ESG Scores Research Articles

Empirical evidence of ESG premium in the U.S. corporate bond market: a propensity score matching approach

ABSTRACT This study aims to explore the connection between ESG scores and corporate bond performance, particularly credit spreads, by adopting a propensity score matching (PSM) approach, enabling a balanced comparison between a control group and one exposed to the ESG treatment effect. The results indicate that bonds issued between 2010 and 2020 by MSCI-rated ESG leaders across all industry sectors are priced at an average lower credit spread of 14.3 basis points (bps) relative to laggards, in the primary market. This credit spread difference persists in the secondary market and increases further when bonds of financial issuers are separated from non-financial sectors. In contrast, the impact of ESG disclosure on bond credit spread results is negligible. The willingness of investors to accept a discount on the credit spreads of a bond issued by highly rated companies offers potential incentives for broader adoption of ESG performance assessment.

Are Controversies an Opportunity to Achieve Profitability? The Healthcare Sector Observation

Starting with climate changes, followed by the pandemic period and conflicts between states, companies have been encouraged to align their strategies to ensure business continuity. In addition to these tumultuous periods, sustainability reporting has often remained a relatively voluntary practice in many states. During the pandemic, newspapers highlighted numerous instances of corruption in the healthcare sector, highlighting concerns about how well companies were addressing community needs. This study aims to analyse the impact of controversies on the profitability of the healthcare sector companies and assess the opportunities that arise from reporting them. To investigate this, a sample of 1323 listed healthcare companies was used, and a quantitative analysis was conducted through statistical and econometric methods. Data were gathered from the Refinitiv Eikon Database covering the period 2020-2022 and included sustainability indicators such as ESG Controversies and ESG scores. ROA (Return on Assets) was used as the key profitability indicator. The study’s findings reveal that there are no significant opportunities aligned tied to controversies in the healthcare sector during crisis periods. Contrary, controversies negatively impacted the profitability of listed healthcare companies during crisis periods. The novelty of the study is reflected in the analysis of the ESG controversies indicator associated with the profitability of the healthcare sector during crisis periods.

Environmental regulation, ESG, and firm value: evidence from China

ABSTRACT Companies are facing increasing environmental regulatory risk, but the literature has rarely studied how firms respond to this type of risk. This paper uses China’s Central Environmental Protection Inspection (CEPI) as an exogenous shock and explores the role of ESG engagement in mitigating the environmental regulatory risk. Our main findings are as follows. First, the CEPI reduces the market value of companies by 1.8%, or about $153,000 million. This implies that environmental regulation reduces firm value in the short run. Second, those with higher ESG scores suffer lower value degradation from the CEPI, implying that ESG plays the moderating role. Mechanism analyses suggest that ESG mitigates environmental regulatory risk by placating the government, but not by placating the public. This paper reveals a new role for ESG, i.e. buffering negative shocks from government environmental regulations. Meanwhile, our research provides helpful policy implications for governments and firms in developing countries to achieve sustainable development.

The Impact of TMT Stability on Firms' Sustainable Development: ESG Scores as a Constraint or Catalyst for Chinese Heavy‐Polluting Firms?

The Impact of TMT Stability on Firms' Sustainable Development: ESG Scores as a Constraint or Catalyst for Chinese Heavy‐Polluting Firms?

How components of ESG performance impact corporate risk-taking?

Corporate risk-taking (CRT) is crucial for sustainable business development. The focus of this study is to examine the relationship between components of ESG performance (ESGP) and corporate risk-taking. We conduct an empirical analysis using CSI ESG score data of A-share listed companies on the Shanghai and Shenzhen stock exchanges from 2009 to 2022. The conclusions are as follows: (1) ESGP exerts a facilitating effect on CRT. Specifically, environmental performance inhibit CRT, whereas social responsibility and corporate governance performance enhance CRT. (2) The facilitating effect of ESGP on CRT is more pronounced at lower levels of equity concentration. (3) ESGP enhances CRT by increasing the level of innovation and institutional investor shareholding. The contribution of this study is to help firms change CRT by adjusting the components of ESGP.

Comparative assessment of ESG ratings methodology and results based on XBRL

This study provides a comparative analysis of Environmental, Social, and Governance (ESG) ratings methodologies and explores the potential of eXtensible Business Reporting Language (XBRL) to enhance transparency and comparability in ESG reporting. Evaluating ratings from different agencies, the research identifies significant methodological inconsistencies that lead to conflicting information for investors and stakeholders. Statistical tests and adjusted rating scales confirm substantial divergence in ESG scores, primarily due to differing data categories and indicators used by rating firms. Using a sample of 265 European companies, the study demonstrates that individual ESG agencies report markedly different ratings for the same firms, which can mislead stakeholders. It proposes that XBRL based reporting can mitigate these inconsistencies by providing a standardized framework for data collection and reporting. XBRL enables accurate and efficient data collection, reducing human error and enhancing the transparency of ESG reports. The findings advocate for integrating XBRL in ESG reporting to achieve higher levels of comparability and reliability. The study calls for greater regulatory oversight and the adoption of standardized taxonomies in ESG reporting to ensure consistent and comparable data across sectors and jurisdictions. Despite challenges like the lack of a standardized taxonomy and inconsistent adoption, the research contends that XBRL can significantly improve the reliability of ESG ratings. In conclusion, this study suggests that standardizing ESG data through XBRL could provide a viable solution to the unreliability of current ESG rating scales, supporting sustainable business practices and informed decision making by investors.

Corporate Social Responsibility and Country Governance: An International Comparative Study Amid the COVID-19 Pandemic

This paper assesses the association of ESG scores with stock returns and highlights the moderating role of the COVID-19 pandemic and the country’s governance. The study uses panel data regression models to assess the relationship between ESG factors and stock returns, focusing on the moderating role of country governance and the COVID-19 pandemic. The results reveal that governance quality significantly enhances the positive effects of ESG practices on returns, particularly during times of crisis. These suggest that higher overall ESG scores are related positively to financial performance, and this relation is enhanced during the COVID-19 pandemic. Specifically, the two dimensions of ESG that matter most are environmental and governance. Country-level governance is important because firms in well-governed countries amplify the benefits of high ESG scores. The opposite is true for the higher controversies scores, whose bad financial outcome is magnified during the pandemic. These results present an argument for the resilience of firm financial performance, dependent on strong ESG practices and governance frameworks. This holds great interest for investors and policymakers in associating good ESG considerations with the effective management of financial risks, leading to sustainable returns during periods of widespread economic uncertainty.

Dissecting E, S, and G for risk mitigation: insights from the term structure of CDS

ABSTRACT In this study, we utilize a comprehensive dataset of US-traded credit default swaps (CDS) to assess the impact of environmental, social, and governance (ESG) adoption on firm credit risk. Our study examines corporate bonds with key maturities from 0.5 to 30 years, covering data from 2007 to 2022. We apply fixed effects regression to analyse the impact of ESG scores on CDS spreads. The results are validated through a battery of robustness checks primarily the 2SLS method. The study finds that ESG scores, including the individual pillars, play a significant role in mitigating credit risk. The intriguing aspect of the finding is the decline in risk mitigation as the term-to-maturity increases. Further, the social pillar causes the highest sensitivity to credit risk, followed by the environmental and governance pillars. The effect of ESG adoption is slightly greater for subordinated bonds compared to senior tranches, however, the effects diverge for individual pillars. The study offers practical insights as understanding the relationship between sustainable practices and CDS term structure helps refine investment strategies and specifically pricing of credit risk.

The effect of ESG ratings on corporate green innovation strategies: evidence from China

Environmental, social, and governance (ESG) approaches have gained popularity in academia and are typically linked to corporate green innovation. Although some scholars argue that corporate green innovation is merely greenwashing carried out in reaction to market pressure from ESG ratings, most research conducted thus far has shown that ESG exerts a beneficial influence on increasing corporate green innovation outputs overall. This study's analysis of panel data from Chinese A-share listed enterprises from 2010 to 2019 demonstrates that, while ESG ratings increase the likelihood of incremental green innovation in areas of current knowledge, they diminish the percentage of exploratory green patents. The managerial myopia brought about by ESG ratings is a key mechanism leading to this result. Extensive study indicates that analysts and managers who pay greater attention to environmental issues may be able to alleviate the negative effects of ESG scores on managerial myopia and company’s incremental green innovation practices.

Entrepreneurial finance and sustainability: Do institutional investors impact the ESG performance of SMEs?

Institutional investors improve the environmental, social, and governance (ESG) performance of small- and medium-sized enterprises (SMEs). Our difference-in-differences framework shows that the backing from private equity and venture capital funds leads to an increase in SMEs’ externally validated ESG scores compared to their matched non-investor-backed peers. Consistent with “ESG-as-insurance” theory, the ESG performance of SMEs with a higher probability of failure is more likely to benefit from the backing of institutional investors. This positive effect is heterogeneous; while SMEs with high ex-ante ESG performance further improve their ESG performance following institutional investor backing, SMEs with low ex-ante ESG performance are unlikely to implement any improvements. Entrepreneurial finance seems to help sustainable entrepreneurs transform into “sustainability champions,” while neglecting the betterment of non-sustainable SMEs.

Credit ratings and corporate ESG behavior

This study examines the effect of credit rating concerns on corporate environmental, social, and governance (ESG) behavior. We use the plus or minus test on a large sample of ESG scores and S&P credit ratings of U.S. publicly traded firms from 2003 to 2017. We find that firms with credit rating concerns often increase their ESG activities. This finding holds even after we control for various factors affecting ESG practices. Moreover, firms on the boundary between investment- and speculative-grade ratings significantly improve their ESG performance compared to other cases. Finally, we find evidence that the positive effect of credit rating concerns on ESG activities is pronounced during the global financial crisis and then strengthens further. Overall, our study highlights the impact of credit ratings on corporate ESG behavior. (JEL G24, G32, M14)

Driving green: Financial benefits of carbon emission reduction in companies

This paper explores the relationship between carbon emissions reduction and corporate financial performance, leveraging a rich dataset of 14,866 observations from 2768 companies across 36 countries and regions, and 35 industries over the period 2002–2022. We find that carbon emissions reductions improve company financial performance, as measured by return on assets and return on equity, with this effect being even more pronounced for companies with higher carbon intensity. Additionally, country carbon regulations are positively associated with a company's financial performance, while higher ESG scores negatively impact it. Notably, we find no significant role for CSR reporting in driving financial gains. Overall, our findings suggest that companies can enhance financial performance by intensifying their carbon emission reduction efforts while also contributing to environmental stewardship. We recommend that businesses adopt tailored sustainability strategies that account for country, firm, and industry-specific factors to maximize these benefits across different regional and sectoral contexts.

The Effect of Women’s Role on Board, ESG Performance, and Tax Avoidance

This research examines the impact of board gender diversity on tax avoidance, with ESG performance as an intervening variable. Using 87 non-financial companies listed on the Indonesia Stock Exchange (IDX) with ESG scores from Thomson-Reuters ASSET4 during the 2017-2019 period, the study reveals that board gender diversity significantly influences tax avoidance, indicating that diversity does not improve tax compliance. The male-dominated boards in Indonesia limit the effectiveness of monitoring corporate activities, including tax avoidance. Additionally, gender diversity negatively affects ESG performance, suggesting that the small number of women on boards diminishes efforts to enhance sustainability. ESG performance does not mediate the relationship between gender diversity and tax avoidance, though it can reduce tax avoidance when transparency in ESG reporting is increased. Limitations include a small sample size and data restricted to the 2017-2019. Future studies could explore alternative tax avoidance measures and other corporate governance factors.

ESG Scores’ Impact on Portfolio Performance, An Evidence from Indonesia

This study is to determine the effect of using the Refinitiv ESG score in stock picking and its impact on portfolio performance using the ESG Score. Methodology for this research using a two-sample t-test of Net Asset Value (NAV) price-return portfolios and the Sharpe ratio as a proxy for risk adjustment return for portfolio evaluation. The results of this study indicate that the use of a Refinitiv rating may serve as a suitable metric for stock selection strategy because companies with higher ESG scores tend to exhibit superior performance. Since ESG ratings in Indonesia are still difficult to obtain, those with access to ESG ratings will have more advantages. Greater return performance is followed by an increased level of risk. Given the assumption of a well-diversified portfolio, it is hypothesized that the increased risk can be attributed to a larger variance coefficient. So that the Sharpe ratio must be used for portfolio evaluation to measure risk-adjusted returns.

The non-linear relationship between ESG performance and bank stability in the digital era: new evidence from a regime-switching approach

This study analyzes the effect of environmental, social, and governance (ESG) performance on banking stability in the digital era for a selected group of European banking institutions. Unlike many research, this paper incorporates the digital environment in which the European banking system operates into its investigation to capture the relationship between ESG scores, digitization, and bank stability from 2005 to 2022. This study uses a regime-switching model to investigate the non-linear hypothesis of the relationship, an aspect that has received insufficient attention in previous research. The empirical results confirm the non-linearity between ESG performance and banking stability in the digital era, identifying three ESG performance regimes. Moreover, higher ESG scores are associated with a lower risk of bank failure, aligning with stakeholder theory. Finally, European banks with weak ESG scores fail to avoid the fragility caused by investments in technological infrastructure. Overall, our results suggest that critics and proponents of banks’ commitment to social responsibility are, to some extent, right. Indeed, low or moderate ESG performance (Regimes 1 and 2) aligns with the classical perspective, while high ESG engagement (Regime 3) is consistent with the stakeholder view. Consequently, European banks need to adopt a digital strategy based on improving sustainability to leverage the positive impact of digitization and ESG performance on bank stability. On the policymakers’ side, they need to strengthen the legal infrastructure to support digitization and engagement in social responsibility activities.

Exploring the synergy of corporate gender diversity, sustainability committee, and reporting ESG practices: An international evidence

This study delves into how gender diversity on the corporate board shapes the reporting of Environmental, Social, and Governance (ESG) practices. Besides, it examines the moderating role of a sustainability committee in the nexus between gender diversity and reporting of ESG practices. It analyzes an international sample of the S&P Global 1200 index from 2011 to 2022. The ESG reporting is based on the Refinitiv disclosure index of the firm ESG scores. The study utilizes various statistical models to provide precise empirical evidence, including fixed effects, a two-stage least squares (2SLS), and a generalized method of moments (GMM). The results demonstrate that disclosing ESG practices is a positive function of the percentages of corporate female board members and executive female directors. This suggests that companies with greater gender diversity disseminate more information about their ESG practices. Besides, a corporate sustainability committee strengthens the positive nexus between reporting ESG performance and corporate female board members and executive female directors. This underscores the moderating role of the sustainability committee in simplifying the nexus between gender diversity and reporting ESG practices. The results offer substantial implications for the leverage of gender diversity on ESG reporting. Policy-setters should actively support and promote greater corporate gender diversity, recognizing its pivotal role in fostering transparency. Additionally, a dedicated sustainability committee is crucial in enhancing the reporting of ESG performance and aligning business practices with sustainable development goals.

Bridging ESG and SDGs Clean Air and Water Through CSR Committee: A New Pathway for Sustainability in the Utility Sector

This study aims to bridge Environmental, Social, and Governance (ESG) principles with the Sustainable Development Goals (SDGs), particularly related to clean air and water, through the role of the Corporate Social Responsibility (CSR) committee in the utility sector. As global awareness of climate change rises, utility companies worldwide are adopting ESG strategies to reduce carbon emissions, improve energy efficiency, and manage water resources. This research proposes a new evaluation framework to assess the contribution of utility companies to achieving SDGs focused on air and water quality. Using data from annual reports and Refinitiv LSEG, the study examines the relationship between ESG scores, asset size, debt-to-equity ratio, and the moderating role of CSR committees in achieving SDG goals. Regression analysis results indicate that ESG scores have a significant positive influence on company contributions to achieving SDGs, especially in terms of clean air and water quality. Additionally, the CSR committee acts as an effective moderator in optimizing asset use and managing company debt to meet sustainability goals. This study provides both theoretical and practical contributions to support evidence-based decision-making for more sustainable policies in the utility sector.

Does the Sustainability of the Country Differentiate the ESG of Companies and How It Affects the Relationship between ESG and Firm Value? Evidence from the European Union

Theoretical background: The paper draws on two relevant theories – stakeholder theory and institutional theory. Non-financial information on how the operations of a company impact its surroundings in environmental, social, and governance (ESG) areas is more and more important in terms of firm value and according to stakeholders theory positive relationship between these two is expected. However, although the research on the relationship between company ESG performance (ESGP) and firm value origins since the beginning of the 1970s, the authors document no conclusive results. Above is theorised to be conditioned by the role of institutions as they reflect a rational purpose that guides behaviours of entities toward certain ends. Purpose of the article: Two aims were set in the study. First, to examine the impact of the sustainability level of the European Union (EU) Member States in the years 2012–2021 on ESGP of non-financial sectors stock companies. The second aim of the paper was to assess the country sustainability level as the factor differentiating the nature and the strength of ESGP impact on firm value of non-financial sectors stock companies listed on the regulated financial markets of EU Member States in the years 2012–2021. Research methods: For the purpose of achieving set goals the study utilised two econometric models. Models were estimated using Panel Least Squares (PLS) regression with Fixed Effects (FE). Tobin’s Q proxied firm value, ESG scoring from Refinitiv proxied company ESGP. Global Sustainability Competitiveness Index (GSCI) from Solability was used as the measure of country sustainability. Company financial and ESG data was sourced from Refinitiv EIKON, while country data was accessed from Solability, Eurostat, Human Development Index and Transparency International. Main findings: Countries of both low and high sustainability level impact company ESGP positively. However, almost twice as big influence of highly sustainable countries was noted for low ones. Research results documented ESG to impact firm value positively. An increase in ESG score of a company from the country with low sustainability level decreased its firm value and the opposite was noted in case of companies of countries with high sustainability level. Investors tend to value positively companies with good ESGP and strong nation-level institutions in the field of sustainability and to punish (i.e. with a lower valuation) firms from countries of poor sustainability, even if these entities reached unexceptionally good ESGP.

Textual Attributes of Corporate Sustainability Reports and ESG Ratings

While the textual attributes of corporate financial documents, such as annual reports, have been extensively analyzed in the academic literature, those of corporate sustainability reports, which serve as a critical channel for nonfinancial disclosure, are relatively under-explored. Given the increasing importance of Environmental, Social, and Governance (ESG) factors in corporate strategy and stakeholder evaluation, understanding the role of textual attributes in sustainability reporting is crucial. This study examines 10,021 hand-collected sustainability reports from Chinese firms between 2009 and 2021, focusing on six key textual attributes: length, readability, tone, boilerplate language, redundancy, and completeness. Using computational linguistics, we analyze how these attributes evolve over time and their impact on ESG ratings provided by both international (MSCI, FTSE) and domestic (SNSI) agencies. Our findings reveal that the length and completeness of sustainability reports significantly influence ESG scores across agencies, demonstrating a shared appreciation for detailed and transparent disclosures. However, international and domestic rating agencies exhibit differing responses to attributes like tone, boilerplate language, and redundancy. These differences highlight variations in evaluation standards, methodologies, and value orientations between global and local stakeholders. The results emphasize the need for firms to tailor their sustainability disclosures to meet diverse stakeholder expectations. This study contributes to the growing body of literature on nonfinancial reporting by providing empirical evidence on how specific textual characteristics of sustainability reports can shape ESG evaluations, offering insights for both corporate communicators and policymakers.

Nested Sentiment Analysis for ESG Impact: Leveraging FinBERT to Predict Market Dynamics Based on Eco-Friendly and Non-Eco-Friendly Product Perceptions with Explainable AI

In the current era, the environmental component of ESG is recognized as a major driver due to the pressing challenges posed by climate change, population growth, global warming, and shifting weather patterns. The environment must be considered a critical factor, and as evidenced by existing research, it is regarded as the dominant component within ESG. In this study, the ESG score is derived primarily from the environmental score. The increasing importance of the environmental, social, and governance (ESG) factors in financial markets, along with the growing need for sentiment analysis in sustainability, has necessitated the development of advanced sentiment analysis techniques. A predictive model has been introduced utilizing a nested sentiment analysis framework, which classifies sentiments towards eco-friendly and non-eco-friendly products, as well as positive and negative sentiments, using FinBERT. The model has been optimized with the AdamW optimizer, L2 regularization, and dropout to assess how sentiments related to these product types influence ESG metrics. The “black-box” nature of the model has been addressed through the application of explainable AI (XAI) to enhance its interpretability. The model demonstrated an accuracy of 91.76% in predicting ESG scores and 99% in sentiment classification. The integration of XAI improves the transparency of the model’s predictions, making it a valuable tool for decision-making in making sustainable investments. This research is aligned with the United Nations’ Sustainable Development Goals (SDG 12 and SDG 13), contributing to the promotion of sustainable practices and fostering improved market dynamics.