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From The Stockholder To The Stakeholder - How Sustainability Can Drive Financial Outperformance

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Abstract

In this enhanced meta-study we categorize more than 190 different sources. Within it, we find a remarkable correlation between diligent sustainability business practices and economic performance. The first part of the report explores this thesis from a strategic management perspective, with remarkable results: 88% of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, which ultimately translates into cashflows. The second part of the report builds on this, where 80% of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance. This report ultimately demonstrates that responsibility and profitability are not incompatible, but in fact wholly complementary. When investors and asset owners replace the question “how much return?” with “how much sustainable return?”, then they have evolved from a stockholder to a stakeholder.

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... Prior studies have investigated the impact of environmental factors on CFP (Goss and Roberts, 2011;Al-Najjar and Anfimiadou, 2012;Clark et al., 2015;Endrikat et al., 2014;Fatemi et al., 2018;Li et al., 2018;Albitar et al., 2020;Chouaibi et al., 2022). They have found that the environmental factor has a significant and positive effect on CFP. ...
... Stakeholders may use relevant ESGDs to evaluate objectively management's engagement with enhancing environmental and governance transparency (Yoon et al., 2018;Albitar et al., 2020;Chouaibi et al., 2022). Moreover, higher environmental and governance disclosures explain managers' incentive to increase the firm's CFP; previous scholars have asserted that higher TQ provides better investment decisions to current and potential investors (Clark et al., 2015;Endrikat et al., 2014;Rossi et al., 2021). Moreover, prior literature considers that the environmental factor is a key element in driving CFP in the long term since stakeholders consider it as a strategy employed by the firm to improve its image and reputation in order to enhance its value in the long term (Albitar et al., 2020). ...
... Models 5 and 9 show that higher environmental disclosures lead to enhanced ROA and ROE, thus leading to H1b and H1c being accepted. The current study findings agree with several prior studies (Al-Najjar and Anfimiadou, 2012;Clark et al., 2015;Endrikat et al., 2014;Fatemi et al., 2018;Li et al., 2018;Albitar et al., 2020;Rossi et al., 2021). Li et al. (2018) argued that firms with higher environmental disclosures are likely to increase their CFP as accounting indicators in order to enhance the CFP to critical values that maximise the profits. ...
The current study investigates the effect of environmental, social, and governance (ESG) factors on corporate financial performance (CFP), and considers an initial sample of all non-financial listed firms in 35 countries for the period 2012–2020. The final balanced sample comprises 7,081 firms, leading to 63,729 firm observations. This study finds that ESG factors play a vital role in enhancing CFP both for market (Tobin’s Q) and accounting (return on assets and return on equity) indicators. This suggests that a firm with higher environmental and governance factors tends to increase its Tobin’s Q in order to satisfy stakeholders’ decision-making needs. The social factor has a negative and significant effect on CFP for market indicators and a negative but not significant effect on CFP for accounting indicators. This suggests that social factor drains the firm’s resources, influence the firm’s reputation, and may lead to competitive disadvantage. This study provides international comprehensive empirical evidence by investigating the impact of ESG’s three factors separately as well as overall ESG disclosures’ effect on CFP.
... Развитием данных концепций стали работы, исследующие взаимосвязи финансовой результативности или CFP (от corporate financial performance) и ESG [13][14][15]. Можно ли ожидать, что более устойчивые компании достигнут роста конкурентоспособности и более высоких финансовых показателей? Либо справедливым является утверждение о том, что инвестиции в устойчивое развитие сокращают величину свободного денежного потока и, следовательно, отрицательно влияют на стоимость бизнеса по крайней мере в краткосрочной перспективе? ...
... В академической литературе вопрос: «Стоит ли быть устойчивым?» является предметом обсуждения на протяжении последних десятилетий. Существует большое количество показателей финансовой эффективности, зависимость которых от ESG-факторов исследуется в работах [14,23]. ...
... Среди наиболее распространенных учетных показателей можно выделить: рентабельность активов, рентабельность собственного капитала. К числу рыночных показателей, наиболее часто выступающих в качестве зависимой переменной, можно отнести: стоимость заемного и собственного капитала, коэффициенты Тобина и Шарпа [14,23]. При этом некоторые ученые утверждают, что выбор ESG-метрики может предопределить результат оценки взаимосвязи ESG-CFP [5]. ...
Article
The subject of the research is the assessment of Investment decision-making efficiency considering the sustainable development requirements. The article aims to identify the relationship between environmental, social and governance (ESG) performance and market returns for investors and the reasons for it. The relevance of the paper is determined by the need to develop research in the field of ESG integration and evaluation of the portfolio investment effectiveness in the context of responsible investment practices popularity. Scientific novelty : the study develops the theory of ESG integration and allows the authors to conclude that ESG commitment is a driver of market profitability for investors. The authors apply methods such as theoretical analysis of scientific publications (analysis, synthesis, generalisation) and quantitative methods, including statistical data analysis, regression analysis, financial modelling. The research base is scientific works of domestic and foreign authors, analytical reports of rating agencies, ESG funds, historical stock market data on companies analysed in the course of this study. All the information used in this study is publicly available or provided by the Bloomberg database. In the course of the study, authors form model portfolios of ESG-oriented and ESG-neutral companies shares and perform a comparative analysis of their fundamental indicators and financial returns. The authors conclude that the portfolio of ESG-oriented companies demonstrates profitability no lower than the portfolio of ESG-neutral companies, considering the risks. At the same time, the values of the fundamental indicators of ESG-oriented companies are inferior to the values of ESG-neutral companies. The relationship between the degree of a company’s ESG compliance and its investment attractiveness is due, among other things, to non-financial value drivers. The authors recommend integrating ESG into the analysis of investment portfolios, significant for the development of investment strategies.
... − assessment of the impact that social and environmental disclosures has on financial performance [1,2], − the dependence of the company's actions in the field of social responsibility and its financial performance [3,5], − the significance of certain aspects of sustainable development for companies of different sectors [4,6], − the degree of satisfaction of the parties involved, investors in the first place, in the disclosure of social information [2,3], − the development of non-financial reporting standards [3,4,7] in the interests of the parties involved and with reference to new challenges, COVID-19 pandemic being the first of them, and others. ...
... − assessment of the impact that social and environmental disclosures has on financial performance [1,2], − the dependence of the company's actions in the field of social responsibility and its financial performance [3,5], − the significance of certain aspects of sustainable development for companies of different sectors [4,6], − the degree of satisfaction of the parties involved, investors in the first place, in the disclosure of social information [2,3], − the development of non-financial reporting standards [3,4,7] in the interests of the parties involved and with reference to new challenges, COVID-19 pandemic being the first of them, and others. ...
... − assessment of the impact that social and environmental disclosures has on financial performance [1,2], − the dependence of the company's actions in the field of social responsibility and its financial performance [3,5], − the significance of certain aspects of sustainable development for companies of different sectors [4,6], − the degree of satisfaction of the parties involved, investors in the first place, in the disclosure of social information [2,3], − the development of non-financial reporting standards [3,4,7] in the interests of the parties involved and with reference to new challenges, COVID-19 pandemic being the first of them, and others. ...
Article
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The article examines issues relating to disclosures of social aspects in companies’ reports. The conducted study has analyzed financial and corporate reports (integrated, on social responsibility, on sustainable development) of leading Russian metallurgical companies, which consider social impacts as the most significant. The practical part of the research is based on analysis of 42 financial and 37 non-financial reports (including 23 SDR, 12 IR and 2 CSR) of Russian metallurgical companies over 2017-2019 period. In addition, we analyzed the interim financial statements of these companies for 2020. The study of social disclosures was structured into two types of reporting - financial and non-financial. Based on conducted statistical and qualitative analyses, the study offers recommendations on improving logical alignment and quality of disclosures on the social-related aspects. Suggested recommendations aim on increasing validity of investment decisions and making financial market more transparent.
... Предметом наиболее активных дискуссий в исследуемой области являются: оценка влияний раскрытий данных социального и экологического характера на финансовые показатели деятельности -в работе B. Cheng, I. Ioannou, G. Serafeim [1], характер зависимости действий компании в области социальной ответственности и ее финансовой эффективности -у M. Barnett, R. Salomon [2], значимость отдельных аспектов устойчивого развития для компаний различных отраслей, степень удовлетворения заинтересованных сторон, прежде всего, инвесторов, в раскрытии информации социального характера -в [3][4][5], с учетом новых вызовов -прежде всего, пандемии COVID-19, и других. Обсуждения в академической литературе последних десятилетий связаны с оценкой взаимосвязи социальной ответственности бизнеса и его финансовой эффективности. ...
... Обсуждения в академической литературе последних десятилетий связаны с оценкой взаимосвязи социальной ответственности бизнеса и его финансовой эффективности. Большая часть проанализированных исследований свидетельствует о положительном характере этой взаимосвязи независимо от используемых финансовых критериев [3,4]. Во многих работах утверждается, что корпоративная социальная ответственность (КСО) положительно влияет на финансовые результаты за счет удовлетворения целей заинтересованных сторон. ...
... Во многих работах утверждается, что корпоративная социальная ответственность (КСО) положительно влияет на финансовые результаты за счет удовлетворения целей заинтересованных сторон. В [1,3,4] содержится вывод, что связь социальной и финансовой эффективности является нелинейной, поскольку положительное влияние КСО является долгосрочным, а соответствующие затраты на поддержание и развитие человеческого и социального капиталов немедленными. Исследование концептуальных вопросов определения социального капитала в современном обществе, его границ и влияния на современные экономические явления представлено в работе H. Bhandari и K. Yasunobu [6]. ...
Article
The article analyzes the social responsibility of business and the quality of its reflection in corporate reporting. The purpose of the study is to develop methodological solutions for conducting an up-to-date study of the social responsibility of Russian large businesses, based on the information contained in their financial and non-financial statements. The study uses the methods of abduction, meaningful analysis of the current state of the social sphere; logical analysis of research made by scientists and interested organizations in the field of social sphere and business social responsibility, which were assessed on the basis of the social reporting study; logical content analysis of financial and non-financial reporting standards in terms of requirements for disclosure of social aspects; expert analysis of social reporting of Russian companies in various industries, linguistic analysis to analyze the use of certain terms and concepts in financial and non-financial reporting of companies. The information base of the study includes the International Financial Reporting Standards, Sustainable Development Reporting Standards, Basic Performance Indicators of the Russian Union of Industrialists and Entrepreneurs (RSPP); financial and non-financial reporting of companies in the material production industries. As a result of the study, the methodological solutions for the analysis and assessment of the Russian economic entities` social responsibility were substantiated and proposed. On the basis of the analysis of trends in the social sphere along with the identified opportunities and threats for its further development caused by the evolution of digitalization, economy and ecology, a block of the most important problems was formed. Participation in the solution of such problems characterizes the social responsibility of business. The paper proposes certain stages of researching the social responsibility of business. With this article, the authors open a series of publications that will comprehensively and systematically study the problems of accounting, analysis and assessment of the economic entities` social responsibility in a rapidly changing environment and emerging new challenges for society and business, including the development of a research methodology, assessment of the composition, completeness and quality of the information base, taking into account industry-specific features of the studied objects, and analytical methods and procedures.
... Based on 2000 previous studies, Friede et al. (2015) documents that there is evidence that ESG investing has a positive impact on financial performance. Clark et al. (2015) analyses 200 previous studies and report that 88% of them conclude that ESG practices affect stock prices positively. On the other hand Revelli and Viviani (2015) report, based on 85 studies and 190 experiments, that socially responsible investments do not yield better financial performance than conventional investments. ...
... To prevent this, the governments should consider intervening.4 For meta-analyses please seeFriede et al. (2015),Clark et al. (2015),Revelli and Viviani (2015)) ...
Article
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There are diverging results in the literature on whether engaging in ESG related activities increases or decreases the financial and systemic risks of firms. In this study, we explore whether maintaining higher ESG ratings reduces the systemic risks of firms in a stock market context. For this purpose we analyse the systemic risk indicators of the constituent stocks of S&P Europe 350 for the period of January 2016–September 2020, which also partly covers the COVID-19 period. We apply a VAR-MGARCH model to extract the volatilities and correlations of the return shocks of these stocks. Then, we obtain the systemic risk indicators by applying a principle components approach to the estimated volatilities and correlations. Our focus is on the impact of ESG ratings on systemic risk indicators, while we consider network centralities, volatilities and financial performance ratios as control variables. We use fixed effects and OLS methods for our regressions. Our results indicate that (1) the volatility of a stock’s returns and its centrality measures in the stock network are the main sources contributing to the systemic risk measure, (2) firms with higher ESG ratings face up to 7.3% less systemic risk contribution and exposure compared to firms with lower ESG ratings and (3) COVID-19 augmented the partial effects of volatility, centrality measures and some financial performance ratios. When considering only the COVID-19 period, we find that social and governance factors have statistically significant impacts on systemic risk.
... This paper aims to investigate whether the environmental, social and corporate governance (ESG) score of companies operating in the energy sector is associated with their corporate financial performance (CFP). There are continuous academic efforts to identify the impact of ESG on CFP, since these are efforts to legitimize its social engagement and prove that business can do well by doing good [76]. Although a causal conclusion remains complex, past academic literature has argued for either a positive or neutral correlation between ESG quality represented by a business and its CFP [76][77][78]. ...
... There are continuous academic efforts to identify the impact of ESG on CFP, since these are efforts to legitimize its social engagement and prove that business can do well by doing good [76]. Although a causal conclusion remains complex, past academic literature has argued for either a positive or neutral correlation between ESG quality represented by a business and its CFP [76][77][78]. ...
Article
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This paper aims to investigate whether the environmental, social and corporate governance (ESG) score of companies operating in the energy sector is associated with their corporate financial performance (CFP). The research covered data from eight companies with a dominant position in the Polish energy sector. The research used the comparative analysis between ESG performance and accounting-based measures of profitability: return on equity (ROE), return on assets (ROA) and return on sales (ROS). Additionally, reference was also made to the DuPont model. The acquired results do not reveal repetitive dependencies that would facilitate the discovery of a pattern of the impact of the factors of ESG on the financial performance of enterprises. Despite indicating the cases of correlations between the ESG scores and CFP at a high level, indeed sometimes at a very high level, the particular case studies significantly differ from each other. This may be caused by the fact that Polish enterprises from the energy sector illustrate far-reaching specifics, among others, with regard to the key significance of the entities with a prevalent state ownership and strict administrative regulations, which are subject to the energy market, state of development and structure of the whole sector in Poland. Thus, this is also why the mechanisms or dependencies, whose existence it is possible to expect in conditions of free competition, may be weakened or even eliminated in Polish conditions.
... Hence, the current examination endeavors to give reasonable bits of knowledge in such manner by looking at the impact of ESG on CFP. Thirdly, one of most important study on ESG conducted by Clark et al., (2015) in context of developing country was theoretical in nature. Hence, the current analysis also fills this gap through an empirical exploration of Indian firms. ...
... Hence, the current examination endeavors to give reasonable bits of knowledge in this domain. Further, one of most important study on ESG conducted by Clark et al., (2015) in context of developing country was theoretical in nature. Hence, the current analysis also fills this gap through an empirical exploration of Indian firms. ...
Article
We tried to explore the connection between ESG disclosures and CFP in the Indian context. For this purpose, the CFP is measured by ROCE and ROA. The ESG overall disclosure and factor scores are obtained from Bloomberg Terminals. The final dataset includes 77 companies for the sample period of 2015-2019. Eight different OLS multivariate regression analyses are performed. The first two is for overall ESG disclosure score, and then six different regressions are for each of E, S, and G factors with control variables such as company size, leverage, BTMV, age, growth, ownership and industry. The findings of this examination confirmed our hypothesis that better ESG disclosures practices positively and significantly affect CFP. Regression results found that there is a positive relationship between the ESG disclosure scores and CFP as well as the individual ESG factor scores except for social disclosures. The better ESG disclosures help the companies to improve their CFP and create a good image, credibility, and promote corporate ethical practices. Moreover, in all eight regression models organizations' leverage and growth was found statistically positively and significantly linkage with CFP. However, this paper did not find any evidence to support that sample firms’ size, BTMV, age, industry, and ownership affect CFP. This study provides managers and other stakeholders with important implications of corporate sustainability in the best interests of the long-term survival of an enterprise.
... Although other industries are reacting to sustainability as a result of external stakeholder pressure, banks are becoming more proactive in their sustainability efforts (Clark, et al., 2015). In the same 3 context, banks are critical to achieving the Sustainable Development Goals (SDGs) because of their intermediary position and the subsequent impact on other sectors (Zimmermann, 2019). ...
... Operating sociology tends to have a positive relationship with operation, profitability, and funding (Clark et al., 2015). However, it has a negative relationship with loan quality and liquidity and of banks. ...
Article
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In the last decades, sustainability has piqued the interest of corporations, academics, and the media. This study looks into how banks and their contributions to financial system risk are affected by sustainability. Banks are vital for economic development and play an important role in society. Because banks are just intermediaries in the financial market it is impossible to directly measure their sustainability (Stauropoulou & Sardianou, 2019). Therefore, to ascertain the impact of sustainability on the banks, the study focuses on banks' environmental and social performance, particularly their policies and performance. Different scholars overtime has attempted to show a link between bank performance and sustainability by showing that bank sustainability can affect the financial system. This implies that banks and their regulators should be concerned about sustainability.
... The bulk of the evidence according to which sustainable factors have a positive influence on the corporate financial performance (Clark et al. 2015, Friede et al. 2015, and particularly the greater consideration of climate risks, has prompted investors to integrate ESG information into their investment decisions. In their broadest sense, sustainable and responsible investment strategies are long-term investment methods that integrate ESG factors into the research, analysis and selection of securities and into the financial management of portfolios. ...
... 'The Bank of Italy values sustainability in its financial investments', Bank of Italy website.43 Friede et al (2015).Clark et al. (2015). ...
Article
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In the last few years, the climate changes under way and the transition towards a sustainable economic development model have become of great importance for the financial system, involving central banks as well. The latter, whose interest is demonstrated by the work of the Network for Greening the Financial System (NFGS), are taking on the challenges posed by these events as part of their institutional and investment activities. By means of internal study projects and by taking part in the most important round tables at national and international level, the Bank of Italy is helping to analyse the risks that climate change creates for the economic and financial system. In addition, and in line with the recent developments in sustainable finance, it has also integrated sustainability criteria into its investment decisions. This paper aims to give an account of the evidence collected so far on the risks and opportunities linked to climate change and sustainable finance, highlighting what has already been done and what else can be done to put these issues on the agenda of central banks.
... While extant literature has documented that shareholders' return is positively related with firms' CSR performance (e.g., Clark et al. 2015;Edmans 2011;El Ghoul et al. 2011;Friede et al. 2015;Kempf and Osthoff 2007), we argue that bondholders have different interests with respect to firms' CSR performance than the shareholders. Literature has shown that firms' CSR performance reduces firms' risk and risk taking (Albuquerque et al. 2019;Godfrey et al. 2009;Harjoto and Laksmana 2018;Oikonomou et al. 2014;Vishwanathan et al. 2020), specifically firms' default risk (Bae et al. 2018;Hsu and Chen 2021;Jiraporn et al. 2014;Sun and Cui 2014;Xu et al. 2020). ...
... 4 Hence, there is no doubt that fixed income investors, i.e., bondholders, represent more crucial capital providers for corporations than shareholders. Yet, most research studies focus on the relationship between firms' CSR performance and equity returns from the shareholders' perspective (Clark et al. 2015;Edmans 2011;El Ghoul et al. 2011;Friede et al. 2015;Kempf and Osthoff 2007;Harjoto et al. 2019). ...
Article
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This study examines the relationship between firms’ corporate social responsibility (CSR) or environmental, social and governance performance and bondholders’ returns. We argue that bondholders are fixed claimants who only value firms’ CSR performance in relation to firms’ risks. We hypothesize that firms with CSR concerns or controversies tend to increase firms’ default risk which would adversely affect bondholders’ returns. We also argue that CSR investments (CSR strengths) increase the opportunity for residual claimants (i.e., shareholders) to shift the investment risk to the bondholders. Hence, CSR strengths represent higher asset substitution risk or risk-shifting. We argue that bondholders’ returns and the stakeholders’ interests are aligned when firms have CSR concerns or controversies but their interests are not aligned for CSR strengths since CSR strengths increase asset substitution risk for the bondholders. The alignment and misalignment between bondholders and stakeholders’ interests are moderated by bond maturities and are affected by a negative shock in the credit market. Analysing a sample of 5240 bonds in a portfolio setting from 425 U.S. companies during the pre-green bond era (2001–2014), we find evidence to support our hypotheses.
... The bulk of the evidence according to which sustainable factors have a positive influence on the corporate financial performance (Clark et al. 2015, Friede et al. 2015, and particularly the greater consideration of climate risks, has prompted investors to integrate ESG information into their investment decisions. In their broadest sense, sustainable and responsible investment strategies are long-term investment methods that integrate ESG factors into the research, analysis and selection of securities and into the financial management of portfolios. ...
... 'The Bank of Italy values sustainability in its financial investments', Bank of Italy website.43 Friede et al (2015).Clark et al. (2015). ...
Article
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Il lavoro traccia un quadro delle maggiori implicazioni economiche dei cambiamenti climatici dal punto di vista di una Banca centrale. Si descrivono i principali rischi per l'economia e il sistema finanziario italiano, considerando sia quelli relativi agli eventi naturali ad esso connessi, sia quelli generati dal processo di decarbonizzazione. Inoltre, si evidenziano le prospettive di mercato della finanza sostenibile e i rischi e le opportunità che essa comporta. In base alle stime disponibili, soggette a limiti in termini di dati e metodologie, gli effetti dei cambiamenti climatici sull'economia italiana sembrano essere nel complesso relativamente limitati e concentrati in alcuni comparti. I rischi per il sistema finanziario vanno monitorati con attenzione, a causa dell'elevata esposizione e della possibilità che le interconnessioni tra economia reale e sistema finanziario ne amplifichino gli effetti. I rischi climatici andrebbero quindi integrati negli strumenti e nelle attività delle banche centrali.
... This meta-analysis suggests that managers are taking ESG issues seriously and ESG-related corporate actions are being given greater scrutiny by institutional investors, regulators, and consumers. Clark et al. (2015) conclude that sustainability and profitability are: 'not incompatible, but in fact wholly complementary. When investors and asset owners replace the question "how much return?" ...
Chapter
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CHAPTER TITLE: UNDERSTANDING ESG RATINGS AND ESG INDEXES Every investment needs a benchmark. For environmental, social and governance (ESG) investment, this need seems to be particularly large given the proliferation of ESG ratings and ESG indexes in recent years. In view of the exponential growth in ESG investing and the strategic role of ESG ratings and ESG indexes, this chapter provides the general reader with a basic understanding of the current state of ESG ratings and ESG indexes and their role in the investment and business value chain. Specifically, the chapter surveys the major ESG ratings providers that have emerged through the series of consolidations in the past two decades, discusses the prevailing practices in ESG ratings methodologies and their strengths and idiosyncrasies, identifies the limitations of the present ESG ratings and indexes, and highlights the challenges as well as the opportunities for the role of ESG ratings and indexes in sustainable and impactful investing. The chapter also assesses the effect of ESG ratings and indexes, and more broadly the ESG movement, on investors, corporations, and corporate managers.
... The growing relevance of sustainability suggests that managerial decisions that improve corporate environmental footprint and risks might be priced by investors, thus reducing the cost of capital for global companies (Gianfrate et al.). Clark, Feiner, and Viehs (2015) show that corporate sustainability standards can be a crucial factor in lowering the cost of capital, which comprises the cost of debt (i.e., credit score/risk) and the cost of equity. ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. ...
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Capital consists of assets used to produce goods and services. Whereas financial capital-i.e., monetary equity conferred by the shareholders in a business entity-has traditionally been a scarce and expensive resource, other complementary forms of equity have progressively emerged. Book versus market value of equity/capital is formed by (in)tangible capital and/or (non) monetary equity.
... Beyond the fact that conducing an environmental focus on investment decision have a positive impact for the planet, it enables to control costs, reduce damaging incidents and favor the economic transition. In the introduction of the study realized by Clark, Feiner and Viehs (2015) based on a meta-analysis of 190 studies, they stated that "sustainability is one of the most significant trends in financial markets for decades. Whether in the form of investors' desire for sustainable responsible investing (SRI), or corporate management's focus on corporate social responsibility (CSR), the content, focusing on sustainability and ESG (environmental, social and governance) issues, is the same.". ...
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This report studies the social issue of ESG analysis and the multi-faceted approaches of measuring and assessing the social dimension. After reviewing the huge array of literature on social inequalities, our analysis focuses on the main "social pillars", which include economic, health, gender and education aspects as the predictors of structural inequality. Moreover, we compare the social risk with the environmental risk to emphasize their relative interconnectedness. An important challenge concerns the measurement puzzle of the social pillars, since there are many conceptual and empirical metrics to measure the social risk at country and corporate levels. Nevertheless, we observe an existing gap between the two fields of analysis, implying that some coherency differences may exist between macroeconomic and micro-economic approaches of social welfare analysis. Finally, the last section of this report is dedicated to the quantitative analysis of the impact of social inequalities on government bond yield spread. In particular , we test four social variables: (1) Gini index of income inequality, (2) universal health coverage, (3) women's economic participation and opportunity, and (4) access to primary education. Using a panel regression model, we found a statistically significant relationship between the Gini index and the cost of borrowing of OECD members between 2015 and 2018. The relationship is no more significant once sovereign credit ratings are included in the regression though, suggesting that credit rating agencies are indirectly integrating income inequalities in the computation of credit ratings. From this result, we split the analysis between the investment grade (IG) category and the high yield (HY) category. We finally confirm the relationship between the two variables for the IG sovereign bond category while we cannot conclude on the relationship regarding the HY category. Overall, the social variables related to the health, gender and education aspect of the S pillar are not integrated in sovereign ESG, either in the pricing of the sovereign bonds or in the monitoring of the sovereign risk.
... Ultimately, empirical evidence does not support these collective barriers characterizing sustainable investments as inferior. Studies analyzing financial performance across a large sample of ESG approaches show that making investment decisions using ESG factors does not hurt investment performance across the sample, and, in some cases, it enhances risk-adjusted returns (Friede et al., 2015;Morgan Stanley, 2015a;Morgan Stanley, 2015b;Clark et al., 2015;Khan, et al., 2016). ...
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This publication serves as a roadmap for exploring and managing climate risk in the U.S. financial system. It is the first major climate publication by a U.S. financial regulator. The central message is that U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks. Achieving this goal calls for strengthening regulators’ capabilities, expertise, and data and tools to better monitor, analyze, and quantify climate risks. It calls for working closely with the private sector to ensure that financial institutions and market participants do the same. And it calls for policy and regulatory choices that are flexible, open-ended, and adaptable to new information about climate change and its risks, based on close and iterative dialogue with the private sector. At the same time, the financial community should not simply be reactive—it should provide solutions. Regulators should recognize that the financial system can itself be a catalyst for investments that accelerate economic resilience and the transition to a net-zero emissions economy. Financial innovations, in the form of new financial products, services, and technologies, can help the U.S. economy better manage climate risk and help channel more capital into technologies essential for the transition. Cite as: U.S. Commodity Futures Trading Commission. (2020). Managing Climate Risk in the U.S. Financial System. In Managing Climate Risk in the U.S. Financial System. U.S. Commodity Futures Trading Commission. https://doi.org/10.5281/zenodo.5247742
... For example, Hsu, Li, and Tsou (2020) document a pollution premium and Bolton and Kacperczyk (2021) find a carbon premium. 13 Note two meta studies, Clark, Feiner, and Viehs (2014) and Friede, Busch, and Bassen (2015), examine the literature and conclude that there is overwhelming evidence that ESG scores have a positive relationship with operational and financial firm performance, but that the relationship with stock returns is less clear cut. ...
... Moreover, it can be important for managing organizational ethics, although ethics beyond compliance is not always perceived as a key strategic concern. Companies now realize that making ethics pervasive within the organization [4] can improve reputation and social legitimacy, and in turn contribute to company growth and profit [5]. We argue that scenarios as a multilevel qualitative analysis can benefit ethical culture evaluation. ...
Article
Scenario planning has presented itself as a useful tool for organizations to cope with high levels of contextual uncertainty, either to support decision-making, reframe strategy, or to improve stakeholder relationships. Limited attention has been given to how scenario planning may be used in practice to assess an organization’s ethical system. Four industrial cases serve as practical examples of the scenario planning development across three different phases—orientation and exploration; building; and validation and implementation. This article provides lessons derived from the industrial cases for companies and practitioners to visualize scenario planning as a useful complementary tool for ethical culture assessment. We rely on complexity science and systems thinking for scenario planning to support the analysis of an organization’s ethical system.
... Quite intriguingly, the studies included in the two meta-analytic studies (Friede et al., 2015;Orlitzky et al., 2003) generally overlook the governance pillar of ESG. Among these two studies, there is no empirical study that focuses on governance, whereas there are only two votecount studies that focus on governance (Gillan & Starks, 2007;Love, 2011), and two studies focus on all three pillars of ESG (Clark et al., 2015;Kleine et al., 2013). Nevertheless, these studies report a generally positive governance-CFP relationship, and a nominal percentage report a negative governance-CFP relationship. ...
Article
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Increasing interest in sustainability performance (environmental, social, and governance pillar performance [ESGP]) and corporate financial performance (CFP) is noteworthy. However, we do not find any all-inclusive study that employs both individual components of environmental, social, and governance pillars (ESG) as well as the cumulative ESG score on both the accounting and market performance of firms. Furthermore, we do not find any study that puts forth “best practices” in the ESGP-CFP nexus. Therefore, our study intends to provide additional empirical evidence in this debate by including all three pillars of ESG as well as the overall ESG score by employing a unique sample of “100 best corporate citizens” in the United States declared by 3BL Media during 2009 to 2018. For this purpose, we employ panel vector auto regression (PVAR) that allows us to overcome the methodological challenges faced by some earlier empirical studies. The core findings are: (a) for market-based financial performance (market-to-book ratio [MTB] and Tobin’s Q), our results only confirm ESGP–CFP relationship and suggest that sustained higher commitment to the environmental pillar, consistent socially responsible conduct, and rationalized governance mechanism of the sampled firms are perceived value additive by the market players. (b) For accounting-based financial performance (return on equity [ROE] and return on assets [ROA]), we find a mix of ESGP–CFP and CFP–ESGP relationship for ROE only. Furthermore, factor error variance decomposition (FEVD) analysis reveals that environmental, social, and overall ESG performances of the sampled firms are quite good predictors of future CFP in the market. These findings assert that actively pursuing ESG endeavors can assist firms in achieving superior financial performance.
... In Model 1, Y i is represented by EVA Spread (EVA_S), the VBM through which investors may evaluate whether a firm is pointing in the direction of wealth creation (Fabozzi & Grant, 2008). The underlying assumption is that the benefits of management's attention to ESG issues may result both in higher and more stable returns affecting ROC, and in a reduction of the cost of capital (WACC) according to Clark, Feiner, and Viehs (2015) and Serafeim (2020). Therefore, considering that EVA_S is calculated as ROC-WACC, the final effect would be double. ...
Article
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This paper goes beyond the relationship between a bank ESG performance (ESGP) and corporate financial performance (CFP). Here, the link between ESG factors and financial benchmarks is analysed to verify whether banks may find in the market reaction sufficient stimuli (higher CFP) to adopt ESG conduct spontaneously. Using panel estimation methods on European banks listed in STOXX Europe 600, between 2008 and 2019, this paper tests the relationship between ESGP and CFP considering different dimensions of financial performance at once, both accounted‐based (ROA and ROE) and market‐based (Capitalisation to Book Value, Tobin's Q). Besides, we employ VBM (EVA Spread) not previously considered. The main findings support the current approach of banking authorities, focusing on bank ESG risks, more than ESG opportunities, in order to “force” banks into adopting a new ESG business model, at this early stage of transition to sustainability.
... There is evidence that sustainable corporate management and investment practice can actually improve the performance of a company (Clark, Feiner, & Viehs, 2015): • firms with sound sustainability standards enjoy a lower cost of capital; • superior sustainability standards improve corporations' access to capital; • environmental risk management practices and disclosure on environmental policies lower a firm's cost of equity; • social factors, such as employee relationships and good workforce practices, have strong impact on operational performance; • corporate eco-efficiency and environmentally responsible behaviours are viewed as the most important factors leading to superior stock market performance. As a part of sustainable corporate management, marketing management also sets sustainability goals and creates specific marketing programmes. ...
Chapter
The aim of this book is to present the most important issues related to sustainable development (SD) and corporate social responsibility (CSR). They are discussed from a macro and micro perspective, both in the form of theoretical foundations of these concepts and practical examples of companies operating in Central and Eastern European countries that have implemented these ideas in their daily operations and translated them into corporate and functional strategies. The book consists of four parts. The first one is theoretical in its assumptions and is devoted to explaining the key concepts of sustainable development (SD) and corporate social responsibility (CSR). The authors describe the determinants of sustainable development in the contemporary world, including the most important ones, such as globalization, climate change, poverty, unlimited consumption, as well as limited access to natural resources - all in relation to the goals of sustainable development. The chapter also discusses the concept of corporate social responsibility (CSR), which is now recognized as the process by which business contributes to the implementation of sustainable development. How sustainable development (SD) and corporate social responsibility (CSR) are incorporated into the organization's strategies and influence the corporate strategy on the corporate and functional areas of the organization is presented in the last chapter of the first part of the e-book. The next part of the e-book helps readers understand the concepts of SD and CSR in the field of organizational strategy - in strategic management, and at the level of functional strategies—marketing, human resources, marketing research, accounting and operational management. The authors explain the reasons why companies need to consider the local and global perspective when setting SDGs, and the existence of potential conflicts within them. Taking into account the area of marketing, the authors point to the increase in environmental and social awareness of all stakeholders, which translates into changes in the criteria for decision-making by managers and risk assessment. The issue of sustainability is also the subject of market research. Companies producing products and services, institutions dealing with environmental or consumer protection, scientists and students conduct many research projects related to, inter alia, much more. How to use secondary data for analysis and how to prepare, conduct, analyze and interpret the results of primary research in that area are discussed in detail in the next chapter of this section. The concept of SD also refers to the basic functions of human resource management (HRM)—recruitment, motivation, evaluation and control. They should take into account SD not only for the efficiency of the organization and long-term economic benefits, but also for ethical reasons. Thanks to the SHRM, the awareness and behavior of the entire organization can strongly express sustainable goals in the planning and implementation of the overall corporate strategy. The growing importance of the idea of SD and the concept of CSR also resulted in the need for accounting and finance to develop solutions enabling the provision of information on the methods and results of implementing these concepts in entities operating on the market. This part of the book also examines manufacturing activities in the context of sustainability. As a result, many problems arise: waste of resources, mismanagement, excessive energy consumption, environmental pollution, use of human potential, etc. The chapter presents such concepts as: zero-waste, lean-manufacturing, six-sigma, circular production, design and recycling products in the life cycle as well as ecological and environmentally friendly production. The next two parts of the e-book contain examples of companies from Central and Eastern Europe that used SD goals in their strategies, questions and tasks for readers.
... Jayachandran et al. (2013) and Jiao (2010) find that firms with the highest ESG scores have higher valuations with low capital costs than those with lower ESG scores. Clark et al. (2015) and Friede et al. (2015) confirm the positive relationship between ESG integration and corporate financial performance. Kempf and Osthoff (2007) also show that positive abnormal returns are generated by buying securities with high ESG ratings and selling securities with low ESG ratings. ...
Article
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This research aims to examine several approaches, most commonly used by portfolio managers, to construct smart beta indices integrating environmental, social, and governance (ESG) factors and evaluate their performance in the Canadian context for the 2014–2109 period. We show that fundamental indexation works in Canada and that taking ESG factors into account does not harm smart beta portfolios performances compared to the capitalization-weighted portfolio. Our results are robust to several performance measures, to market conditions (bull vs. bear), and to different interest rate regimes.
... 12. Note two meta-studies, Clark, Feiner, and Viehs (2014) and Friede, Busch, and Bassen (2015) examine the literature and conclude that there is overwhelming evidence that ESG scores have a positive relationship with operational and financial firm performance, but that the relationship with stock returns is less clear cut. 13. ...
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We examine the impact of excluding sin stocks on expected portfolio risk and return. Exclusions involve risk relative to the market and peers. We show how this tracking error can be translated into an equivalent loss in expected return, which is negligible at low tracking error levels, but not at higher levels. However, even modest ex ante tracking error levels may lead to sizable compoundedunderperformance ex post. Taking an asset pricing perspective we find that popular exclusions typically go against rewarded factors such as value, profitability, and low risk, which is harmful for expected portfolio returns. Theoretically sin itself may also be a priced factor, but this is not yet supported by the empirical evidence. Tracking error may be minimized and expected portfolio return restored by filling the gap left by excluding sin stocks with non-sin stocks that offer the best hedging properties and similar or better factor exposures.
... Servaes and Tamayo (2013) demonstrate how socially responsible activities can beneficially protect the firm's reputation with customers. Clark et al. (2015) comprehensively review papers relating socially responsible corporate behaviors to firm performance and claim a significant correlation between ESG practices and a lower cost of capital and superior operational performance. Consistent with this literature, this paper concentrates on how ESG failures might affect firm value through the responses of customers, employees and equity investors. ...
Article
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This paper investigates the motivations behind corporate social responsibility (CSR) by considering the consequences of environmental, social and governance (ESG) failures that CSR is intended to avoid. Using data from 2581 public U.S. firms over 2007–2018, this paper finds that such failures are associated with increased CEO turnover. This relationship is driven primarily by CEOs with longer tenures and by environmental issues. These negative events are also found to be associated with declines in the firm’s sales growth, employment growth and equity returns. CSR activities that reduce the incidence of such events therefore benefit both the CEO and the shareholder. Interestingly, replacing the CEO does not mitigate the negative impacts of such events on the firm, nor does it reduce the incidence of such events in subsequent years. The decision to remove the CEO following such failures appears costly to both the CEO and the firm’s shareholders.
... Any organization's fundamental objectives, as well as its continual pursuit of maximum revenues and profits, must contain this view (Zyadat et al., 2017) There is a vast amount of literature on the topic of how sustainability measures increase financial performance in Islamic institutions (Jan et al., 2019). In this scenario, Islamic bank investors and depositors urge that their banks engage sensibly in sustainable initiatives since they will benefit financially (Clark, et al., 2015). Other stakeholders, such as public interest groups and interest groups that advocate for good performance, exert pressure on banks to adhere to sustainable principles. ...
Article
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Sustainability can be looked into in three dimensions: social dimension, economic dimension, and environmental dimension. This study looks into the three dimensions and their impacts on the performance of Islamic banks which is represented by return on assets (ROA), return on equity (ROE), and earnings per share (EPS). Data on the performance of Islamic banks is obtained from financial statements, annual reports, social responsibility reports, and sustainability reports. On the other hand, levels of sustainability are determined by examining the same reports and financial performance metrics. Therefore, to ascertain the impacts of sustainability on Islamic banks, this study focuses on Islamic banks' social, economic, and environmental performance. The study discovers that the aspects of sustainability have a substantial impact on the Islamic banks' financial performance as assessed by ROA and EPS. The characteristics of sustainability, on the other hand, did not affect the financial success of those institutions as assessed by ROE.
... While the impact of company size, measured by market value, is directly linked to the stock performance, the way ESG activities affect stock performance can be indirect and non-linear (Jahmane andGaies, 2020, Franco et al., 2020). The non-linear relationship here means that, mathematically, if we are to set an equation between ESG activities and stock performance, the equation is non-linear; economically, there are intermediaries between ESG activities and stock performance -for example, high-ESG could bring down the cost of capital (Clark et al., 2015) and then the price would go up. In summary, more considerations should be carried out when constructing ESG risk factors. ...
... From an empirical perspective, one study found that investing in sustainability will give an entity competitive advantage through risk reduction, increased performance, and a managed reputation (Clark, Feiner, & Viehs, 2015). The study also found that 88% of the reviewed literature also shows that good ESG practices would lead to improvement in an entity's operational performance. ...
... Given the lack of conclusive findings and consensus among scholars, the ongoing debate on the nexus between ESG and financial performance (FIN) remains unsolved [18,19]. While Horváthová (2010) and Wright and Ferris (1997) [20,21] reveal a negative relationship between ESG and FIN performances, other studies indicate a catalyst effect (i.e., positive) [22,23] or non-significant effect [24,25]. ...
Article
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Shifting from short-term profit maximizing strategies to more sustainable long-term ones, the corporate world has been exerting extra effort to adopt environmental, social, and governance (ESG) performances. However, the loop question remains unsolved: is ESG financially-driven or is financial performance (FIN) ESG-driven? Building on the slack resources theory and bridging three management literatures, this analysis relies on a six-year panel dataset of multinational organizations from different industries. A distributed lag regression model is proposed to empirically investigate the impact of FIN performance on ESG and to test the moderator effect of total quality management (TQM). The findings reveal a stimulus effect between free cash flow (FCF) and ESG scores. While the interaction between TQM and FCF has a negative effect on ESG, the interaction between TQM and Tobin’s Q reveals a positive relationship with ESG. This study sheds further insights for both research and practice towards the operationalization of sustainability management.
Article
This study provides evidence on the relationship between working capital management (WCM) and firms’ sustainability level covering 1,394 US publicly-listed firms in the period 2002-2020. We find that firms with higher ESG scores operate with lower working capital requirements and a shorter cash conversion cycle, although the effect comes entirely from the environmental and social pillars. The inconclusive result for the governance pillar reinforces the role of sustainability on WCM. Outperforming firms in sustainability scores have a lesser need for cash than the industry average. Overall, our findings highlight that WCM optimization may be attained following investment in firms’ sustainability. JEL Classification: G30; G31; Q56
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Studies show that companies with a strong Environment, Social and Governance (ESG) profile are more competitive than their peers, as they use resources, human capital and innovation more efficiently. High ESG-rated companies have lower exposure to systematic risk factors and low expected cost of capital, leading to higher valuations in a DCF model framework. They are typically more transparent, particularly with respect to their risk exposures, risk management and governance standards and have better long-term vision. The paper finds that higher Alpha can be harvested by restricting investment exposure to the ESG theme combined with various style characteristics, as they display low systematic and idiosyncratic tail risks. It shows that an ESG overlay on such factor-based strategies, particularly on ‘multi-factor’, ‘value’ and ‘low volatility’ in that order, reduces both systematic and idiosyncratic risks further. ESG overlay on ‘quality’ factor provides the highest return among ESG target indices, however, the underlying ‘quality’ factor provides even higher excess return. These findings can provide some insight on return enhancement to investors investing in the global equity markets.
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This study examines the effect of 1096 analyst recommendation revisions on prices of Shari'ah-compliant and Shariah non-compliant listed securities in Bursa Malaysia over the period 2005-2016. The study finds that while stocks added-to-buy had positive abnormal returns, the stocks added-to-sell and removed-from-buy had negative abnormal returns in short-and long-term horizons. This finding shows that analysts' recommendation revisions carry valuable information. Secondly, the study examined the effect of analysts' recommendation revisions issued contemporaneously with earnings announcements and without earnings announcements on price reactions over various time horizons. The results show that earnings announcements can trigger analysts' recommendation revisions because the investors react strongly to analysts' recommendation revisions issued contemporaneously with earnings announcements. We find that performance differences of Shari'ah-compliant and Shariah non-compliant stocks in response to analysts' recommendation revisions are often negligible. Overall, this study provides empirical evidence that analysts' recommendation revisions for Shari'ah-compliant companies often do not own any additional investment value than those for Shariah non-compliant stocks.
Article
Over recent years, investors' attention on the environment, social responsibility, and governance (ESG) has been growing. At the same time, managers, investors, and regulators are interested in ascertaining whether mutual funds that invest in ESG‐compliant assets perform better than those with a low ESG commitment. The sustainability of funds' portfolios can be measured by ESG ratings, a measure of the financially material ESG factors of the securities held by a fund. Our study therefore aims to verify whether funds with high ESG ratings outperform funds with low ESG ratings, considering the risks taken, including higher moments, and costs borne by investors. Our analysis is carried out on a sample of 634 European mutual funds. By using data envelopment analysis, it provides evidence of the superior efficiency of funds investing in high ESG‐rated securities.
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The publication aims to examine the different methodologies for identifying and quantifying the economic, social and environmental impacts of investment in sustainable and environmentally-friendly projects. More detailed attention will be paid to the S-ROI methodology as one of the key efficiency indicators for such projects nowadays.
Article
Despite a considerable volume of literature on the environmental, social and corporate governance (ESG) investments, most studies have focused on the perspective of managers and investors in markets with developed ethical funds. This study complements previous studies by exploring the retail investors’ attitude toward ESG in Poland as a Central and Eastern European country (CEE) with a minor but developing sustainable investment market. While EU ESG regulations focus mostly on disclosure obligations, this study aims to determine whether retail investors in Poland are interested in ESG and identifies the conditions for the investors’ interest. The binomial logistic regression is applied to retail investors based on data from a survey of a representative sample of the Polish population. The results show that Poles consider human-caused climate changes as an important challenge and most of those willing to invest in the capital market want to do so in a sustainable way. However, they are unwilling to sacrifice their profits for the sake of ESG. Only those investors who make investment decisions based on social aspects are more likely to forgo a part of their profits. Women are more willing to engage in responsible investments and forgo higher profits.
Article
This report shares journeys from three WRI Sustainability Initiative projects focused on waste and plastics reduction, bike and active commutes, and sustainability of WRI's endowment. Each journey is authored by a different project lead and shares the implementation challenges, data, and outcomes, as well as relevant research and case studies that informed the project design and development.
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Since the advent of Corporate Social Responsibility (CSR), companies have implemented multiple approaches towards achieving a new balance between their financial, environmental, and social objectives with mixed results. Emerging markets are no exception. In Latin America, companies have further responsibility in this domain; given the enormous biodiversity richness, they need to protect the wellbeing of the entire world and the burning social needs across the region. A new framework named Environmental Social Governance (ESG) evolved from the need to solve problems that CSR could not resolve. This framework aims to quantify '' impact in the ecological, social, and corporate governance domains to change the way businesses behave. Arguably, implementing ESG philosophy and practices allows companies to improve their operations and have higher stock performance, while making substantial contributions to address burning societal and environmental issues. Latin American companies have an opportunity to leapfrog to the highest international standards using ESG, potentially becoming poster-children of effective implementation of this strategy. The opportunity is mainly because of the demands of preserving biodiversity, adapting to climate change, and resolving the burning issue of inequality that requires urgent innovations and adaptations to business strategy. In this chapter, we provide data on the adoption of ESG standards across Latin America and highlight several cases of mutilations (multinationals from Latin America) leading and paving the way for successful integration of the ESG dimensions into their strategies.
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The metaverse is a persistent, online, 3D universe that combines multiple different spaces where users can interact, work, meet, game, and socialize using virtual and augmented reality. Environmental, social, and governance (ESG) criteria, consistently with Sustainable Development Goals, are a set of best practice standards used by socially conscious investors to screen and back sustainable projects. Incoming metaverse ecosystems raise sustainability concerns that need to be adequately known and foreseen to attract sensitive investors before their standards become consolidated and ubiquitous. Artificial intelligence (AI) and blockchains that validate the big data and provide the background for a cryptocurrency-driven payment system represent the engine behind 3D virtual platforms where physical individuals are represented by their avatars (digital twins). This study innovatively considers these trendy issues, showing which are the main ESG parameters of existing big techs like the GAFAM (Google/Alphabet, Amazon, Facebook/Meta, Apple, Microsoft) that are investing in the Metaverse, trying to envisage how they can be adapted to a virtual upgrade.
Thesis
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Environmental and climate factors are a source of financial risks. Risks need to be identified, measured, and managed. Even though proper risk management is essential for efficient investment management, environmental and climate risk management is a challenge to investors, including central banks when acting as investment managers. Central banks are among the largest global investors, managing international reserves totaling trillions of dollars. The theoretical and practical gaps in this subject were highlighted by NGFS, the Network of Central Banks for Greening the Financial System. In this context, the objective of this research was to propose a framework to manage exposure to environmental and climate risks in the management of international reserves by central banks, without prejudice to their economic and financial objectives. To address this objective, this thesis is based on three studies. In the first one the risks were analyzed, and a framework was proposed for environmental and climate risk management of the international reserves. The second study discussed the application of the framework to a sample of central banks from Latin America and the Caribbean. The third study tested the application of the framework, including portfolio optimization and multi-objective analysis. The conclusion is that environmental and climate risk analysis should be included in the traditional approach to strategic asset allocation by central banks at least due to the relevance of the environmental and climate risks to which international reserves are exposed. As a result of the applied framework, with multi-objective analysis, the management of the international reserves can become more resilient to environmental and climate risks without undermining the financial and economic objectives of the central banks. Also, this management may eventually compose a strategy of positive impact in the real-world. This thesis is relevant to the investment management perspective of the international reserves, to safeguard the execution of the monetary and foreign exchange policies using those reserves and for the possible real-world effect of the strategic asset allocation.
Conference Paper
The attention to sustainability has been increasing rapidly due to environmental and social issues, as well as increasing business risks. It is changing an understanding how business is valued, putting pressure on, and also bring-ing opportunities for business performance. Along with the increasing weight of sustainability aspects, accessing the value of the company has become a more complex task. The literature analysis suggests different implications on the impact of sustainable development on business value, with most finding a positive relation; however, no clear measures to evaluate such impact can be distinguished. The aim of this paper is to find out the impact of sustainable development on the value of the company. Business sustainability is analysed through the aspects of Environmental, Social, Govern-ance (ESG), which is currently the most emerging sustainability framework, with a special emphasis on governance. Meanwhile, business value is investigated through literature review by determining a range of possible internal and external measures. Panel regression analysis is considered as a method in order to discover a link between sustainable development and business value through selected time period. The results suggest that sustainable development could have a positive impact on business value in the long term.
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The objective of Sustainable Development Goal (SDG 8) in the 2030 Agenda for Sustainable development is to attain economic prosperity through Decent Work across the member nations of the United Nations. In order to achieve this goal in the next 10 years it is the responsibility of the Governments across the globe to work for its attainment by leveraging through its business houses and corporates at large. The target for decent work for all includes equal opportunities and equal pay for all that leads to economic development. India has already started working on the target by implementing various schemes attached to SDG 8 and to supplement it through organisations across the country that are including these SDG targets into their strategic goals and mission and vision statements up to a large extent. The current study delves into the role of Multi-National corporations (MNCs) operating out of India in incorporating workforce diversity, equal opportunity and inclusive growth of its employees by providing a decent work environment. The study focuses on 9 MNCs having headquarters in the United States of America and Europe and operating as subsidiaries in Delhi, NCR. The data was collected through secondary sources like websites, HR manuals and Annual reports. The data was qualitatively analysed and presented in the form of small cases for each MNC. These business conglomerates operate through best practices and policies. These practices are disseminated through Human Resource department that acts as a backbone for the MNCs. The study reveals that workforce diversity is prevalent in these MNCs and equal opportunity is also practiced. The implications of the current study are that other private and public enterprises or start-ups can take learning from these MNCs that form a benchmark for implementing workforce diversity in their operations. This will lead to achieving not only business goals but also help in building better economy for the country.
Article
At the present stage of the development of the global business community, we pay more and more attention to the principles of environmental, social and governance (ESG) responsibility. Financial intermediaries in their activities considered the influence of natural and climatic factors. Their risks sometimes turn out to be more tangible than, for example, the financial condition of customers. The subject of the study is the development of measures to implement ESG principles in banking products, and its purpose is to study implementing the above principles in Russia at the present stage of business models and setting tasks aimed at overcoming the difficulties of software in sustainable development. The research used the methods of comparative, statistical and factor analysis, identification of trends, graphical comparison, etc. The existing studies on this topic allowed us to determine the need to use ESG principles in banking business models and to identify the motives for their implementation. In the author’s conclusion, Russian banks are guides and an example of making business in line with the principles of environmental, social and governance. The speed, depth and sustainability of their application by other financial intermediaries will depend on economic incentives, government support, and the development of regulatory requirements. The transformation of the business community (according to the new rules of conduct) will bring the entire economy of the country to sustainable development. The author considers a promising topic for further study as the introduction by the mega-regulator of mandatory standards for the activities of financial intermediaries for assessing climate and environmental risks, as well as the development of a supplier audit directive on the criteria for implementing ESG principles. This determines the scientific and practical significance of the study.
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The concept of sustainable development is becoming incomprehensible and complex in global supply networks, especially in low- and middle-income countries (LMIC) that are most affected by ever-changing industry challenges and standards. Smart technologies, sustainability, and circular economy (CE) connection, which remain unexplored, can be integrated into the supply chain as a business strategy to increase collaboration and cooperation between different tiers of the supply chain to achieve sustainable development goals (SDGs) according to LMIC. Therefore, the main objective of this paper is to discover the drivers of a smart sustainable circular supply chain (SSCSC) in achieving the SDGs in LMIC through stakeholder theory. First, a systematic review is employed to identify the drivers of the SSCSC to achieve the SDGs in the LMIC incorporating existing literature on the subject. Second, the Best-Worst Method (BWM) is applied to analyse the identified drivers, then the Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) is used to analyse the SDGs. The applicability of the solution methodology was illustrated by providing a numerical example. The results of the study are twofold: first, drivers are analysed by implementation of BWM. The results of the BWM reveal that Economic Sustainability is the best key driver among the eight driversin achieving the SDGs, meaning that without financial assistance and support achieving the SDGs becomes ineffective. Second, the TOPSIS analysis reveals that SDG 16 (Peace, Justice, and Strong Institutions) is the SDG most supported by drivers.
Article
Aim. The presented study aims to investigate the trends and risks of ESG investing. Tasks. The authors determine the causes of the increasing popularity of socially responsible investment and analyze the relationship between the company’s compliance with ESG factors, its financial indicators, and its stability in the market. Methods. This study uses general scientific methods of cognition to examine socially responsible investment in various aspects and to identify trends in managing a portfolio of financial assets. Results. The authors propose the fundamentals of creating a new methodological framework for assessing the level of social and environmental responsibility of companies and provide recommendations for including socially responsible investment in the stock portfolio. Conclusions. The increasing popularity of the social responsibility of business makes it impossible to ignore ESG investing in the stock portfolio. However, when investing in a business, it is necessary to pay attention to the correctness of the results of company valuation. The ratings do not make allowance for companies partially complying with ESG factors.
Conference Paper
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Ongoing climate change threatens sustainable development. The main cause of climate change is the greenhouse effect, which is caused by greenhouse gas (GHG) emissions. Companies, as emitters of greenhouse gases, also play an important role in reducing them. This is particularly important for the energy sector, which produces the most emissions worldwide. GHG emissions are part of the environmental, social and governance (ESG) framework. Companies report on ESG to measure their contribution to sustainable business. To determine the relationship and impact of social and governance factors on GHG emissions, this paper presents the results of a study on the relationship between social and governance factors and GHG emissions using a sample of 38 European energy companies. Using a multiple regression analysis and data from the Refinitiv ESG database, a positive correlation is found between social factors and GHG emissions and between governance factors and GHG emissions. More precisely, the study found that workforce and corporate social responsibility (CSR) strategy have a significant impact on GHG emissions reduction. The findings suggest that companies that care about job satisfaction, a healthy and safe workplace, and maintaining diversity and equal opportunities for their workforce have an impact on reducing GHG emissions in their production and operations processes. Companies' practices to communicate sustainability dimensions into daily decision-making processes also have an impact on reducing GHG emissions.
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The purpose of this chapter is to outline the development of the idea of "stakeholder management" as it has come to be applied in strategic management. We begin by developing a brief history of the concept. We then suggest that traditionally the stakeholder approach to strategic management has several related characteristics that serve as distinguishing features. We review recent work on stakeholder theory and suggest how stakeholder management has affected the practice of management. We end by suggesting further research questions.
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We study the relationship between employee satisfaction and abnormal stock returns around the world, using lists of the “Best Companies to Work For” in 14 countries. We show that employee satisfaction is associated with positive abnormal returns in countries with high labor market flexibility, such as the U.S. and U.K., but not in countries with low labor market flexibility, such as Germany. These results are consistent with high employee satisfaction being a valuable tool for recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing. In contrast, in rigid labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The results have implications for the differential profitability of socially responsible investing (“SRI”) strategies around the world. In particular, they emphasize the importance of taking institutional features into account when forming such strategies.
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We show that a firm's CSR policy is significantly influenced by the CSR policies of firms in the same three‐digit zip code, an effect possibly due to investor clienteles, local competition, and/or social interactions. We then exploit the variation in CSR across the zip codes to estimate the effect of CSR on credit ratings under the assumption that zip code assignments are exogenous. We find that more socially responsible firms enjoy more favorable credit ratings. In particular, an increase in CSR by one standard deviation improves the firm's credit rating by as much as 4.5%.
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This paper investigates whether relative corporate sustainability as measured by the SAM sustainability ranking and sustainability reporting in terms of Global Reporting Initiative (GRI) application levels are associated with a higher market valuation. We conduct a value relevance study for the 600 largest European companies with the Feltham and Ohlson valuation model as a reference point. Our results indicate that for the observation period 2001 to 2011, the association between corporate sustainability and market value is positive. The empirical evidence of a positive relationship between GRI reporting and market value is statistically significant in some but not all of the model specifications. We find no evidence of interaction between the value relevance of corporate sustainability and sustainability reporting, nor do we find any positive effect of external assurance on the capital market perception of GRI application levels. Our results support the notion that conducting business in accordance with ethical norms is also a shareholder value-increasing business strategy. However, it is not possible to verify the information given in sustainability reports through external assurance.
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This paper advances the risk management perspective that superior social performance enhances firm value by serving as an ex ante valuable insurance mechanism. We posit that good social performance is more valuable as an insurance mechanism for firms with higher litigation risks. Moreover, value generation of corporate social performance (CSP) depends on whether a firm has gained pragmatic legitimacy (i.e., a firm’s financial health) and moral legitimacy (i.e., whether or not a firm operates in a socially contested industry) among its stakeholders. We find that the value of CSP as insurance against litigation risk is practically significant, adding 2 to 4 percent to firm value. But CSP is less likely to create value if the firm is in financial distress or is operating in socially contested industries. Copyright 2013 John Wiley & Sons, Ltd.
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In this paper, we provide evidence on the impact of the quality of corporate social responsibility (CSR) reporting on the cost of equity capital for a sample of Spanish listed firms. We aim to verify whether firms with higher CSR disclosure ratings enjoy significantly lower costs of equity capital, after controlling for the well-known Fama and French risk factors (i.e. beta, market-to-book, and size). Consistent with our main hypothesis, we find a significant negative relationship between CSR disclosure ratings and the cost of equity capital. We also obtain that the negative relationship between CSR reporting quality and the cost of equity capital is more pronounced for those firms operating in environmentally sensitive industries. Our findings contribute to the debate on whether CSR activities are value-enhancing or value-neutral by showing that improved CSR can enhance firm value by reducing the firm's cost of equity capital. This implies that CSR reporting is a part of a firm's communication tools in order to decrease information asymmetries between managers and investors. In other words, mandatory social responsibility reporting is called for in order to produce a more precise valuation of a firm. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.
Common sense suggests that the adoption of better corporate governance practices, which enable greater transparency, more protection against capital expropriation, and greater rights for investors, should have the effect of reducing the risk perceived by shareholders and so lead to lower required returns. This article investigates the existence of an inverse relationship between the quality of corporate governance and the cost of equity capital for Brazilian companies. The authors begin by constructing a broad index of corporate governance quality that combines four key aspects of corporate governance: (1) transparency and disclosure; (2) structure of the board of directors; (3) ownership and control structure; and (4) shareholder rights. To estimate the cost of equity, the CAPM was applied by using ex ante market premiums calculated with a simple discounted-dividend method. On the basis of a sample of 67 Brazilian companies traded at the São Paulo Stock Exchange (Bovespa) during the period 1998–2008, the study concludes that there is a significant inverse relationship between the cost of equity and a number of proxies for effective governance, particularly those representing transparency and disclosure. Closer inspection of the reductions in cost of capital associated with improvements in the specific governance quality index components suggests that companies would benefit the most from prompt submission of information to regulators and full disclosure of executive pay.
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The evidence is compelling: Sustainable Investing can be a clear win for investors and for companies. However, many SRI fund managers, who have tended to use exclusionary screens, have historically struggled to capture this. We believe that ESG analysis should be built into the investment processes of every serious investor, and into the corporate strategy of every company that cares about shareholder value. ESG best-in-class focused funds should be able to capture superior risk-adjusted returns if well executed.This is the key finding of our report in which we looked at more than 100 academic studies of sustainable investing around the world, and then closely examined and categorized 56 research papers, as well as 2 literature reviews and 4 meta studies - we believe this is one of the most comprehensive reviews of the literature ever undertaken.Frequently, Sustainable Investing is stated to yield "mixed results." However, by breaking down our analysis into different categories (SRI, CSR, and ESG) we have identified exactly where in the sprawling, diverse universe of so-called Sustainable Investment, value has been found.By applying what we believe to be a unique methodology, we show that "Corporate Social Responsibility" (CSR) and most importantly, "Environmental, Social and Governance" (ESG) factors are correlated with superior risk-adjusted returns at a securities level. In conducting this analysis, it became evident that CSR has essentially evolved into ESG. At the same time, we are able to show that studies of fund performance - which have been classified "Socially Responsible Investing" (SRI) in the academic literature and have tended to rely on exclusionary screens - show SRI adds little upside, although it does not underperform either. Exclusion, in many senses, is essentially a values-based or ethical consideration for investors.We were surprised by the clarity of the results we uncovered: 100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity. In effect, the market recognizes that these companies are lower risk than other companies and rewards them accordingly. This finding alone should put the issue of Sustainability squarely into the office of the Chief Financial Officer, if not the board, of every company. 89% of the studies we examined show that companies with high ratings for ESG factors exhibit market-based outperformance, while 85% of the studies show these types of company's exhibit accounting-based outperformance. Here again, the market is showing correlation between financial performance of companies and what it perceives as advantageous ESG strategies, at least over the medium (3-5 years) to long term (5-10 years).The single most important of these factors, and the most looked at by academics to date, is Governance (G), with 20 studies focusing in on this component of ESG (relative to 10 studies focusing on E and 8 studies on S). In other words, any company that thinks it does not need to bother with improving its systems of corporate governance is, in effect, thumbing its nose at the market and hurting its own performance all at the same time. In the hierarchy of factors that count with investors and the markets in general, Environment is the next most important, followed closely by Social factors.Most importantly, when we turn to fund returns, it is notable that these are all clustered into the SRI category. Here, 88% of studies of actual SRI fund returns show neutral or mixed results. Looking at the compositions of the fund universes included in the academic studies we see a lot of exclusionary screens being used. However, that is not to say that SRI funds have generally underperformed. In other words, we have found that SRI fund managers have struggled to capture outperformance in the broad SRI category but they have, at least, not lost money in the attempt.
Article
Institutional investors wanting to integrate Environmental, Social and Governance (ESG) factors in their investment strategies need the right tools to measure portfolio risk characteristics and performance. MSCI’s BarraOne and Barra Portfolio Manager can provide this utility with Intangible Value Assessment (IVA) ratings from MSCI ESG Research. In this study, we examine the use of IVA ratings with the Barra Global Equity Model (GEM3) to build optimized portfolios with improved ESG ratings, while keeping risk, performance, country, industry, and style characteristics similar to conventional benchmarks, such as the MSCI World Index. The currently available dataset of IVA scores allowed us to compare three strategies during the period between February 2008 and December 2012, using current IVA ratings methodology. Of the three strategies, we found the best active returns during this period were achieved by overweighting firms whose IVA ratings improved over the recent time period, showing ESG momentum. Underweighting assets with low ESG ratings also raised portfolio performance during this period. The highest ESG rated assets had more uneven performance; they generally did better in periods of limited risk appetite during this volatile market cycle.
Article
Sustained and superior performance depends, in part, on effective measurement, management and disclosure of traditional financial metrics. There are many other metrics such as those used to evaluate environmental, social and governance (ESG) performance; resource efficiency; business model resilience; innovative capacity; brand strength and corporate culture that can be just as informative on how a business is creating value. There is a lot to be said for building a business that outperforms on these metrics — especially when competitors miss, ignore or simply misunderstand how they can drive business value and growth opportunities. CFOs, with their unique, cross-functional vantage point, need to consider more than their results for the next quarter and a wider range of stakeholders — customers, suppliers, consumers, employees, non-governmental organizations and communities — that play an important role in an organization’s success. This research takes an in-depth look at how companies determine materiality in the ESG context, and discusses the challenges managers face and how these impact what type of data is disclosed. Today, most companies who measure these nontraditional metrics disclose most of the information in a separate sustainability report — yet this is likely to change. The challenge faced by all public and private companies is how to determine what information to disclose. Many companies are trying to apply the principle of materiality from traditional financial reporting to this new set of performance metrics, but this remains difficult terrain because there is little hands-on guidance about precisely what to do. Simply put, managers have neither the tools nor the approach to make these decisions efficiently and rigorously. The result is data that is difficult to use for making business decisions, both inside a company and externally. Materiality determination is one of the most complicated ESG-related decisions for senior management, which faces considerable uncertainty related to ESG topics. With limited resources at hand, managers should choose a small set of material performance indicators that inform on valuation impacts and consistently report data and should focus less on trying to satisfy every one of the company’s stakeholders. Furthermore, ESG materiality determination need not be a qualitative “finger to the wind” exercise. We believe that decision science methods have the potential to put corporate leaders and CFOs in a stronger position to use the intelligence that is gained from all key stakeholders using a structured approach to stakeholder engagement; and make strategic choices, including capital budgeting decisions. More importantly, the result is quantitative and based upon fundamental insights into how complex decisions are made.
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This study examines the effect of corporate social responsibility (CSR) on financial performance. Specifically, we analyze the effect of CSR-related shareholder proposals that pass or fail by a small margin of votes. The passage of such "close-call" proposals is akin to a random assignment of CSR to companies and hence provides a clean causal estimate. Consistent with the view that CSR is a valuable resource, we find that adopting a CSR-related proposal leads to superior financial performance. The effect is weaker for companies with higher levels of CSR, suggesting that CSR is a resource with decreasing marginal returns. Finally, consistent with institutional theory, we find that the effect is stronger for companies operating in industries where institutional norms of CSR are higher.
Article
This paper shows that corporate social responsibility (CSR) and firm value are positively related for firms with high customer awareness, as proxied by advertising expenditures. For firms with low customer awareness, the relation is either negative or insignificant. In addition, we find that the effect of awareness on the value-CSR relation is reversed for firms with a poor prior reputation as corporate citizens. This evidence is consistent with the view that CSR activities can add value to the firm but only under certain conditions.
Article
The market continues to show growing interest in how well companies are performing across a broad range of environmental, social, and governance (ESG) dimensions. Partly as a result, the companies themselves are paying more attention to these performance dimensions, how they contribute to financial performance, and how to evaluate tradeoffs that arise. One of the greatest challenges facing both investors and companies in using ESG performance information is the absence of standards. Another challenge is knowing which of the many ESG dimensions are most material for a company in terms of creating value for shareholders and stakeholders over the long term. The authors argue that materiality and reporting standards must be developed on a sector-by-sector basis, and that failure to do so will result in inconsistent and even misleading disclosures. The authors illustrate this with the case of climate change. The SEC has already issued interpretive guidance on climate change disclosures, making it quite clear that existing regulations require companies to report on material effects of climate change, from both an upside and downside perspective. Based on an analysis of 10K filings in six industries, the authors show that, even within a given industry, there is substantial variation in reporting among companies that ranges from no disclosure, to boilerplate disclosure, industry-specific interpretation, and the use of quantitative metrics. After providing further detail on this by looking at the airline and utilities industries, the authors conclude by offering a methodology for defining material ESG issues on a sector-by-sector basis that could provide the basis for developing key performance indicators.
Article
This paper examines how existing firm resources and contemporaneous symbolic and substantive strategic actions interact to drive firm performance in the context of Corporate Social Responsibility (CSR). We integrate neo-institutional literature and the resource-based view of the firm to develop hypotheses about the differential impact of these distinct types of strategic CSR investments on firm performance, conditional on the level of existing CSR resources. We use the market-value equation and a database comprising 2,261 firms in 43 countries from 2002 to 2008. We find a positive impact on firm performance when a firm a) undertakes symbolic CSR actions in the presence of a larger stock of CSR resources or b) concurrently undertakes symbolic and substantive CSR actions. We discuss implications for future research and practice.
Article
How are job satisfaction and firm value linked? I tackle this long-standing management question using a new methodology from finance. I study the effect on firm-level value, rather than employee-level productivity, to take into account the cost of increasing job satisfaction. To address reverse causality, I measure firm value by using future stock returns, and control for risk, firm characteristics, industry performance, and outliers. Companies listed in the "100 Best Companies to Work For in America" generated 2.3-3.8%/year higher stock returns than their peers from 1984-2011. These results have three main implications. First, consistent with HRM theories, job satisfaction is beneficial for firm value. Second, corporate social responsibility can improve stock returns. Third, the stock market does not fully value intangible assets, and so it may be necessary to shield the manager from short-term stock prices to encourage long-run growth.
Article
Using a large sample of mergers in the U.S., we examine whether corporate social responsibility (CSR) creates value for acquiring firms’ shareholders. We find that compared to low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers’ social performance is an important determinant of merger performance and the probability of its completion, and support the stakeholder value maximization view of stakeholder theory.
Article
Historically. management theory has ignored the constraints imposed by the biophysical (natural) environment. Building upon resource-based theory, this article attempts to fill this void by proposing a natural-resource-based view of the firm-a theory of competitive advantage based upon the firm's relationship to the natural environment. It is composed of three interconnected strategies: pollution prevention, product stewardship, and sustainable development. Propositions are advanced for each of these strategies regarding key resource requirements and their contributions to sustained competitive advantage.
Article
A mishmash of sustainability tactics does not add up to a sustainable strategy. Too often, companies launch sustainability programs with the hope that they'll be financially rewarded for doing good, even when those programs aren't relevant to their strategy and operations. They fail to understand the trade-offs between financial performance and performance on environmental, social, and governance (ESG) issues. Improving one typically comes at a cost to the other. But it doesn't have to be this way. It's possible to simultaneously boost both financial and ESG performance-if you focus strategically on issues that are the most "material" to shareholder value, and you develop major innovations in products, processes, and business models that prioritize those concerns. Maps being developed by the Sustainability Accounting Standards Board, which rank the materiality of 43 issues for 88 industries, can provide valuable guidance. And broad initiatives undertaken by three companies-Natura, Dow Chemical, and CLP Group-demonstrate the kind of innovations that will push performance into new territory. Communicating the benefits to stakeholders is also critical, which is why integrated reports, which combine financial and ESG reporting, are now gaining in popularity.
Article
This research note analyzes the relationship between indicators of corporate social and financial performance within a comprehensive theoretical framework. The results, based on data for 67 large U.S. corporations for 1982-1992, reveal no significant negative social-financial performance relationships and strong positive correlations in both contemporaneous and lead-lag formulations.
Article
Using a large sample of bank loans issued to U.S. firms between 1990 and 2004, we find that lower takeover defenses (as proxied by the lower G-index of Gompers, Ishii, and Metrick 2003) significantly increase the cost of loans for a firm. Firms with lowest takeover defense (democracy) pay a 25% higher spread on their bank loans as compared with firms with the highest takeover defense (dictatorship), after controlling for various firm and loan characteristics. Further investigations indicate that banks charge a higher loan spread to firms with higher takeover vulnerability mainly because of their concern about a substantial increase in financial risk after the takeover. Our results have important implications for understanding the link between a firm's governance structure and its cost of capital. Our study suggests that firms that rely too much on corporate control market as a governance device are punished by costlier bank loans.