ESG Indicators Research Articles

Environmental risks and sustainable development indicators: determinants of impact

The concept of sustainable development brought new constraints for the old-fashioned business models. At the same time, it created new opportunities for those who have a forward-looking strategy and strive to overcome «the limits to growth», in other words, to ensure a long-term blended value creation with economic and non-economic benefits. There are numerous sets of the sustainable development indicators and indices, but the weights of each particular component are different and need further clarification. Nowadays, the environmental risks in general and climate-related in particular are priced (e.g. environmental taxes) and have a strong impact on the social and economic relations by creating negative and positive externalities for our daily life. For this reason, economic agents are forced to become sustainable to the non-financial risks through switching to the new environmental and social business models. For this reason, better sustainable development indicators are crucial for an improved management of the non-financial risks and sustainable blended value creation. Hence, the aim of this paper is to examine the role of environmental risks in shaping sustainable development conditions on the macrolevel and to elaborate the ways for a better management of the non-financial risks (Environmental, Social and Governance - ESG). For this purpose, the impact of the most important environmental risks on the main economic and social indicators has been examined (e.g. Human Development Index and GDP per capita). Such an approach allowed us to identify the extent to which specific environmental factors influencing social and economic development can reshape the sustainable development conditions. In course of research, two sets of countries have been singled out to verify statistical significance of elaborated models. To achieve this goal, the authors have split an available dataset into two groups: EU and non-EU countries. The reason behind it is the fact that EU countries are among the leaders in the area of sustainable development and have already undertaken related environmental improvements in the last decades. Moreover, the above-mentioned countries are continuing such successful pathways today and with the new European Green Deal could go even far beyond this frontier. The results of current research suggest that existing indicators cannot fully encompass all the aspects of sustainable development and should be revised. Such findings relate both to the composition of the indicators and the weights attributed to each particular component. The application of regression analysis showed that such factors as water and air quality and biodiversity have the strongest explanatory power - 67% of the fluctuations in GDP per capita and 87% in case of HDI. The R -squared is ranging from 0.7 to 0.8 in both cases and confirms consistency of the elaborated models. To verify the results achieved, the similar models have been prepared only for the EU countries. As a result, all independent variables demonstrated the same significant impact on GDP per capita also for the EU countries. However, in this case the R -squared is only 0.27 due to the fact that ESG indicators within the EU area are rather homogenous. The impact of environmental factors on the level of HDI for the EU countries is much stronger comparing to GDP per capita. An overall explanatory power of the model for the EU countries exceeds 0.45 (R -squared). The most influential factor is the quality of water resources. Other important independent variables in the model for the EU member states are biodiversity and air quality. The authors argue that it is necessary to incorporate the above-mentioned environmental factors into the updated version of the Human Development Index as the most appropriate indicators of sustainable development. Consequently, the weights of the components should be recalculated to improve management of the non-financial risks on macrolevel, facilitating the blended value creation process.

Value Creation and Corporate Governance

Shareholder value maximization has been severely criticized in recent years, but it is not clear what, if anything, is to take its place. In this paper, we review three models of corporate value creation – shareholder value, stakeholder value, and company purpose achievement – and their implications for corporate governance. We first discuss shareholder value and how it is implemented through dispersed financial ownership, facilitation of takeovers, stock options and other mechanisms. Secondly, we discuss stakeholder value and its implementation through cooperatives, mutuals, employee representation and ESG indicators. Thirdly, we consider the more recent idea of a company purpose, which calls for responsible long-term ownership, management continuity and financial conservatism. We conclude that the purpose view may be the most promising alternative because it addresses weaknesses in the two other models by providing a clear social objective that is consistent with constrained profit maximization. However, we argue that agency problems and tensions with the broader interests of society are likely to persist regardless of value creation model.

Combining E, S, and G Scores: An Exploration of Alternative Weighting Schemes

How an overall rating is constructed can have a significant impact on its usefulness to investors. In this study, we tested two approaches: equal weighting and backward optimization. Equally weighting E, S, and G pillar scores across sectors showed less financial significance than the stand-alone G pillar score—that is, without E and S scores—over the 13-year study period. Although backward optimization showed greater significance than the stand-alone G scores, this approach may underestimate the importance of ESG indicators to financial results over longer periods of time. These results suggest that investors seeking to combine E, S, and G into an aggregate ESG score should proceed with caution. A naive approach such as equal weighting could introduce noise that decreases financial significance and a backward-optimized approach may ignore the importance of different time frames in how ESG risks unfold. Our findings illustrate the historical value in prospectively adjusting the selection and weighting of ESG Key Issues industry by industry to capture companies’ exposure to dynamic and emerging risks. TOPIC:ESG investing Key Findings • Environmental (E), social (S), and governance (G) scores have shown different relationships with financial characteristics of firms. Historically, governance has provided the strongest significance, social the weakest. • A combination of E, S, and G scores that maximized historical financial significance did not lead to a signal with superior long-term stock-price effect. • The weighting of E, S, and G issues in aggregating a composite score may better reflect the dynamically changing ESG landscape, aiming to capture unfolding, emerging risks.

Does the ESG Index Affect Stock Return? Evidence from the Eurostoxx50

Recent findings provide evidence that companies highly rated in terms of Environmental, Social, and Governance (ESG) score report higher excess returns and lower volatility, this being supported by the assumption that ESG factors are considered, by market agents, as a good proxy for firms’ financial soundness. The aim of this paper is to investigate how ESG components affect stock returns. We use a two-step methodology to analyze the performance of companies included in the Eurostoxx50 index over the 2010–2018 period according to their ESG score. To classify companies in terms of ESG commitments, we combine several ESG indicators (quantitative ratings, scorings and qualitative-opinions) collected on a monthly basis. Our results do not support previous evidence; the Eurostoxx50 companies’ performance does not seem to be affected by their efforts in terms of ESG commitments.

Mind the gap! Machine Learning, ESG Metrics and Sustainable Investment

This work proposes a novel approach for overcoming the current inconsistencies in ESG scores by using Machine Learning (ML) techniques to identify those indicators that better contribute to the construction of efficient portfolios. ML can achieve this result without needing a model-based methodology, typical of the modern portfolio theory approaches. The ESG indicators identified by our approach show a discriminatory power that also holds after accounting for the contribution of the style factors identified by the Fama-French five-factor model and the macroeconomic factors of the BIRR model. The novelty of the paper is threefold: a) the large array of ESG metrics analysed, b) the model-free methodology ensured by ML and c) the disentangling of the contribution of ESG-specific metrics to the portfolio performance from both the traditional style and macroeconomic factors. According to our results, more information content may be extracted from the available raw ESG data for portfolio construction purposes and half of the ESG indicators identified using our approach are environmental. Among the environmental indicators, some refer to companies' exposure and ability to manage climate change risk, namely the transition risk.

ХЕДЖУВАННЯ ЕКОЛОГІЧНИХ РИЗИКІВ ПІДПРИЄМНИЦЬКОЇ ДІЯЛЬНОСТІ: МІЖНАРОДНА ПРАКТИКА

The article discusses hedging tools and insurance of environmental risks used in international practice. It was noted that so-called environmental derivatives are used as financial instruments for hedging environmental risks. Environmental derivatives are financial instruments that can be used by organizations or individuals to reduce the risk of adverse and unforeseen weather conditions or environmental catastrophes (in particular, weather derivatives, carbon credits and greenhouse gases emissions quotas, as well as futures and options for them, exchange trade funds based on ESG indicators, including environmental, social and management strategies). The main types of weather and carbon derivatives, as well as ways to trade them are considered. Thus, weather derivatives are usually based on an index that measures a certain weather aspect: cooling degree days, heating degree days, snowfall, snow depth, wind speed or chill level. Weather options and futures for trading (call) and put (put) are traded on exchanges, and on the over-thecounter markets (OTC) weather derivatives take various forms - from swaps to forward contracts. Carbon financial instruments include such as tradable pollution permits and credits, green trade, carbon derivatives, natural securities, carbon investment funds. The following carbon assets are traded on the EU spot carbon market: EU quotas, EU aviation quotas, certified emission reductionunits, emission reduction units. There are primary and secondary markets for carbon assets, as well as a market for derivatives — futures and options for quotas. Index exchange traded funds (ETFs), which are formed on the basis of ESG indicators (environmental, social and management strategies), are also considered as a tool for hedging environmental risks. Environmental, social and management strategies are increasingly popular in the indexing and ETF industries as investors seek to apply social values to investment portfolios.

The predictive role f country-level ESG indicators

Environmental, social and governance aspects, collectively known as ESG fac-tors, have gained significant importance in finance recently. This paper focuses on uncovering the importance of the predictive power of country-level ESG indica-tors in estimating risk premiums. We use the Worldwide Governance Indicators and the database of global ESG indicators provided by the World Bank, while we apply the neural networks methodology. A constant relationship between ESG factors and risk premiums would result in obvious implications for policymakers, as well as for investors. We seek empirical evidence to leverage ESG considera-tions in investment decisions and policymaking to ensure sustainable economic development.

Corporate sustainability and institutional shareholders: The pressure of social responsible pension funds on environmental firm practices

AbstractThis paper analyses the role of social responsible (SR) pension funds as influential institutional shareholders in the corporate sustainability of investee firms. We study the influence of 197 UK SR pension funds on 1,253 firms with 31 environmental, social, and governance (ESG) indicators from 2002 to 2018. According to the indicator nature, we perform logit and ordinary least square (OLS) estimations with panel error correction models to control causality. Our results show that SR pension funds significantly impact on 41.93% of the ESG indicators studied. We find that larger pension‐fund shareholding positively influences on ESG firm performance and encourages proactive behaviour towards environmental practices. Firms with larger pension‐fund shareholding are more likely to use renewable energies and disclose environmental information, increasing the firm transparency towards stakeholders. This study contributes to understand that, besides stakeholders, institutional shareholders (SR pension funds) demand sustainable development and are able to transfer important values for the society and the environment to corporate governance.

CSR Performance Proxies in Large-Sample Studies: 'Umbrella Advocates', Construct Clarity and the 'Validity Police'

Corporate social responsibility (CSR) performance is multidimensional, and is often considered an “umbrella” construct (Gond & Crane, 2010). This multidimensionality has generated substantive concerns regarding the construct validity and reliability of common empirical proxies of CSR performance (CSRP); thereby attracting the “validity police” (Rowley & Berman, 2000; Gond & Crane, 2010). Although the breadth and depth of CSRP measurement continues to increase, its links to an underlying, agreed-upon theory remains in doubt. Meanwhile, a market for quantitative measurement of CSRP has grown dramatically. The major providers of CSR ratings are: MSCI (ESG STATS, formerly known as KLD); Thomson Reuters (ASSET4); and Sustainalytics (ESG Indicators). Almost all large-scale empirical studies dealing with CSR use only one of the three providers as the source for their CSRP proxies. The purpose of our study is to review the CSRP constructs and proxies employed in studies published in a select set of influential journals and working paper series, and to determine whether the results might be influenced by the selection of CSRP proxies. We situate our analysis within broader academic debates concerning the calibration of construct and proxy convergence and precision, which provides a basis for evaluating the empirical durability of CSRP constructs across proxy specifications. Using a combination of statistical techniques and interviews with professionals involved in the CSR ratings and investment industry, our analyses show the potential for empirical results to be significantly sensitive to proxy selection and provide qualitative evidence that helps explain the need for more precise and thorough construct and proxy development. We assert that this research is critically important because the accounting literature builds on significant results generated by different proxies for CSRP.

Mainstreaming Sustainable Investing

“Mainstreaming Sustainable Investing” is the title, tagline, and guiding principle of the annual Sustainable Investing Seminars run by CFA Society Boston since 2013. In that first year, the idea of “mainstreaming” sustainable investing seemed wildly aspirational to many. Yet by the time the society held its fourth annual seminar in November 2016, aspiration had been surpassed by reality, as the increasing attendance and diversity of the audience reflected the change that was underway in the industry. To put this development into perspective, though, it is necessary to more clearly articulate what is meant by both “mainstreaming” and “sustainable investing.” A simple and widely used definition of sustainability is taken from a 1987 report on sustainable development prepared for the United Nations by the Brundtland Commission: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” This definition will sound familiar to investment professionals involved with endowments and families as the concept of intergenerational equity. The purpose of investing is to apply capital to productive use, addressing opportunities and challenges facing societies and economies, thereby building value over time for the investors supplying that capital. But that value-building economic activity does not take place within a hermetically sealed financial system. Value creation takes place in and depends on environmental, social, and governance systems. It requires the assets and resources those systems provide. Economic activity that is not sustainable degrades those systems, diminishing their future viability and value. Sustainable economic activity maintains or enhances those systems, increasing their future viability and value. The future value of the investment depends heavily on the future state of those systems. The investment profession has a well-developed language and formal system for measuring and assessing the value created (or destroyed) by financial capital. We use these financial factors and indicators in this work. But we do not yet have a similarly robust system for assessing the value created or destroyed by the use or misuse of environmental, social, and governance (ESG) capital. What we do have is an evolving language of ESG issues, factors, and indicators. The core of sustainable investing is incorporating these ESG issues, factors, and indicators into the investment process. Viewed through this lens, considering the ESG impacts on future value contributes to fulfilling our mandate as investment professionals. As Erika Karp, the opening speaker at the first Sustainable Investing Seminar in 2013, observed, “Sustainable investing is just investing.”

The Perceived Usefulness of ESG Indicators by Tunisian Financial Professionals: Exploratory Study for the Construction of a Measurement Scale

The Perceived Usefulness of ESG Indicators by Tunisian Financial Professionals: Exploratory Study for the Construction of a Measurement Scale

ESG as a Performance Factor for Smart Beta Indexes

Although traditional financial factors, such as value, growth, and momentum, have become common practice in the construction of smart beta indexes, the question whether environmental, social, and governance (ESG) data can be used as a performance factor in a similar way is a controversial topic in the asset management community. In this article, the authors develop a methodology to extract an unbiased standalone ESG performance factor from a broad database of ESG indicators and apply this ESG factor in different smart beta type of index methodologies. The results show that this ESG factor can add financial value in portfolios and financial indexes and can be used the same way as or in addition to traditional common performance factors.

An Investigation of Environmental, Social and Governance Measures of Listed Mining Sector Companies in Australia

The aim of this paper is to determine the extent of ESG reporting and to determine the nature and type of ESG indicators used to report ESG disclosures of listed mining sector companies in Australia. The study was conducted with secondary data collected from integrated or sustainability reports of Top 100 Companies in the Diversified Metal and Mining Sector for the year 2013. A pilot study was conducted with 12 companies which were top end of market capitalisation and compared with total of 30 companies. Findings revealed that majority of the companies had a sustainability report and the trend is towards integrated reporting and majority of the companies at the top end of market capitalisation reported on non-financial disclosures. However, the measures used for environmental and social indicators is an issue because the same indicator was measured differently by companies even in the same industry, whereas, indicators used for governance was of regulatory nature and was comparable. This study showed that there is a clear need for uniform measures to report ESG indicator.

DETERMINATION OF ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE INDICATORS: FRAMEWORK IN THE MEASUREMENT OF SUSTAINABLE PERFORMANCE

The article is concerned with determination of environmental, social and corporate governance (ESG) indicators of performance. The objective of carried-out empirical research is to determine ESG indicators as a key framework of the measurement of sustainable performance of a company in its Sustainable Reporting. On the basis of conducted empirical research, applying factor analysis, the environmental, social and corporate governance indicators for companies active in the processing industries CZ-NACE have been specified. The indicators were selected in a series of successive phases by a multi-factor analysis. The results of factor analysis indicated that the factors fall into three measurement categories: environmental (Investments, Emissions, Source Consumption, Waste), social (Society, Human Rights, Labour Practices and Decent Work, Product Responsibility), and corporate governance (Monitoring and Reporting, Corporate Governance Effectiveness, Corporate Governance Structure, Compliance). This article contributes to the effort to solve measurement of performance of the corporate sustainability and proposal to conceptual framework of ESG indicators of performance for the Sustainability Reporting of Czech companies operating in the processing industry.

The Impact of Strategic Relevance and Assurance of Sustainability Indicators on Investors' Decisions

SUMMARY In this study, we report two 2 × 2 between-subjects experiments that investigate the effect of strategic relevance of reported sustainability information and its assurance on nonprofessional investors' investment decisions. The first experiment manipulates strategic relevance of reported environmental, social, and governance (ESG) indicators between “high” and “low” by varying the company strategy (sustainability-based differentiation strategy versus cost leadership strategy unrelated to sustainability). The second experiment manipulates the strategic alignment of the ESG indicators (holding strategy constant). We also manipulate the presence (absence) of assurance in both experiments. Results from both experiments document that investors perceive ESG indicators to be more important, and are more willing to invest in the company if ESG indicators have higher strategic relevance. Experiment one also provides evidence that assurance increases investors' willingness to invest to a greater extent when ESG indicators have high relevance to the company strategy. Our findings suggest that the assurance of ESG indicators has a beneficial signaling role in communicating the importance of this reported information to investors.

Analysis of ESG indicators for measuring enterprise performance

In this article authors focus on the analysis of the whole set of environmental, social and corporate governance (ESG) indicators for the elimination of double or triple effects within the next construction of methods for measuring corporate performance. They build on their previously published results (in Acta univ. agric. et silvic. Mendel. Brun., 2012). The partial actual selected results of a recently undertaken currently project entitled ‘Construction of Methods for Multifactorial Assessment of Company Complex Performance in Selected Sectors’ were used. This project was solved the research teams of the Faculty of Business and Management of Brno University Technology and Faculty of Business and Economics of Mendel University in Brno since 2011. Further theoretical resources in the environmental, social and corporate governance area, known indicator databases (namely Global Reporting Initiative), comparative analysis, resp. syntheses for identifying possible of common indicator properties were identified to classify indicator subsets to preclude double or even triple effect based on mathematical set theory (Venn diagrams). The indicator analysis in constructed multi-factorial methods contributes to precise decision making in management to improve corporate performance.

Modelling of Corporate Governance Performance Indicators

This article is focused on modelling of performance indicators for corporate governance, which are designed to measure the performance of a company along with environmental and social (ESG) indicators. The ESG indicators thus become important performance benchmarks for investors in the European Union and other parts of the world. Performance indicators in the Czech manufacturing industry were researched in Project No. P403/11/2085 Construction of Methods for Multi-Factorial Assessment of Company Complex Performance in Selected Sectors at the Faculty of Business and Management, Brno University of Technology (BUT FBM), funded by Grant Agency of the Czech Republic (GACR). The article intends to propose performance indicators of corporate governance suitable for companies in manufacturing industries per CZ-NACE. These performance indicators of corporate governance are the result of an extensive review and a theoretical assessment of numerous literary sources, various materials of international organizations (such as GRI, UNCTAD, IFAC, IFRS, EFFAS-DVFA, CFA), OECD Principles of Corporate Governance, and EU Green Paper, the essence of which was incorporated into the questionnaires used in the survey. Seventy-nine companies were selected from the compiled data base and personally contacted. These were legal enterprises with more than 250 employees by the EU criteria. Selection of significant indicators proceeded from the inlet database, analysed and verified by cluster analysis. The objective of cluster analysis working with all initial input indicators, obtained by the analysis of available expert sources and empirical research, was the identification of particularities of variables, having any impact on the results of other methods of subsequent research stages. Selection of significant indicators for reviewed industry from the input database was the aim. The purpose was not to substitute identified database, but to establish an alternative file of appropriate variables. The objective of further data processing was the reduction of original broad file of indicators, namely by expert analysis and subsequent decision made by the team of authors, representing the input for subsequent application of multi-dimensional statistical method. The factor analysis yielded four categories of corporate governance measurement areas: 1) Monitoring and Reporting 2) CG Effectiveness 3) CG Structure 4) Compliance.The company itself should select its key Corporate Governance indicators on the basis of their significance and from the point of its strategy. These performance indicators should facilitate the companies to prove the progress towards sustainability objectives and to guarantee their environmental, social and economic impact coverage. The application of key performance indicators in a particular organizational context can be demanding. The understanding of their application and most appropriate implementation into the internal management shall be necessary prior to company’s decision regarding the measures of key performance indicators. DOI: http://dx.doi.org/10.5755/j01.ee.23.5.2865

The Construction of Environmental Indicators for Determination of Performance of Esg Indicators to Support Decision-Making of Investors

This contribution deals with the construction of environmental indicators, serving investors for the assessment of complex performance of companies in accordance with social and corporate governance indicators, the so-called ESG performance indicators. The research project “Construction of Methods for Multifactor Assessment of Company Complex Performance in Selected Sectors”, solved by the team of authors has been introduced. In recent years, investment managers have preferred the importance of ESG indicators showing long-term sustainable performance of those companies in which they have invested their financial resources. The objective of presented contribution is the proposal of environmental indicators, i.e. key ESG performance indicators. Environmental indicators are used not only for decision-making, but also for determination of sustainable value. A number of successive steps have been taken to construct environmental indicators and a combination of various statistical methods has been employed. An empirical analysis of environmental performance indicators for the companies operating in the processing industry according to CZ-NACE has been carried out on the basis of the analysis of sources, suggested by international organisations and voluntary environmental instruments. Environmental performance indicators, facilitating investors to decide on their investment activities and forming the part of key ESG-performance indicators, represent expected results of the empirical research.