ESG Ratings Research Articles

ESG rating uncertainty and institutional investment—evidence from China

Using panel data on China's A-share listed enterprises from 2015 to 2022, this study applies a fixed effects model of the year, industry, and region to empirically test the impact of ESG ratings and ESG rating uncertainty on institutional investment. The results of this study find that: (1) ESG ratings significantly and positively affect institutional investment, but the existence of ESG rating uncertainty significantly and negatively affects institutional investment. Meanwhile, ESG rating uncertainty weakens the influence of ESG ratings on institutional investment. (2) Institutional investors are more sensitive to the ESG rating uncertainty of enterprises that are government-related (state-owned and politic connected), executive-right-expanded, loss-making, non-heavy-polluting, non-high-tech, and in the eastern region. Meanwhile, passive institutional investors are more sensitive to the ESG rating uncertainty. (3) The number of institutional investors, government subsidies, and securities market performance are the channels through which ESG rating uncertainty affects institutional investment.

An empirical Study on the Impact of Mid-Sized Enterprises’ ESG Awareness and Rating on Firm Performance

An empirical Study on the Impact of Mid-Sized Enterprises’ ESG Awareness and Rating on Firm Performance

Accounting statements in the investment strategies of retail investors

Subject. The article investigates accounting (financial) statements as a source of information for retail investors, and tools to analyze and evaluate the investment attractiveness of a company as a way to reduce the risk of inefficient investment. Objectives. We focus on identification of the place and role of accounting in investment strategies of retail non-professional investors seeking to improve their financial situation by investing in the shares of Russian and foreign companies. Methods. The study draws on general scientific principles of cognition, including the analysis of statistical information, induction, synthesis, etc. Results. The paper presents the results of a survey of retail non-professional investors with experience in investment activities. The responses of respondents involved in the survey on the basis of an electronic platform are presented in a tabular form. We demonstrated the advantages and disadvantages of using various sources of information. The study revealed the key factors of investment attractiveness that retail investors take into account when choosing optimal investment objects. Conclusions. The most competent investors use the tools of accounting analysis and investment attractiveness assessment to build an effective long-term investment strategy. In addition to accounting statements, investors consider some non-financial parameters, like company reputation, brand awareness, ESG rating, etc.

ESG in the Sustainability Report and the Impact on Investors' Choices: A Literature Review

The main objective of this article is to understand whether there is evidence to prove the relationship between the inclusion of Environmental, Social, and Governance (ESG) in the Sustainability Report and the impact on investors' choices. In this sense, it seeks to demonstrate through the literature review that companies that publish non-financial information through ESG ratings tend to be chosen by investors and that good ESG rating results represent a relevant and decisive factor when choosing an investment.

The impact of ESG ratings on the quality and quantity of green innovation of new energy enterprises

The impact of ESG ratings on the quality and quantity of green innovation of new energy enterprises

The impact of energy use rights trading policy on industrial companies’ green investments –Evidence from a quasi-natural experiment in China

As the world's largest energy consumer, China's energy strategy is of great significance in achieving a low-carbon economy for the world. Among the various pathways towards a low-carbon economy, green investment represents a pivotal element. In contrast to traditional investment, which tends to undervalue externalities, green investment considers both economic and environmental effects. This multifunctional approach necessitates the implementation of effective environmental regulation to stimulate green investment. In 2015, China initiated a pilot energy use rights trading policy, offering a quasi-natural experiment in policy for corporate green investment. This paper examines the impact of China's energy use rights trading policy on increasing green investment by Chinese industrial companies. The aim is to provide a valuable reference for the promotion of increased green investment by industrial companies in China and other major economies. The paper empirically examines the micro-economies under the method of multi-period difference-in-differences, taking 4037 observations of 1166 A-share listed industrial companies in China as the research sample from 2013 to 2021, sourced from the Wind database and hand-collected financial statements. It is found that (1) the energy use rights trading policy can significantly promote Chinese industrial companies to increase green investment. (2) After controlling for companies' relevant financial data and undergoing a series of robustness tests, including the placebo test and the propensity score matching difference-in-difference (PSM-DID) test, our main findings remain significant and robust. (3) The heterogeneity results show that the energy use rights trading policy has a more significant role in promoting the increase of green investment in non-state-owned companies, companies in the central region, and companies in high energy-consuming industries.(4) In terms of mechanism analysis, we demonstrate that energy use rights trading policy can promote an increase in green investments by increasing the environmental responsibility index in companies’ ESG ratings.

Sustainable Innovation and Economic Resilience: Deciphering ESG Ratings’ Role in Lowering Debt Financing Costs

AbstractThis study delves into the intricate dynamics between environmental, social, and governance (ESG) ratings and corporate debt financing costs among China’s A-share listed companies from 2010 to 2021. Analyzing a substantial dataset unveils a tangible link where higher ESG ratings correlate with significantly lower debt financing costs. This relationship manifests more prominently in enterprises with lower pollution levels, state ownership, and those in China’s central and western regions, especially under heightened economic policy uncertainty. The findings elucidate that improved ESG ratings, reflective of robust sustainability practices, diminish corporate agency costs and enhance financial stability, thereby reducing debt financing expenses. This research extends the discourse in the knowledge economy by offering empirical evidence on how ESG integration can serve as a lever for financial efficiency and sustainability in business operations. By spotlighting the financial merits of embracing ESG criteria, the study offers profound insights for policymakers, investors, and corporations, encouraging the acceleration of ESG disclosure and assessment frameworks. In doing so, it supports the cultivation of high-caliber, environmentally friendly enterprises, aligning with the broader objectives of innovation, entrepreneurship, and societal welfare within the knowledge economy paradigm.

Corporate Resilience During the Covid-19 Pandemic: the Role of ESG Performance and Financial Flexibility

Stocks of substantial ESG firms have been claimed to perform better during crisis periods and consequently serve as an "equity vaccine" for investors. This study explores ESG ratings and financial flexibility's impact on stock performance. We test these hypotheses in the ASEAN-5 setting by assessing the relation between ESG and financial flexibility to stock price resilience in terms of time to recover during 2020 and 2021. The method used in this study is a cross-sectional data regression analysis. In a sample of 142 stocks from 5 countries consisting of Indonesia, Malaysia, Thailand, Philippines, and Singapore, we found that firms with higher ESG ratings had a better stock market performance. They tend to recover faster to achieve their lowest price in 2019. We also discovered that having more cash and liquid assets before Covid-19 doesn't make a company better at dealing with the impacts of the pandemic compared to other companies. Keywords: ASEAN-5; corporate resilience; covid-19; ESG; financial flexibility

Pay dispersion and ESG performance

ABSTRACT This article aims to investigate the relationship between pay dispersion and firm’s ESG performance, utilizing the Sino-Securities Index ESG rating data of Chinese A-share listed firms from 2009 to 2021. This article provides new empirical evidence for addressing the controversy between social comparison theory and tournament theory. Empirical analyses show that the vertical pay dispersion has a positive influence on ESG performance, consistent with tournament theory; in contrast, the horizontal pay dispersion negatively affects firm’s ESG, which supports social comparison theory. We further discuss the applicability of social comparison and tournament theory, and introduce managerial myopia to reveal the mediating effect between pay dispersion and ESG performance. The findings of this study help to understand the relationship between pay dispersion and firm’s degree of sustainability.

Who cares about ESG?

We investigate the ESG-related social media and trading activities of a large sample of retail investors. We find that after COP21, investors significantly increased both their ESG-related social media activities and their ESG investments. The increase in portfolios’ ESG ratings correlates with climate change concerns expressed in the media. Overall, posts with ESG content receive more likes, and investors who post about ESG also have portfolios with a higher investment-weighted ESG rating. We do not find evidence of investors’ outperformance or underperformance with an emphasis on stocks with high ESG ratings.

ESG rating divergence, information disclosure, and stock price volatility: evidence from Chinese listed companies

ABSTRACT This study utilizes ESG rating data from nine rating agencies covering Chinese A-share listed companies from 2006 to 2022 to construct a more rational measurement of ESG rating divergence and examines its impact on stock price volatility. The results indicate that excessive ESG divergence worsens stock price volatility, but this linkage between divergence and volatility is mitigated when corporate information disclosure compliance improves.

Is air pollution the original sin of firms? The impact of air pollution on firms' ESG scores

This is the first article to demonstrate the negative impact of air pollution as an informal institution on firms' ESG scores with listed manufacturing firms in China from 2010 to 2020. It is based on causal attribution theory and risk perception theory. We argue that, under the current ESG rating system, air pollution issues may be overly attributed to firms, resulting in decreased ESG scores. We find that when PM2.5 pollution concentration increases by 1 μg/m3, firms' ESG scores decrease by roughly 0.3 points. These results remained significant after a series of robustness tests and instrumental variable regressions. We find that firms in heavily polluting industries are almost twice as affected as those in non-heavily polluting industries. The negative impact on labor-intensive firms is also significantly higher than the impact on capital-intensive firms. State-owned firms and large-scale firms are less affected than private firms or small firms. The results show that information asymmetry is an important influencing mechanism. Firms can reduce the negative influence of air pollution through active information disclosure and external media reports. We note that air pollution can also decrease firms' ESG scores by increasing firm survival risks. Our results enrich the ESG literature and contribute to the understanding of the impact of informal institutions on firms' ESG scores.

Do companies improve their ability to innovate sustainably as a result of ESG ratings?

Promoting the ESG concept is of great significance for the realization of the ‘Carbon Peaking and Carbon Neutrality’ Goals and ESG has gradually become a comprehensive system for evaluating sustainable development. Based on the 2015 ESG ratings of SynTao Green Finance as a quasi-natural experiment and based on the panel data of China's A-share listed companies from 2010 to 2020, this study deeply explores the impact of ESG ratings on the continuous innovation ability of enterprises by constructing a multi-temporal double-difference model and a triple-difference model. The results show that ESG ratings can significantly enhance firms’ continuous innovation ability, a conclusion supported by a series of robustness tests. The positive impact of ESG ratings is more prominent for firms with low market attention, state-owned enterprises, and firms with high digital transformation. The impact mechanism suggests that ESG ratings advance firms’ ability to continuously innovate by increasing employment, improving employee income, and enhancing firm value. It is further found that ESG ratings are more effective in enhancing the continuous innovation ability of heavy polluters and capital – and technology-intensive firms than other firms. The findings of the study help to promote the sustainable development of enterprises and realize the synergy between ESG construction and high-quality development.

ESG and the Cost of Debt: Role of Media Coverage

This study delves into the interplay between the Environmental, Social, and Governance (ESG) ratings and the debt costs incurred by Korean-listed companies, highlighting their pivotal significance in today’s corporate ecosystem. Our primary focus is to explore how the extent of media coverage moderates this relationship, thereby shedding light on the pivotal role that public scrutiny plays in shaping a company’s financial outcomes. Utilizing the Ordinary Least Squares (OLS) regression model, we rigorously control for industry and year effects, as well as firm-specific variations. Additionally, we conduct a series of supplementary analyses and robust tests to further strengthen the credibility of our findings. Our empirical analysis reveals that firms with poor ESG ratings, indicating corporate social irresponsibility, incur higher debt costs in the subsequent period. Notably, this adverse financial impact is significantly alleviated for companies that enjoy higher media coverage. This notable discovery underscores the potential of media scrutiny to reduce the financial burden imposed by inadequate ESG performance. Our results suggest that companies, especially those with limited media attention, should prioritize enhancing their ESG performance to mitigate potential financial implications. Overall, our research contributes to a more nuanced understanding of the intersection between corporate social responsibility, media coverage, and financial performance.

The Impact of Firm Digital Transformation on Environmental, Social, and Governance Performance: Evidence from China

Abstract Growing consciousness about sustainability and the onset of the digital era have affected the corporate environmental, social, and governance (ESG) outcomes to the forefront of new debates. This article attempts to use statistical analysis software such as Stata to explore relevant issues. A-share listed firms in Shanghai and Shenzhen between 2006 and 2022 are examined in this research for the sake of exploring how digitalization in businesses affects ESG ratings. Findings suggest a positive correlation between digital initiatives and ESG metrics improvements. These findings are consistent even after multiple robustness checks. Additionally, this article delves into the mechanisms driving this primary relationship, discovering that digital advances in firms enhance ESG scores by easing financial limitations, diminishing information disparities, and bolstering technological innovation. This article further reveals variable impacts based on firm size and geographical location.

Impact of information technology and industrial development on corporate ESG practices: Evidence from a pilot program in China

In the context of China's rapid digital transformation and emphasis on sustainable development, this study explores the impact of the Pilot Program of the Integration of Informatization and Industrialization (PPII) on corporate environmental, social, and governance (ESG) practices. The research addresses the challenge of understanding how government-led digital initiatives influence sustainable business practices using an exogenous policy shock to mitigate self-selection bias and endogeneity concerns. Employing a stacked difference-in-differences method, the study finds that PPII significantly enhances ESG ratings of manufacturing firms, driven by increased green innovation and improved information quality. The positive effects are more pronounced in state-owned enterprises, large firms, firms with higher institutional ownership, and those located in central cities. This research underscores the synergy between digital transformation and sustainable development, providing empirical support for the efficacy of digital technology–led industrial policies in promoting ESG practices and achieving long-term economic and environmental goals.

Making amends or downplaying? The impact of ESG incidents on boilerplate disclosure of CSR reports in Chinese companies

ABSTRACT This study measures boilerplate disclosure (BD) of Corporate Social Responsibility (CSR) reports published by Chinese companies using natural language processing (NLP) technology, and then investigates the impact of Environmental, Social, and Governance (ESG) incidents on BD of CSR reports. The results indicate that companies experiencing ESG incidents tend to reduce BD to save their reputation. Further analysis shows that more detailed CSR reports are truly helpful for firms to obtain higher ESG ratings.

The Role of ESG Ratings in Shaping Chinese Investors’ Decision-Making Behavior: An Analysis from the Fund Signaling Perspective

In order to promote the healthy development of China’s fund market and alleviate the phenomenon of “funds make money, investors don’t”, this paper explores the impact and economic consequences of fund signals on investors’ decisions in China. An analysis of quarterly Chinese fund data from January 2010 to December 2022 finds that Chinese investors tend to rely on strong signals and flow their money to highly rated or high-yielding funds. Sustainability is an integral part of ESG ratings, which have gradually become a focal point in the international investment market, but the lack of a platform to display ESG ratings in China has prevented investors from effectively utilizing these ratings in their investment decisions. The study also found that individual investors prefer short- and medium-term returns, while both institutional and individual investors chase ratings, with individual investors relying more on these signals. In addition, strong signals are not effective in predicting fund performance returns, while ESG ratings show significant positive predictive effects, validating the irrational preference of Chinese investors to blindly follow strong signals.

Glitter or gold? Deriving structured insights from sustainability reports via large language models

Over the last decade, several regulatory bodies have started requiring the disclosure of non-financial information from publicly listed companies, in light of the investors’ increasing attention to Environmental, Social, and Governance (ESG) issues. Publicly released information on sustainability practices is often disclosed in diverse, unstructured, and multi-modal documentation. This poses a challenge in efficiently gathering and aligning the data into a unified framework to derive insights related to Corporate Social Responsibility (CSR). Thus, using Information Extraction (IE) methods becomes an intuitive choice for delivering insightful and actionable data to stakeholders. In this study, we employ Large Language Models (LLMs), In-Context Learning, and the Retrieval-Augmented Generation (RAG) paradigm to extract structured insights related to ESG aspects from companies’ sustainability reports. We then leverage graph-based representations to conduct statistical analyses concerning the extracted insights. These analyses revealed that ESG criteria cover a wide range of topics, exceeding 500, often beyond those considered in existing categorizations, and are addressed by companies through a variety of initiatives. Moreover, disclosure similarities emerged among companies from the same region or sector, validating ongoing hypotheses in the ESG literature. Lastly, by incorporating additional company attributes into our analyses, we investigated which factors impact the most on companies’ ESG ratings, showing that ESG disclosure affects the obtained ratings more than other financial or company data.

Executive compensation and corporate sustainability: Evidence from ESG ratings

Selecting A-share listed companies in Shanghai and Shenzhen, China, during the period of 2012–2021 as research subjects, this study examines the relationship and operational mechanisms between executive compensation and corporate ESG Ratings. It is found that executive compensation incentives can significantly enhance corporate ESG Ratings. This effect is achieved through promoting green innovation efficiency, enhancing environmental information disclosure, and improving financial performance. However, this positive impact weakens with an increase in management shareholding, but strengthens with a higher proportion of independent directors. When compensation exceeds appropriate levels, overcompensation leads to a decline in ESG Ratings. The significance of this study lies in revealing potential pathways for enhancing corporate sustainability through executive compensation incentives, while also emphasizing the importance of formulating appropriate compensation strategies.