structure, preprocessing, and scoring methodology have been elaborated. The scoring algorithm considers the intrinsic value of each criterion and evaluates the relative performance of a company within an industry. The methodology discussed here can provide a basis for investors to select companies based on ESG performance.
 
 Results: The authors accomplished several tasks in this study, including introducing the concept of ESG and discussing its importance, describing sources of data and criteria used to evaluate sustainable development, and developing a methodology for assessing ESG scores. They also discussed the benefits of this methodology for the Russian market and created a consolidated rating of companies based on ESG factors.
 
 Conclusion: The authors have developed a comprehensive and objective assessment model for evaluating the Environmental, Social and Governance (ESG) factors of companies in Russia. The model's approach to data collection, preprocessing, and scoring provides investors with reliable and informative data for making responsible investment decisions.

Compulsory disclosure regulation: the effect of ESG on extreme risk

ABSTRACT We examined the impact of compulsory disclosure regulations on the relationship between the Environmental, Social and Governance (ESG) and firm-specific extreme risk. We used a difference-in-difference approach to solve endogenous concerns and found that the negative impact of the ESG score on extreme risk is more significant after announcing compulsory disclosure regulations. Additionally, we demonstrated that this effect becomes more substantial when firms issue green bonds. Finally, the subsample tests showed that the compulsory influence of the government is more evident in firms with high financial transparency and firms with low crash risk. Our empirical findings had policy implications for governments, regulators, and investors.

The impact of mutual funds’ ESG scores on their financial performance during the COVID-19 pandemic. A data envelopment analysis

Purpose The purpose of this study is to evaluate the performance of mutual funds during the COVID-19 pandemic with environmental, social and governance (ESG) criteria. The main research question is whether mutual fund performance differs with respect to the level of the mutual fund’s ESG score. Design/methodology/approach The data set contains global fund data, and mutual fund performance is analyzed using two types of data envelopment analysis (DEA) models: the DEA portfolio index (DPEI) and the range direction measure (RDM) DEA. Propensity score matching and logistic regression are also applied. Findings The results reveal that: nonequity mutual funds present significantly higher performance compared to the performance of equity mutual funds; mutual funds with high ESG scores are associated with significantly higher performance compared to those with low to medium ESG scores; funds with high ESG scores experience higher performance irrespective of their type; and efficiency scores derived from the RDM DEA are significantly higher than those derived from the DPEI model. Research limitations/implications Investors, fund managers and market participants can benefit from the findings of this study and improve their investment decision-making process, including more sustainable funds in their portfolios. Regulators and policymakers should further promote or even require the inclusion of more sustainable investments in the financial products offered by institutional investors. The main limitation of the study is related to data availability regarding the ESG score of mutual funds. Originality/value To the best of the authors’ knowledge, this is the first study that provides robust evidence in support of a positive association between ESG scores and mutual fund performance during the pandemic-induced crisis applying a DEA methodology.

Shari'ah governance quality and environmental, social and governance performance in Islamic banks. A cross-country evidence

PurposeThe paper aims to examine the impact of Shari'ah governance quality on environmental, social and governance (ESG) performance in Islamic banks.Design/methodology/approachThe study's sample consists of 66 Islamic banks from 14 countries over 2015–2019. The research uses the Heckman model, which is a two-stage estimation method to obtain unbiased estimates, as ESG scores are only observable for 17 Islamic banks in Eikon Refinitiv database at the time of the analysis.FindingsThe analysis shows that Shari'ah governance has a beneficial role to achieve ESG performance. The analysis also shows that enhanced profiles of Shari'ah supervisory boards' (SSB) attributes are more efficient than the operational procedures to promote ESG performance. In addition, the analysis shows that enhanced SSBs' attributes strengthen the bank's corporate governance framework, while sound-designed procedures increase the bank's social activities by emphasizing their roles to ensure Shari'ah compliance. Finally, the analysis sheds light on the failure of Shari'ah governance to promote environmental performance.Research limitations/implicationsThe existing databases providing companies' ESG-related information still do not offer sufficient data to conduct an international study with a larger sample of Islamic banks (IBs) having ESG scores for a more extended period.Practical implicationsThe research provides policy insights to Islamic banks' stakeholders to promote social and governance performance in the Islamic finance industry through improving Shari'ah governance practices. However, raising environmental awareness is imminent among all actors implicated in the Shari'ah governance processes to help overcome the anthropogenic risks.Originality/valueThe research complements the governance-banks' ESG performance literature by examining the role of Shari'ah governance. The research also extends the literature on Islamic banks' sustainability by pointing to the Shari'ah governance failure to enhance environmental performance and thus achieve Maqasid al-Shariah regarding the environment.

Does environmental, social and governance (ESG) affect market performance? The moderating role of competitive advantage

PurposeThis research aims to determine the influence of environmental, social and governance (ESG) factors on market performance. The study shows the perspective of ESG on market performance. The study attempted to test the relationship between ESG and Tobin’s Q and the effect of control variables.Design/methodology/approachThe study used panel data from a sample covering 720 firms and ran a fixed-effects model regression during the 2007–2019 period for eight European countries’ listed companies.FindingsThe findings reveal that ESG positively impacts Tobin’s Q. According to the findings, high company ESG performance boosts market performance via the moderator effect of competitive advantage. The results indicate that all control variables are significant. The firm’s leverage has a negative relationship with ESG. The size of the firm impacts ESG positively. Also, the results prove that the firm’s size and industry positively affect Tobin’s Q.Research limitations/implicationsThe findings of this study suggest that managers, practitioners and authorities interested in learning about ESG scores (ESGSs), market performance and competitive advantage might draw intriguing conclusions from the data. Managers can identify the appropriate levels of competitive advantage that improve market performance. Practitioners must determine whether fit, size, growth, leverage and industry could enhance market performance. The findings also give authorities and the board of directors information on future growth opportunities for the company and the country.Originality/valueThe research presents a vision of how ESG factors affect market performance. This study aims to identify the positive link between ESGSs and European market performance.

The impact of corporate social responsibility on the financial performance of renewable energy firms

Tackling environmental pollution and climate change is a global challenge. Therefore, sustainability has become a hugely relevant topic in recent years. In their decision making, investors increasingly consider the non-financial performance of companies such as their social and environmental impact. However, the business research community has not yet reached a consensus regarding the relationship between corporate social responsibility (CSR) and corporate financial performance. This research contributes to the discussion on this relationship. It does so by assessing the impact of the individual dimensions of the environmental, social and governance (ESG) score on the corporate financial performance of renewable energy firms from a quantitative and qualitative perspective. Fuzzy-set qualitative comparative analysis (fsQCA) reveals complex and equifinal configurations that lead companies to record high and low levels of Tobin’s Q. The results for a sample of 96 energy companies from the Eikon database do not provide strong enough evidence to affirm that the individual dimensions of the ESG score have a decisive effect on the corporate financial performance of renewable energy firms.

Is the environmental, social and corporate governance score the missing factor in the Fama-French five-factor model?

Background: Companies are increasingly encouraged to focus on the creation of sustainable value. Financial research institutions evaluate companies’ performance based on pre-established indicators relating to environmental, social and governance (ESG). These scores are intended to inform decisions by equity investors, among others. However, traditional asset pricing models do not include ESG scores.Aim: The purpose of this research is to discover whether the inclusion of ESG scores in the Fama-French five-factor model (FF5F) will improve the model’s predicting power.Setting: Financial research institutions aim to improve the information environment in the South African capital markets. Johannesburg Stock Exchange (JSE)-listed firms are also required to produce integrated reports, emphasising responsible investment.Method: For the largest 40 JSE-listed companies, data over the 5-year period from 2015 to 2019 were employed to compare the predicting power of the FF5F model before and after the inclusion of ESG scores.Results: The results showed that the predictive power of the FF5F model is only marginally improved when the ESG scores are incorporated.Conclusion: These findings indicate that equity returns are not significantly influenced by ESG scores. This research provides the basis for further endeavours on the share-price implications of ESG performance.Contribution: This research contributes to the growing strand of literature on responsible investment and the creation of sustainable value. The research also offers a theoretical contribution by connecting literature on asset pricing with work on sustainability.

Screening activity matters: Evidence from ESG portfolio performance from an emerging market

AbstractSocially Responsible Investments (SRI) have recently generated much interest among asset owners, managers and academicians. Though the Efficient Market Theory suggests that stock prices fully reflect all available information, few existing studies indicate that Environmental, Social and Governance (ESG) portfolios deliver superior risk‐adjusted performance. ESG investing is at a nascent stage in India but is growing rapidly, especially after the COVID‐19 pandemic. Asset managers always face the dilemma of choosing between different screening methods, screening intensities and stock weighting schemes to deliver outperformance. Our study attempts to investigate the impact of these portfolio construction criteria on the risk‐adjusted performance of ESG portfolios in India. Our results show that there exists a trade‐off between superior investment performance and unsystematic risk of ESG portfolios. Investors can benefit from investing in equally‐weighted best‐in‐class portfolios constructed using ESG scores. We highlight the implications of our findings for asset owners, managers, index providers and regulators, and also provide directions for future research in the area of ESG portfolio management.

ESG scores relationship with firm performance: panel data evidence from the European tourism industry

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

Environmental, social, and governance premium in Chinese stock markets

Financial markets have increasingly adopted the concept of ESG (environmental, social, and governance); this paper studies the evolving effect of corporate ESG performance on the stock returns in China's stock markets. Utilizing the Paris Agreement and China's President Xi's pledge to achieve carbon neutrality by 2060 as ESG shocks, we find that firms with lower ESG scores provide higher stock returns after the announcement of the Paris Agreement. Furthermore, the effect of ESG performance heightens after Xi's pledge. Using sorted portfolios and Fama–French factor models, we find that investors are rewarded for bearing ESG-related risks. Our estimated monthly ESG risk premium is between 0.52% and 0.61%, while state-owned firms with larger market capitalizations and better financial and operational performance tend to have better ESG performance.

On the drivers of sustainable development: empirical evidence from developed and emerging markets

ABSTRACT Why do firms’ sustainability disclosure performance differ so much between firms and across countries? Which factors drive firm’s awareness of sustainable development and do these factors have different driving mechanisms between developed and emerging countries? We answer these questions using a panel data regression model on around 1500 companies from 20 developed countries and 20 emerging countries during the period from 2009 to 2019. Our empirical results reveal that both firm-level and country-level variables are important predictors for sustainable disclosure performance. In developed countries, most firm-level indicators show a significant and positive effect on Environmental, Social and Governance (ESG) disclosure scores. In emerging countries, only operating performance, measured by total revenues, and firm size have a positive impact on ESG disclosure, while high level of profitability is associated with low ESG score. On the country level, we find a significant relationship between all drivers and ESG scores in developed countries. However, in emerging markets, only economic, cultural (excepting uncertainty avoidance index) and technological factors are shown to impact significantly sustainable development.

Glasgow climate pact and the global clean energy index constituent stocks

PurposeThis study examined the impact of the Glasgow Climate Pact on the abnormal returns of global clean energy stocks. Further, this study examines which country-specific and firm-specific variables drive the cumulative abnormal returns (CARs) of clean energy stocks.Design/methodology/approachThe authors used the event study method and cross-sectional multivariate regression model. The clean energy stocks in this study are limited to 81 constituent firms of the S&P Global Clean Energy Index across 17 nations. The final sample includes 80 firms and the sample period ranges from January 26, 2021, to December 07, 2021.FindingsThe study finds that the Glasgow Climate Pact negatively affects the stock returns of clean energy firms. Moreover, the climate change performance index (CCPI) positively impacts cumulative abnormal returns (CARs), signifying that clean energy investors react positively to firms in nations with good CCPI scores. The environmental, social and governance (ESG) measure for the shorter window (−1, +1) exhibited a negative relationship with CARs. The firm-specific variables (BTM, stock liquidity, size and past returns) exhibit a negative relationship with CARs in different event windows.Research limitations/implicationsThe authors use the CCPI as a proxy for the stringency of environmental policies in any nation. The authors extend the existing literature by employing firm-specific variables and supporting previous findings. Their findings have policy implications for clean energy investors, policymakers and other market participants.Practical implicationsClimate risks impact the global financial market, so the findings have implications for global regulatory bodies. Currently, there are bankruptcy cases due to climate risks. Because financial markets must play a critical role in shifting the economy toward a green one, regulators can use the cross-sectional drivers of this study to shape policy. It is also critical for regulators to reduce stock price volatility in the event of the implementation of environmental regulations and improve environmental disclosures by publicly traded companies. Furthermore, governments are interested in researching the effects of environmental regulations to protect stakeholders' interests. These regulations significantly impact emerging markets because they lack the same solid institutional frameworks as developed markets.Originality/valueThe authors provide evidence that firms with better ESG scores and larger firm sizes have experienced fewer abnormal returns, as these firms have stable financial and non-financial fundamentals. This timely study on the ongoing regulatory shift in environmental policy will help investors, policymakers, firms and other stakeholders make relevant decisions.

The Impact of ESG Scores on Corporate Performance - A-Share Banks and Securities Firms

Globally, companies are increasingly paying attention to the impact of environmental, social and governance (ESGs) on corporate performance. The objective of the study is to the impact of ESG scores of third-party institutions on the performance of Banks and Securities Firms. Based on the data of A-share banks and securities firms with complete ESG scores from Bloomberg 2011-2021, 19 listed banks and securities firms were selected. A linear regression of their return on assets, E, S, G, and ESG scores, and corporate performance is conducted to analyze which specific factor scores have the most direct impact on the corporate performance of securities firms, and thus help them to better implement ESG strategies. The results of the study revealed that the scores of G factors have the most direct impact on the corporate performance of banks and securities firms, and that securities firms need to improve the scores of G factors faster to achieve higher corporate performance. Therefore, information disclosure, as a part of corporate governance, should also be on the agenda when it is in line with the excess returns of securities firms.

Environmental, Social and Governance (ESG) Report Quality and Firm Value in Southeast Asia

This study examines the impact between the Environmental, Social, and Governance (ESG) score and firm value described by market capitalization from the perspective of legitimacy theory. This study focuses on ESG disclosures from 608 companies in Southeast Asia for 5 years. This study tested three dimensions of the ESG Score (environmental, social, and governance pillar score) that most affect the value of the company. ESG Score is measured from the Thomson Reuters Eikon Refinitiv matrix and analyzed with multiple regression analysis. This research shows that ESG disclosure positively affects firm value. This finding shows that every ESG score increase affects the increase in market capitalization. Furthermore, the social score is the most affected by firm value. This study adds to ESG literature by examining three components of ESG score. Previous research focused on each component of ESG. This research uses three components of ESG and its relationship to firm value to examine which component has a strong effect on market capitalization.

Market capitalisation and environmental, social and governance ratings in the European Union

Purpose: The paper aims to study the relationship between market capitalisation and environmental, social and governance (ESG) ratings of the companies in the European Union (EU).Methodology: The authors analysed a sample of 1,456 companies over five years, from 2016 to 2020. The ESG combined score and market capitalisation of the companies were observed. Spearman’s correlation coefficient was used to determine the relationship between the observed variables. The companies from twenty-one EU Member States have been analysed due to data availability.Results: The results showed that a negative correlation is statistically significant, which confirms the results obtained in previous research. Since the ESG scores are measured on a scale where a higher value means a lower rating, the results can be interpreted as valid, and they show that higher ESG ratings positively correlate with the company’s market capitalisation. Conclusion: According to the analysis results, the correlation between ESG ratings and market capitalisation has improved over the years. In the first two years of the analysis, the correlation was weak, while it became stronger in the last three years of analysis. It is crucial for companies to understand this information since it gives them recommendations for future actions. ESG reporting can improve their market position. Since ESG reporting is still voluntary, companies which incorporate ESG reporting into their business strategy can become market leaders.

Factors of ESG ratings assigned to commercial banks – the cultural and credit risk dimensions

The purpose of the study was to examine the impact of cultural differences and credit ratings on the ESG (Environmental, Social, and Governance) scores assigned to commercial banks. The analysis was performed using ordered logistic regression. The Akaike information criterion (AIC) and the statistical significance of the explanatory variables were used as the method of comparing the models. Count R2 and adjusted count R2 were chosen as the measure of goodness of fit, but a non-diagonal element analysis of the contingency table was also performed. Based on the data of 330 banks from 50 countries the study proved that among all the clusters considered, the region with the highest ESG risk attributable to banks was the Arab countries, whereas regions with the lowest ESG risk were Western European and Nordic countries. Cultural variables found to influence ESG ratings were MAS (masculinity vs. femininity), PDI (power distance index), LTO (long-term orientation vs. short-term orientation), and UAI (uncertainty avoidance). In addition, a relationship between banks’ ESG and credit ratings was observed, i.e. an increase in the average credit rating reduces the chance of classifying a bank as high or medium ESG risk vs. ESG low risk. This is the first study focused on binding the cultural characteristics of a given country with the results of ESG risk assessments of banks registered in this jurisdiction as well as assessing the relation between ESG and credit risks. This kind of clustering with the use of an econometric model allows for capturing the interrelationships of many factors simultaneously with full interpretability of the results. An added advantage was the excellent accuracy of the model, even though the maximisation of the predictive power was not the key aspect of the research.