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When ESG meets AAA: The effect of ESG rating changes on stock returns
Abstract
This study is the first to employ calendar-time portfolio methodology to investigate the impact of 748 ESG rating changes on stock returns of US firms over 2016-2021. While ESG rating upgrades lead to positive yet inconsistently significant abnormal returns of 0.5% per month, downgrades are detrimental to stock performance, leading to statistically significant monthly risk-adjusted returns of -1.2% on average. These findings are more pronounced for ESG leaders than laggards and are robust to various asset-pricing model specifications. The effects of ESG rating levels are modest, with ESG laggards underperforming in risk-adjusted terms.
... However, very few studies focus on ESG rating changes and their relation to companies' stock performance. Shanaev and Ghimire (2022) find a negative (at times, positive) relationship between US companies' stock performance and downgrades (upgrades) to MSCI ESG letter ratings from 2016 to 2021 using one-month calendar-time portfolios. They contribute these results to the financial materiality of ESG ratings and investors' desire to mitigate ESG risks. ...
... They contribute these results to the financial materiality of ESG ratings and investors' desire to mitigate ESG risks. Our paper's key contribution is the identification of several theoretical and methodological mistakes in Shanaev and Ghimire (2022), which further solidifies the need for replication studies in finance. First, the main results from Shanaev and Ghimire (2022) are based on one-month calendar-time portfolios which assume that investors react to rating changes in the month after the rating change takes place. ...
... Our paper's key contribution is the identification of several theoretical and methodological mistakes in Shanaev and Ghimire (2022), which further solidifies the need for replication studies in finance. First, the main results from Shanaev and Ghimire (2022) are based on one-month calendar-time portfolios which assume that investors react to rating changes in the month after the rating change takes place. This assumption implies that a large portion of investors both monitor MSCI ESG ratings on a monthly basis and rebalance their portfolios ad hoc due to rating changes which is unlikely due to its negative effect on the portfolios' financial performance (Donohue andYip, 2003 andZilbering et al., 2015). ...
Environmental, social and governance (ESG) ratings are mainstream in sustainable finance. This paper provides important evidence on the effects of ESG rating changes on companies’ stock performance. We contribute to the ESG rating change literature by replicating the calendar-time portfolio analysis for US stocks from Shanaev and Ghimire (2022), which found economically significant results. We find contradictory results, which are robust to the omnipresent rating heterogeneity problem. More precisely, we find that rating changes do not significantly affect stock performance in the short-term. Four methodological mistakes in the original study explain the differences in the results.
... In actuality, investors seek bigger returns, which explains why equities in the oil, coal, and other heavy industries continue to be popular, since they encourage greater opportunistic risk-taking. The most recent studies [29,20] on the impact of ESG disclosure on the stock performance of firms emphasize the beneficial impact of ESG. Shanaev & Ghimire (2022) [20] demonstrated that decreased ESG ratings have a detrimental effect on stock returns. ...
... The most recent studies [29,20] on the impact of ESG disclosure on the stock performance of firms emphasize the beneficial impact of ESG. Shanaev & Ghimire (2022) [20] demonstrated that decreased ESG ratings have a detrimental effect on stock returns. Such pervasive tendencies serve as an urgent warning to firms to invest more heavily in ESG disclosure and the auditing process. ...
... The most recent studies [29,20] on the impact of ESG disclosure on the stock performance of firms emphasize the beneficial impact of ESG. Shanaev & Ghimire (2022) [20] demonstrated that decreased ESG ratings have a detrimental effect on stock returns. Such pervasive tendencies serve as an urgent warning to firms to invest more heavily in ESG disclosure and the auditing process. ...
This article examines the environmental, social, and governance (ESG) performance of firms, with a focus on the environmental pillar of the ESG concept. It is believed that the price of equities as well as sector-specific characteristics may be affected by ESG data. It also contributes to the argument that environmental performance and governance quality are related. The purpose of this paper is to statistically validate the separated environmental data from the ESG concept and investigate its impact on the equity price in the EU and the United States. Using simple linear regressions and a fixed effect panel data model, the association between environmental score and governance score, as well as equity price and environmental score, was estimated. This study examines the 500 largest US corporations comprising the S&P 500 index (S&P) and the 600 largest EU companies comprising the STOXX Europe 600 index (STOXX) (SXXP). This article analyzes ESG statistics for the period 2015–2020. The results indicate that a higher government score has a favorable effect on environmental pledges and that changes in stock price depend in part on environmental data. The novel contribution of this paper is that the results suggest a sector-specific contribution to the model, and it would be fascinating to analyze sector disparities and their ESG-related policies in greater detail.
Doi: 10.28991/ESJ-2023-07-02-08
Full Text: PDF
... Kanuri (2020) suggested that ESG portfolios outperform the Global Dow ETF product returns [26]. More specifically, Shanaev and Ghimire (2022) showed that changes in ESG rating of US firms have an asymmetric effect on stock returns [27]. In other words, the rise of ESG rating is not significantly related with stock returns, but downgrading it will reduce stock returns. ...
... Kanuri (2020) suggested that ESG portfolios outperform the Global Dow ETF product returns [26]. More specifically, Shanaev and Ghimire (2022) showed that changes in ESG rating of US firms have an asymmetric effect on stock returns [27]. In other words, the rise of ESG rating is not significantly related with stock returns, but downgrading it will reduce stock returns. ...
With the increasing attention to sustainable development, environmental, social, and corporate governance (ESG) investment has become an important vehicle for achieving carbon neutrality worldwide. In this paper, the impact of ESG performance on stock returns and the transmission mechanism are explored. A fixed effect model based on a panel unbalanced data of listed companies in China from 2011 to 2020 is selected for the empirical analysis. The results show that ESG performance of listed companies in China positively impacts stock returns. However, by distinguishing the ownership nature and region to which listed companies belong, this study finds that the relationship between ESG performance and stock returns is particularly significant for non-state-owned companies and those in the eastern region. Further, based on stakeholder theory, financial performance and corporate innovation ability are embedded into the relationship between ESG performance and stock returns. Both financial performance and corporate innovation ability play partial mediating roles in the correlation between ESG performance and stock returns. In addition, the relationship between ESG performance and corporate innovation ability is non-linear. This paper provides insight for emerging markets into cultivating the value investment concept of investors and improving the ESG information disclosure system.
... businesses' ESG scores are critical for both internal and external stakeholders when it comes to ESG funds. In the literature, the interaction between businesses and its ESG scores are discussed from a comprehensive perspective by associating with financial asset prices (Bofinger et al., 2021;Avramov et al., 2021;Pedersen et al., 2021;Fuente et al., 2021;Shanaev & Ghimire, 2021;Feng et al., 2021;Diiaz et al., 2020;Chen & Yang, 2020), capital costs and firm value (Barros et al., 2021a;Azmi et al., 2021;Bofinger et al., 2022), public offering (Baker et al., 2021), financial performance (DasGupta, 2021;Shakil, 2021;Yoo & Managi, 2021;Escrig-Olmedo et al., 2017;Auer and Schuhmacher, 2016;Khaled et al., 2021), mergers (Barros et al., 2021b), corporate social responsibility strategies (Rajesh et al., 2021), investments (Singhania and Saini, 2020), brand value (Lee et al., 2022) and even financial irregularities that may be witnessed (Yuan et al., 2022). ...
... According to the literature, the reflection of a businesses' ESG score on the prices of financial assets can vary. For instance, it is stated that the businesses' high ESG score may lead to overpricing of stocks (Bofinger et al., 2021;Fuente et al., 2021;Shanaev and Ghimire, 2021;Feng et al., 2021;Chen & Yang, 2020). It is also stated that the uncertainty of a businesses' compliance with the ESG criteria may also cause a decrease in demand for the businesses' financial assets by ESG sensitive investors (Avramov et al., 2021). ...
This study aims to determine whether ESG funds can be used as an effective tool for environmental sustainability. ESG funds, which first appeared in the 2000s and were exported by environmentally friendly companies, are among the most effective tools for increasing firm value and managing environmental degradation. The causality relationship between the ESG funds, one of the environmentally friendly investment instruments, and the CO2 emission values, which are used as an environmental degradation criterion, was investigated in this study. The study used 209 daily data sets from July 31, 2020, to May 28, 2021. The symmetric developed by Hacker and Hatemi-J (Appl Econ 38:1489–1500, 2006), the asymmetric developed by Hatemi-J (Empir Econ 43:447–456, 2012), and time-varying asymmetric causality tests were used as models. According to the study results, while there is no symmetric causality between CO2 emissions and ESG funds, there is causality between CO2 emissions and ESG funds prices for negative shocks and between CO2 emissions and ESG funds trade volume for positive shocks. The results of a time-varying asymmetric causality test also support that this causality relationship varies by period. As a result, ESG funds can be used as a strategic financial tool to improve environmental quality during the COVID-19 period; however, this may vary for different sub-sample periods.
... It makes markets more confident of their economic results and favor their market value. Lastly, Shanaev and Ghimire (2021) found that companies with CSR investments outperform in risk-adjusted returns. To address this concern, we postulate this hypothesis. ...
... Obviously, findings support for incorporating robust favorable ESG profiles to develop the corporate finance strategy. It appears that markets are influenced by the level of firms' ESG ratings when performing about environmental and governance issues, thereby supporting Miralles-Quirós et al. (2019);Shakil, 2021;Shanaev and Ghimire (2021) studies'. Results show that environmental and governance dimensions are the factors that conform the ESG index that will be higher when they are both high. ...
The oil and gas sector is under pressure because of its impact on sustainability. Company’s stakeholders are aware of the ethical behavior of those firms related to hazardous activities. Literature has analyzed the relationship between corporate social responsibility and different measures of efficiency (e.g., financial performance or market value) without a conclusive result.
This research establishes an ESG index (environmental, social and governance) that allows a comprehensive measure of corporate social responsibility and its effects on corporate financial strategy. The study analyzes how the ESG index influences the value of oil and gas companies as well as their financial performance and financial risk. To do this, the PLS-SEM was applied to a sample of 219 oil and gas companies in different countries. Results show that the environmental and governance dimensions are the backbone of the ESG index that positively impact on all three.
... Furthermore, they may use different screening methods to define a responsible investment (Dreyer et al., 2020). The differences in methodologies used by ESG-rating agencies can only amplify this problem (Shanaev and Ghimire, 2021). Finally, the literature frequently uses ...
... Other studies relate ESG considerations to financial performance under situations of market distress. In this case, many authors have found conflicting evidence on the role of ESG in mitigating risk (Ferriani and Natoli, 2021;Broadstock et al., 2021;Shanaev and Ghimire, 2021). ...
Purpose
This paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020.
Design/methodology/approach
The authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods.
Findings
Using US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance.
Research limitations/implications
If ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers.
Originality/value
Two different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.
... Some argue that financial performance and ESG performance trade-offs exist, while others do not find a significant correlation in this relationship. The ESG rating is a relatively young metric that businesses have begun to report over the past decade, and the changes in ESG ratings for companies have become more evident since 2017 (Shanaev and Ghimire, 2021). Thus, new evidence based on this rating would contribute to resolving the confusion caused by the contradictory available evidence in the existing research. ...
... The fourth category focuses on overall ESG performance and its financial implications (Alareeni and Hamdan, 2020). As the measurement of ESG performance became standardized and multiple ESG rating agencies developed rating tools, it became possible for researchers to assess the financial implications of overall ESG performance (Shanaev and Ghimire, 2021). Research across these four categories has produced contradictory results (Alareeni and Hamdan, 2020). ...
Purpose - The purpose of this paper is to investigate the relationship between a company's environmental, social and governance (ESG) performance and its financial performance. This paper also investigates the relationship between ESG performance and a company's market valuation. This paper provides convincing empirical evidence that delivering superior ESG performance pays off financially.
Design/methodology/approach - The financial data and ESG scores of 150 publicly traded companies listed in the Standard and Poor's 500 index for 2017-2020, comprising 5,750 observations, were collected. STATA was used to run a fixed-effect regression and a weighted least squares model to analyze the panel data.
Findings - The results of the empirical analysis suggest that companies with superior ESG performance perform better financially and are valued higher in the market compared to their industry peers. The ESG rating score impacts both return-on-capital-employed as a proxy for financial performance and Tobin's Q as a proxy for the market valuation of a company.
Originality/value - This study contributes to the existing research on ESG performance and financial performance relationship by providing empirical evidence to resolve confusion in the existing literature caused by contradictory evidence. Taking advantage of worldwide crisis caused by the COVID-19 pandemic, this study shows that a positive relationship between ESG performance and a company's market valuation holds even during times of unexpected crises. Further, this study contributes to business practitioners' knowledge by showing that ESG aspects constitute highly relevant non-financial information that impact the market's perception of a company and that investing in sustainability positively impacts a company's bottom line.
... It is necessary considering that many companies in ASEAN still consider that implementing sustainability is still voluntary but essential in enhancing the company's reputation. As a result, delivery in the form of sustainability disclosures is still carried out in various ways, causing different interpretations between stakeholders in the decision-making process [11][12][13][14]. Therefore, it is vital to have a standard that is the same in carrying out sustainability activities and disclosure. ...
... As investors are placing greater emphasis on ESG concerns, a company's disclosure of its ESG performance may impact how investors perceive and make investment choices. One potential J o u r n a l P r e -p r o o f explanation for the beneficial impact of ESG disclosure is the perception of increased financial stability among corporations that engage in corporate social responsibility practices during periods of market uncertainty (Shanaev and Ghimire, 2022). This may attract more investors and funds, resulting in increased stock stability. ...
This research study explores the impact of the ongoing Russian-Ukrainian conflict on ESG-enabled global supply chains, resulting in disruption to worldwide industries. The conflict has caused product shortages, food scarcity, and significantly impacted the global economy. From the extant literature, there is a lack of understanding about the effect of the conflict on different industries from a supply chain perspective, as well as the ESG-prioritized companies. Therefore, this study aims to evaluate the influence of the Russian-Ukrainian conflict on the performance of companies with respect to different regions and industries of their upstream and downstream customers. The top-100 companies in the S&P 500 index which are actively participating in the ESG development are selected and grouped according to customer regions and industries, and the event study analysis is applied to evaluate abnormal returns from stock prices due to the disruption events. Through the empirical analysis, no matter how the ESG-prioritized companies are grouped according to their supply chain structures, it is found that the occurrence of companies obtaining the abnormally high stock return is higher than the occurrence of the opposite. Moreover, the active involvement in ESG disclosure and environmental management demonstrates significant results to withstand disruptions to their supply chains. The findings in this study contribute to a growing body of ESG-related business research, implying that companies which prioritize ESG policies may be better equipped to manage supply chain disruptions during crises.
... Meanwhile, scholars such as Pacelli have begun to use ESG performance as an independent variable to explore its impact on total factor productivity and enterprise value [26]. Shanaev and Ghimire found that a higher level of ESG performance enhances a company's stock returns and market performance, which, in turn, improves investors' perceptions of the company and reduces financing constraints [27]. Currently, ESG performance is mainly used as a causal variable in an attempt to explain the effects it has on the firm. ...
The United Nations Development Summit in 2015 adopted the “2030 Agenda for Sustainable Development”, establishing a framework for Sustainable Development Goals (SDGs) with the aim of achieving coordinated economic, social, and ecological development worldwide by 2030. The “environmental, social, and governance” (ESG) approach is important within the concept of SDGs and is the subject of increasing attention from scholars. Despite China’s significant contributions to the SDGs, it still faces numerous challenges in terms of environmental and governance development. With the ongoing development of digital technology, many Chinese enterprises aspire to harness the dividends of digital transformation in order to achieve SDGs. In this study, we aim to help companies understand how they can improve their ESG performance through digital transformation. We use a sample of A-share listed companies in China from 2011 to 2020 to construct a digital transformation index by profiling the frequency of digital-related words in companies’ annual reports using textual analysis. Furthermore, we empirically examine the direct effect of digital transformation on companies’ level of ESG disclosure and explore the mediating effect of dynamic capabilities on the impact of digital transformation on ESG performance. Empirical testing reveals that digital transformation indeed has a positive impact on enterprises’ ESG performance, and digital technology innovation can enhance ESG performance through dynamic capabilities such as green innovation, social responsibility, and operational management. The findings indicate that companies need to actively develop and promote digital technologies to obtain the benefits of digital transformation, with company executives including advanced technology in their decision-making and operational processes in an effort to promote innovation and management efficiency, thereby improving their ESG performance.
... ESG performance refers to the performance of companies in Environmental (environment), Social (society), and Governance (governance), including relevant actions within the company, such as establishing an appropriate corporate governance framework, using clean energy and equipment, or making ESG disclosures. Existing research shows that ESG performance affects enterprise value [5][6] [7] , enterprise performance [8] and enterprise innovation [9] [10] . ...
... Prior studies show a clear correlation between strong ESG performance and positive financial outcomes, including higher return on equity (ROE), return on assets (ROA), improved cost of capital, and enhanced stock price performance (e.g. Bodhanwala and Bodhanwala 2023, Maji and Lohia 2023, Parikh et al. 2023, Shanaev and Ghimire 2022, Sinha Ray and Goel 2022, Wong et al. 2021). However, Whelan et al. (2021) reviewed more than 1,000 studies on the relationship between ESG and financial performance (e.g. ...
Purposes: This study attempts to evaluate ESG pillars of manufacturing firms in Vietnam based on a framework developed by Global Sustainability Standard, namely General Reporting Initiatives: GRI 2 - General Disclosures 2021, GRI 3 - Material Topics 2021, GRI 4 and its relation to corporate financial performance, and financial risk,
Design/Methodology/Approach: First, a systematic scoring method was employed to evaluate the ESG pillars of 43 listed manufacturing firms in Vietnam from 2017 to 2021. Second, relationships between ESG pillars and corporate financial performance, and corporate financial risk are investigated by employing Fuzzy set Qualitative Comparative Analysis (FsQCA).
Findings: The first findings of the study show ranking ESG scoring of manufacturing firms in Vietnam from 2017 to 2021. In Vietnam, The PAN Group Joint Stock Company (PAN) had the highest performance followed Vietnam Dairy Products Joint Stock Company (VNM). Phu Nhuan Jewelry Joint Stock Company (PNJ) ranked third. In contrast, Duc Giang Chemicals Group Joint Stock Company (DGC) had the worst performance, followed by the KIDO Group Corporation (KDC), and then Vinh Son - Song Hinh Hydropower Joint Stock Company (VSH).
Concerning the effects of ESG pillars on corporate financial performance, and corporate financial risk, the study finds six configurations or six causal paths that lead to high CFP. In addition, twelve configurations lead to low CFR. This study also shows that the S pillar is the core condition combined with the E pillar and G pillar variables leading to high CFP and low CFR results.
Implications: The study on the ranking of manufacturing firms in Vietnam benefits the firms themselves. Firstly, the research findings enable firms in Vietnam to make further enhancements to ESG pillars. Also, the firms can focus on certain ESG pillar variables to ensure their high performance on corporate financial performance and low corporate financial risk. Secondly, the results provide investors and other stakeholders with additional information to make more informed decisions related to manufacturing firms, especially when firms are listed on the Stock Exchange.
... Analyzing the beginning of the pandemic period Folger-Laronde et al. (2020) suggests that socially responsible assets do not have a better financial performance, especially in market downturns. Concerned with the effect of rating changes on stock returns, Shanaev and Ghimire (2021) show that these changes lead to non-statistically significant increases in returns in the case of ESG rating upgrades and when there are downgrades, the results are more impactful and statistically significant. ...
We compare traditional portfolio selection strategies with traditional stock market indexes in their standard and ESG versions. In addition to the comparison of 12 indexes from different markets in their ESG and standard versions. To compare the portfolios we use conventional performance measures, and the results show that replacing the indexes with their ESG versions does not detract from performance in terms of the Shape ratio and other measures. In general, there is no statistically significant difference between the returns of the indexes and the portfolios built with these indexes compared to those using the standard versions. So that the investor concerned with environmental and social issues can replace their equity market investments with ESG assets without harming their financial performance.
... Implikasinya, bank harus menerapkan kebijakan penyaluran kredit dan in vestasi yang mengikuti paradigma berkelanjutan dan bertanggung jawab pada aspek sosial maupun lingkungan. Chouaibi et al. (2021), Khan (2019), dan Shanaev & Ghimire (2022) secara lintas neg ara memperlihatkan capaian ESG perusahaan diapresiasi investor. Informasi yang terkandung dalam lapor an keberlanjutan mampu menggam barkan kinerja organisasi dan juga dampaknya pada aspek ekonomi, sosial, dan lingkungan. ...
Abstrak – Pentingnya Laporan Keberlanjutan bagi Perbankan di Indonesia
Tujuan Utama – Penelitian ini berupaya untuk membuktikan pengaruh pengungkapan laporan keberlanjutan terhadap nilai perusahaan menggunakan dua variabel kontrol, yaitu return on asset dan loan to deposit ratio.
Metode – Penelitian ini menggunakan metode regresi linier berganda. Sampel penelitian ini adalah laporan keberlanjutan dan laporan keuangan perusahaan sektor perbankan yang listing di Bursa Efek Indonesia selama tahun 2018-2022.
Temuan Utama – Penelitian ini membuktikan pengungkapan laporan keberlanjutan memicu nilai perusahaan. Selain itu, nilai perusahaan juga ditemukan berpengaruh negatif terhadap loan to deposit ratio. Walaupun demikian, nilai perusahaan terbukti tidak dipengaruhi oleh return on asset.
Implikasi Teori dan Kebijakan - Penelitian ini menunjukkan bahwa teori pemangku kepentingan, legitimasi, dan sinyal dapat menghasilkan rancangan strategi tujuan pembangunan berkelanjutan bagi perusahaan perbankan. Oleh karena itu, Investor dapat melihat pengungkapan laporan keberlanjutan perusahaan untuk memprediksi nilai perusahaan.
Kebaruan Penelitian - Kebaruan penelitian ini adalah penggunaan variabel kontrol return on asset dan loan to deposit ratio pada pengujian variabel.
Abstract – The Importance of Sustainability Reports for Banking in Indonesia
Main Purpose – This study seeks to prove the effect of sustainability report disclosure on firm value using two control variables: return on assets and loan-to-deposit ratio.
Method – This study uses multiple linear regression as the method. The samples are sustainability and financial reports of banking sector companies listed on the IDX during 2018-2022.
Main Findings – This study proves that sustainability reports disclosure triggers corporate value. In addition, firm value harms the loan-to-deposit ratio. Even so, it is proven that firm value is not affected by return on assets.
Theory and Practical Implications - This study shows that stakeholder, legitimacy, and signalling theories can produce strategic designs for sustainable development objectives for banking companies. Therefore, investors can look at the company's sustainability report disclosures to predict the company's value.
Novelty - The novelty of this research is the use of control variables return on assets and loan-to-deposit ratio in variable testing.
... Recent work has uncovered a clear correlation between strong ESG performance and positive financial outcomes, including higher return on equity (ROE), improved cost of capital, and enhanced stock price performance. See, for example, Bodhanwala and Bodhanwala (2023); Maji and Lohia (2023); Parikh et al., (2023); Shanaev and Ghimire (2022); Sinha Ray and Goel (2023), and Wong et al., (2021). In a related stream of literature, several studies have investigated the impact of ESG scores and ratings on lending institutions and portfolio allocation. ...
We examine the impact of ESG practices on financial performance among Nifty 50
companies in India from 2015 to 2022. Using fixed-effects panel quantile regression, we observe that the relationship between ESG practices and financial profitability varies across the ROE distribution. While the environmental pillar score and the governance pillar score negatively impact ROE almost all quantiles with high statistical significance, the social pillar score exhibits mostly an insignificant relationship. Its impact is negative but only mildly statistically significant in the lower end of the ROE distribution. The findings and their implications are important to investors, corporate executives, and policymakers.
... ESG scores provide readily available data on corporate sustainability performance, and ESG scores and ESG evaluation systems are widely used in the literature to measure corporate sustainability performance [5]. Some scholars have directly used existing ESG evaluation systems, such as those offered by Bloomberg (Bloomberg) [5], Morgan Stanley Capital International (MSCI) [6,32], Thomson Reuters [33,34], and Refinitiv [34], for their studies. Some researchers have also adopted measurement frameworks similar to international measurement methods, adapting specific indicators in the evaluation framework based on the research context [35,36]. ...
In 2021, China’s power generation industry took the lead in launching carbon emissions trading, ushering in a major challenge and opportunity for the sustainable development of power enterprises. Assessing the sustainable development performance of power enterprises has become the key to the sustainable financing and development of power enterprises in this new developmental stage. Based on the integration of the long-term UN Sustainable Development Goals (SDGs) and the ESG (Environmental, Social, and Governance) evaluation indicators of listed companies, this paper constructed an index system for the evaluation of the sustainable development of electric power companies consisting of 75 indicators corresponding to four dimensions: economic, social, environmental, and governance. Given the vision for the sustainable development of electric power companies, the assessment thresholds for each indicator were determined by the practical exploration and typical progress assessment of SDGs. Aggregate assessment and dashboard assessment techniques for the sustainable development of electric power companies were established, and we conducted a robustness analysis of the evaluation system. The results revealed the following details: (1) The disclosure of sustainable development indicators of Chinese electricity enterprises was 94.13%, among which the four dimensions of economy, environment, society, and governance were 99.89%, 82.62%, 94.00%, and 97.71%, respectively. (2) The aggregate sustainable development index for Chinese power companies was 59.34, and the environment, society, governance, and economic scores were 62.10, 64.49, 76.79, and 41.37, respectively. (3) Based on the results of the dashboard, investment in innovation, public welfare, emissions of greenhouse gases, and economic sustainability are the key factors limiting the achievement of sustainable development. (4) The framework’s robustness analysis showed that the results of the evaluation of this paper’s indicator framework fell within a reasonable range of variation using different ranking and weighting systems. Chinese electricity companies should comprehensively control costs and expenses, strengthen capital management, expand funding channels, focus on enhancing R&D capabilities, enhance their scientific and technological innovation management systems, and improve their disclosure of information about greenhouse gas emissions, resource consumption and use, and employee issues to improve the overall level of sustainable development. The evaluation system developed in this paper further enriches the evaluation of corporate sustainability performance. This paper explored the application of the SDG index and dashboard construction methods at the national level to the evaluation of sustainability at the corporate level, providing a clear picture of corporate performance with respect to various dimensions, issues, criteria, and indicators.
... ESG rating downgrades are also associated with negative stock abnormal returns [60]. Moreover, Barros et al. [61] show that firms have higher ESG performance following M&A activity. ...
Financial distress is a research topic in finance that has attracted attention from academia following past financial crises. Although previous studies associate financial distress with several elements, the relationship between distress and ESG has not been broadly explored. This paper investigates these issues by elaborating a Dynamic Network DEA model to address the underlying connections between accounting and financial indicators. Thus, a model that includes profit and loss, balance sheet, and capital and operating expenditures indicators is demonstrated under the dynamic network structure to compute financial-distress efficiency scores. Then, the impact of carryovers is considered for the accurate calculation of efficiency scores for the three substructures. The influence of contextual variables, such as socioeconomic and macroeconomic variables, and whether the firm owns an ESG Risk Score or not, is assessed through a stochastic non-linear model that combines three distinct regression types: Simplex, Tobit, and Beta. The results indicate that firms that hold an ESG Risk Score are less prone to be in financial distress, and Governance Score is negatively associated with financial distress efficiency.
... This requires collective effort and transformational change in attitude, investment approaches, and business practices. Goals 12 and 17 of the SDG encourage companies to adopt and integrate sustainable practices into their business models and further highlight the need for multi-stakeholder partnerships to meet the targets of the sustainable goals [93]. ...
As investors' knowledge on sustainability concerns rises, the concept and interest of sustainable investment continue to expand and become increasingly attractive as the global financial market is considered an effective and powerful tool in the process of developing sustainable economies. Although sustainability is not a new concept in the financial market, its recent recognition and wider adoption has increased as consumers, investors, businesses, and world leaders have become more sensitive and concerned about the future of the planet. Hence, this paper reexamines the impact of environmental, social, and governance (ESG) scores on the financial performance of the listed companies on the German Stock Exchange from 2011 to 2021. With a total of 450 listed firms and 4,950 observations sourced from the Refinitiv database, vector autoregressive (PVAR) together with the system-generalized method of moments (system-GMM) and robust panel multiple regression models were employed to examine the impact and causal relationship between ESG scores and corporate financial performance. The results suggest that ESG scores contribute to organizations' financial performance. We found that better ESG ratings increase companies' systematic risk (volatility), which could boost or increase their stocks' returns. The study however did not find Granger causality between ESG scores and the accounting-based financial performance (ROA), but it did for the market-based financial performance (Tobin's Q). It showed that ESG scores negatively Granger cause firms' financial performance. In a nutshell, organizations' financial performance may be improved by having a higher ESG score and performing better in the social dimension. Overall, the evidence supports the idea that a business case exists for sustainability and corporate social responsibility.
... Glück, Hübel, and Scholz (2021)s h o w that downgrades in the environmental and social dimensions of an MSCI ESG rating lead to negative abnormal stock returns within 11 days of a rating change. Shanaev and Ghimire (2022) also document an effect of MSCI rating downgrades over a one-month period. Rzeznik, Hanley, and Pelizzon (2022)s h o wt h a tap r o f o u n dm e t h od o l o g yc h a n g e in Sustainalytics ESG ratings led to transitory price pressure for firms whose ratings changed the most, pressure that subsided five months after the event. ...
... Besides, it is important for investors to consider the changes in ESG ratings when making investment decisions since they also affect returns. Despite the fact that increases in ESG rating may lead to positive (although inconsistently and small) abnormal returns, the ESG rating downgrades yield statistically significant negative risk-adjusted returns [23]. ...
Investment management has been an important part in a long-term financial planning for investors around the world. Traditionally, investors aim to maximize the risk premium relative to the riskiness of the investment subjected to certain goals and constraints such as the time horizon, risk appetite, and consumption behavior. Recently, investors, both retail and institutional investors, have shown significant interests in sustainability especially on the environmental, social, and governance, which is often referred to as ESG investments. Studies on ESG investing are unable to reach consensus. We will review literature related to ESG investing in order to identify key limitations that obstruct advancements in this field. In particular, key limitations that we have identified involve the issues of data inconsistencies and the choice of benchmarks, among others. Furthermore, this chapter identifies areas for future research that address these limitations and thus should advance research in this field.
... Such panel dataset, spanning over several variables of interest across multiple time periods, tends to reduce the probability of errors on temporal scale in the process of generalization of results (Bell, Bryman, and Harley 2022). Other applications adopted by the researchers in the related field comprise data envelopment analysis by Xie et al. (2018), capital asset pricing model (CAPM) by Avramov et al. (2021), clustering technique in regression analysis by Mohammad and Wasiuzzaman (2021) and calendar-time portfolio methodology by Shanaev and Ghimire (2022), to name a few. ...
ABSTRACT
The study attempts to empirically investigate the impact of ESG score on the financial variables
that may affect the performance of firms in the Indian context; SEBI’s recent mandate on ESG
reporting by the listed entities being the point of departure for the present discourse.
A representative sample of 48 Indian firms having ESG scores under BSE-100 index is used in the
analysis. The study period comprises the years 2011–2019. Static and dynamic panel regression
analyses are conducted. The financial performance variables incorporated in this paper include
ROA, ROE, firm size, market capitalization, PBDIT, Tobin’s Q and share price. It is demonstrated that
ESG score influences these variables, however with time lags. The distinctive contribution of the
current endeavour lies in establishing a long-term positive association between ESG disclosure and
annual average share price for the listed firms in a developing economy like India. The results are
implicative of the fact that ESG score is an emerging indicator for conceiving future financial
performance and risk mitigation strategies, and therefore, of considerable importance from policy
perspective.
This study explores the research on Environment, Social and Governance (ESG) investments, which have emerged as a feasible way to strike a balance between sustainability, responsibility and profitability. The article employs bibliometric technique to analyse 161 articles published on ESG investments after 2007 in Scopus database. The data were analysed using VOS viewer. There was a sudden surge in publications is ESG investments after COVID pandemic. Seven clusters emerged out of bibliographic coupling; ESG risk and return, preferences for ESG investments, ESG investments under shocks, usage of ESG information, influence of ESG rating and determinants of ESG investment. The study provides insights into the evolution of ESG investing over time and across organizations and countries. The results indicate that ESG investments provide an alternative way to manage risk-reward trade-off. The study presents the prominent countries, institutions, sources, authors and cited articles in the area of ESG investments. The findings will be beneficial for investors and policymakers interested in ESG investments.
In recent years environmental, social, and governance (ESG) aspects have gained a notable emphasis. The present paper primarily aims to select a portfolio of the stocks listed to ESG index at BSE, India based on their market performance. To this end the ongoing research proposes a new extension of compromise ranking of alternatives from distance to ideal solution (CRADIS) model by using grey correlational approach to foster a flexible decision-making under uncertainty. Through comparison with other multi-criteria decision making (MCDM) models it is revealed that the grey correlational CRADIS (GC-CRADIS) provides a reasonably reliable result. The sensitivity analysis (with flexible changes in the given conditions) shows the stability in the result. A possible portfolio of ESG stocks is resulted using GC-CRADIS. Further, the current paper attempts to delve into the association of the stock performance with ESG score. However, no significant association of stock performance with others is noticed. The findings of the paper help in formulating a portfolio of ESG stocks for investment.KeywordsStock selectionMarket performanceESGGrey correlationCompromise ranking of alternatives from distance to ideal solution (CRADIS)Logarithmic Percentage Change-driven Objective Weighting (LOPCOW)
I investigate the exposure of sectoral equity portfolios to climate transition risks by augmenting a three-factor asset pricing model with a green-minus-brown (GMB) factor as a proxy. I estimate the relationship between risk factors and excess returns within an additive mixed model representation, which flexibly captures possible changes in investors' subjective beliefs as reflected in the determinants of asset pricing. Empirical evidence is provided based on European sectoral portfolios covering the 2016--2021 period. Compared to classic linear models, the results show an improvement in model goodness-of-fit when flexibly estimating the relationship between risk factors and excess returns. I confirm previous studies that exposure to climate transition risks particularly affects high-energy-intensity sectors. I also find heterogeneity in exposure between firms within each sectoral portfolio in terms of the sign and/or magnitude of estimates. Moreover, some firms still have no statistically significant exposure to climate transition risks.
Environmental (E), social (S), and governance (G) concepts have become a global consensus. Therefore, exploring the motivation mechanism adopted by companies to carry out ESG practices to promote sustainable social and economic development is of far-reaching significance. This study investigated whether there was a peer effect in the ESG practices of A-share listed companies and explored its mechanism of action and economic consequences using the data of Chinese A-share listed companies from 2010 to 2021. The empirical results show that there is a significant regional and industry peer effect on the ESG practices of A-share listed companies, which still holds when the average stock trait return is used as the instrumental variable. Furthermore, the mechanism test indicates that the information learning motive and agency cost are potential reasons for the peer effect of ESG practices. On the one hand, followers with information disadvantages tend to imitate the ESG practices of leaders with information advantages, but the converse is invalid. On the other hand, a worse external information environment leads to a higher degree of uncertainty, while a higher agency cost leads to a stronger peer effect of ESG practices. Lastly, the peer effect of corporate ESG practices helps create corporate value and increases corporate risk-taking to some extent. This paper provides a new micro perspective for understanding the occurrence mechanism and economic consequences of ESG practices, as well as crucial empirical evidence for firms to make sustainable development investment decisions.
Enterprises are important subjects in the transformation of national green development, while financial support is an important thrust to promote the fulfillment of environmental responsibility. In the dual context of building a digital inclusive financial system and green transformation of corporate production, this paper explores the impact of digital inclusive finance on corporate ESG performance and its mechanism of action through theoretical and empirical analyses using data of Chinese A-share listed enterprises from 2011 to 2020. It is found that the development of digital inclusive finance significantly contributes to the improvement of corporate ESG performance, and the impact of digital inclusive finance on corporate ESG performance has a marginal decreasing effect, while corporate green technology innovation has a marginal increasing effect on corporate ESG performance. The mechanism analysis found that corporate green technology innovation has a mediating effect. The development of digital inclusive finance can enhance the green technology innovation ability of enterprises, and the green technology innovation of enterprises enhances the green sustainability ability of enterprises and improves the ESG performance of corporates. Further research shows that the effects of digital inclusive finance and corporate green technology innovation on corporate ESG performance are industry heterogeneous and pollution degree heterogeneous. How to promote financial services to better promote the combination of corporate green development and fulfillment of social and environmental responsibility is the most direct research implication of this paper.
RELAÇÕES ENTRE OS FATORES ENVIRONMENTAL, SOCIAL, AND
GOVERNANCE (ESG) DE MEIO AMBIENTE, SOCIAL E GOVERNANÇA COM A
PERFORMANCE CORPORATIVA FINANCEIRA (CFP) DAS EMPRESAS TÊM SIDO
MUITO ESTUDADA AO LONGO DOS ANOS. ESTE ARTIGO TEVE COMO OBJETIVO
REALIZAR UMA PESQUISA BIBLIOGRÁFICA SOBRE CINCO ESTUDOS IMPORTANTES
SOBRE O TEMA. OS ESTUDOS ABORDAM ASPECTOS SEMELHANTES DO ESG E DA
PERFORMANCE FINANCEIRA CORPORATIVA E TÊM COMO OBJETIVO TRAZER
VISÕES COMPLEMENTARES SOBRE ESSA RELAÇÃO. EM GERAL, A COMPLEXIDADE
DESSE VÍNCULO PROMOVE UMA A AUSÊNCIA DE LINEARIDADE CLARA ENTRE A
INTEGRAÇÃO DE FATORES ESG E A CFP. PÔDE-SE OBSERVAR TAMBÉM QUE, EM
ESTUDOS COM MAIOR BASE DE DADOS, AS RELAÇÕES NÃO SÃO TÃO FORTES.
FINALMENTE, OBSERVA-SE UMA RELAÇÃO POSITIVA ENTRE ESG E PERFORMANCE
FINANCEIRA CORPORATIVA. ADEMAIS, ENTRE OS VALORES INDIVIDUAIS DO ESG,
O ASPECTO DA GOVERNANÇA É NOTADO COMO TENDO MAIOR IMPACTO NESSAS
RELAÇÕES.
The heterogeneity of ESG rating outcomes, due to different methodologies adopted by ESG rating providers and an unclear distinction between ratings, scores, and opinions, leads to multidimensionality of information. This study aims to analyse the state of the art of the scientific literature on ESG ratings, scores, and opinions. The analysis was conducted using both bibliometric and systematic reviews of the literature, using data visualisation techniques. Our main research question is: what are the main trends analysed in the literature on ESG ratings, scores, and opinions? Our initial hypothesis is that the existing literature tends to focus on specific issues and leaves other areas of inquiry uncovered, e.g., by not drawing appropriate distinctions in terms of methodologies, definitions, and relationships to ESG risks, while also placing less focus on the specific implications of the ESG topic for banks and financial intermediaries. Our results indicate, first, a lack of clear demarcation between the different methodologies and definitions used to assign ESG ratings and scores; implications relate to disclosure profiles and investors’ use of information. Secondly, our analysis shows that—although ESG issues play an essential and growing role in the financial sector—there are still rather few studies that explicitly focus on the effects of ESG profiles from a purely banking and finance perspective.
This paper investigates whether there exists a clear relationship between ESG indicators and financial performance with specific reference to the CoVid-19 crisis and to discover what are, if any, the key takeaways for issuers that emerge from such relationship. To assess this connection, we carried out an ESG scores based long-short portfolio analysis in the spirit of Fama and French (1992) on the European market in the period 2016‒2021. The results indicate that there is robust evidence that the bottom decile portfolio provides negative alphas and some weak evidence that the long-short portfolio provides some positive abnormal returns compared to all three most prominent asset pricing models (CAPM, Fama-French three-factor model and Fama-French five-factor model).
The article aims to empirically test the hypothesis on the impact of environmental, social and corporate governance (ESG) practices and employees’ personal environmental concerns on the performance of Russian companies. The methodological basis is the theory of corporate social and environmental responsibility embodied in the ESG concept. Exploratory factor analysis and linear regression are used to assess individual factors of corporate responsibility and personal environmental concerns on the ability of companies to perform better, i.e. to achieve their long-term goals. The empirical basis is the survey data of 339 employees of Russian companies. The research results show that strategic aspects of environmental responsibility and corporate governance are strongly connected within a single theoretical framework, while social responsibility of companies and environmental concern can be identified as a separate area of managerial efforts. Originality of the chosen approach is related to the proposed structured questionnaire that reveals various aspects of personal environmental concern and contributes to ESG practices assessment. The conducted regression analysis has demonstrated a positive impact of ESG strategies on the performance of the Russian companies in question, showing that social responsibility plays a decisive role in the ESG formula. Environmental concerns of employees do not have a significant effect on their personal assessment of organizational performance. The authors propose that managers should implement the most relevant ESG practices discussed in this article to sustain high levels of organizational performance.
This study investigates the dynamic volatility connectivity of important environmental, social, and governance (ESG) stock indexes from May 2010 to March 2021. The empirical research is focused on five major S&P ESG stock indexes from the US, Latin America, Europe, the Middle East and Africa, and Asia Pacific regions. The study reveals that ESG stock indexes in the Middle East Africa, and Latin America are net shock transmitters, whereas the United States and Asia Pacific are net volatility receivers. Furthermore, the study finds that bilateral intercorrelations are higher among US, Latin America, and Europe region group pairs and weaker in relation to Middle East Africa and Asia Pacific region group pairs, indicating the presence of contagion within developed and/or emerging regions, which has relevance for portfolio and risk management.
This study investigates the effect of digital finance on corporate environment, social and governance (ESG). Using a large sample of Chinese listed firms over the period 2011–2020, we find that digital finance positively affects corporate ESG performance, which remains robust after a series of robustness checks. We also find that digital finance enhances the ESG by mitigating corporate financial constraints. In addition, the positive effect of digital finance on corporate ESG performance is more pronounced in non-state-owned firms, small-sized firms, firms with lower level of marketization, and firms located in the central and western regions of China. Overall, we provide a timely assessment of the social value of digital finance in emerging countries like China from the new perspective of ESG.
The literature on the risk-return performance of equity portfolios depending on their ESG score is mixed. While most studies use some variant of Fama-French, we optimize equity portfolios of the NYSE between 2018-2019 according to the Markovitz mean-variance framework depending on their ESG scores to better reflect the behavior of financial agents. We then systematically analyze the optimal and efficient portfolio performance and find that high ESG portfolios have lower volatility and even lower returns, resulting in lower Sharpe ratios. The lower performance of high ESG portfolios is homogeneous across the three ESG components and robust across specifications.
Given the scarcity of comprehensive review studies in the literature, this bibliometric analysis thrives on taking a scientific approach to delivering quantitative and qualitative information on the ever-evolving field of ESG. Utilizing the performance analysis and science mapping techniques which includes citation analysis, co-word analysis, the study reports a holistic overview of 693 (ESG) papers from 1991 to 2020. The paper aims to provide a unified perspective on the evolution and further identify future research directions in this field. The findings point to the most important countries, authors, studies, and top journals in this field. Results show that published articles on ESG gained momentum after 2006; however, an exponential rise is being observed in the past 5 years, with research focusing on sustainable finance, sustainable development, ESG, and CSR with themes extending to risk management, stakeholder engagement, and portfolio construction, among others. Furthermore, the research identifies how the practice of ESG reporting affects many variables such as financial performance, social performance, environmental performance, and sustainability score. The findings also indicate that the field of ESG is still evolving, with numerous unexplored themes. The work is novel and relevant on the pretext that it uses the Scopus and Web of Science databases for bibliometric mapping, whereas previous studies have used the Scopus database but have lacked a robust methodology, so the findings of this study provided strong support for identifying emerging paradigms in the ESG literature.
Climate change is reshaping finance. Climate risks affect local, national and transnational financing and change investors perspectives and long-term assumptions for risk and economic growth. The transformation to sustainable financing is shifting capital allocation towards ESG projects and investments with far-reaching impacts for financial markets and businesses of all sizes. This Special Issue of Corporate Governance and Research & Development Studies focuses on the topic of "Climate risk, sustainable finance and businesses". We welcome a broad set of research studies that contribute to a deeper understanding of the current and potential impact of climate risk on financial market players and business performance. The aim of this issue is twofold: to understand the perspectives of investors and financial regulators, and the impact of sustainable markets and policies on businesses. Climate risk is investment risk; hence we invite academic research that will help to clarify the best ways of constricting sustainability-and climate-integrated portfolios targeting at better risk-adjusted returns to investors, new approaches and methodologies that account for common risk-adjusted and sustainability factors, research targeting ESG ratings uncertainty and the use of new climate-investing benchmarks. Companies of all sizes will be profoundly affected by the transition to a net zero economy. Therefore, it is crucial to understand the impact of ESG practices on firm value, performance and corporate governance systems. Special attention should be given to SMEs, considering their role in economic development, jobs creation, innovation and growth. This issue is targeting studies that provide theoretical or empirical evidence on the relationship between ESG practices and firm value and performance, the impact of sustainable policies on growth and innovation, methodological and theoretical papers discussing the costs of implementing socially responsible actions versus firm performance and ESG benefits. We aim at collecting a broad spectrum of empirical contributions that cover important features in both domains. We welcome all aspects of
research on climate risk, sustainable finance and its impact on businesses, which include but are not limited to:
• Corporate social responsibility, ESG practices and firm performance
• The impact of corporate social responsibility and ESG practices on firm value
• The relationship between corporate social responsibility/ESG practices and firm
investments and innovation
• Characteristics of firm management, CEO benefits and corporate social
responsibility
• The impact of corporate governance and board structure on corporate social
responsibility
• Climate risk, sustainability and firm access to financing
• The importance of climate risks for private investors and access for firm financing
• Impact of ESG ratings on firm financing
• Issues in ESG ratings construction
• The value of corporate social responsibility and ESG practices during the financial
crisis and COVID-19 pandemic
• ESG disclosure based on a cross-country analysis
• Theoretical and methodological papers on the measure of sustainability
• Public, media and social media impact on corporate social responsibility and ESG
profile
• Corporate social responsibility/ESG practices and institutional ownership
• Corporate social responsibility, sustainability, firm strategy and timing
• Environmental shareholder value, impact on firm decisions and performance
• The impact of ESG practices on brand valuation
• ESG disclosure, information asymmetry and market efficiency
• The relationship between ESG and IPO underpricing
• Volatility of ESG firms
• The impact of ESG obligations on portfolio composition and fund flow
• ESG impact and risk factor models
• Various research targeting sustainable and socially responsible SMEs
• Diversity on corporate boards, CSR/ESG practices and firm performance
We introduce a factor approach to performance measurement of global ESG equity investments. We construct ESG pure factor portfolios (PFP) following Fama-MacBeth; then, applying Fama-French (FF) spanning regressions that simultaneously test performance and the validity of adding new ESG factors to the FF 5-factor model. To address endogeneity, we use a GMM-IV estimator. Our ESG portfolios do not generate significant alphas during 2015-2019, corroborating the literature's neutrality argument. We find no sufficient evidence for ESG factors to complement FF5. PFPs, nevertheless, may serve as ESG indices to quantify investment portfolio sustainability risks via performance attribution of the ESG factor tilt.
There are two primary factors that affect expected returns for companies with high ESG (environmental, social and governance) ratings—investor preferences and risk. Although investor preferences for highly rated ESG companies can lower the cost of capital, the flip side of the coin is lower expected returns for investors. Regarding risk, the jury remains out on whether there is an ESG‐related risk factor. However, to the extent, ESG is a risk factor it also points towards lower expected returns for investments in highly rated companies. Though ESG investing may have social benefits, higher expected returns for investors are not among them.
With the advent of the COVID-19 pandemic, the world has experienced economic and social fragility, which calls for alternative approaches to navigate towards sustainable outcomes. While recent studies show that responsible investments (RI) are resilient during the economic downturn caused by crises such as COVID-19, there has been little exploration into exchange-traded funds (ETFs). Using ANOVA and multivariate regression models, we analyze the differences and relationship between the financial returns of ETFs and their Eco-fund ratings during the COVID-19 pandemic-related financial market crash. Our results indicate that higher levels of the sustainability performance of ETFs do not safeguard investments from financial losses during a severe market downturn. These results contribute to the research by exposing weaknesses of current sustainability scores and rating methods to provide an initial analysis of RI during the COVID-19 pandemic
While a growing number of firms are being evaluated on environment, social and governance (ESG) criteria by sustainability rating agencies (SRAs), comparatively little is known about companies’ responses. Drawing on semi-structured interviews with companies operating in Italy, the present paper seeks to narrow this gap in current understanding by examining how firms react to ESG ratings, and the factors influencing their response. Unique to the literature, we show that firms may react very differently to being rated, with our analysis yielding a fourfold typology of corporate responses. The typology captures conformity and resistance to ratings across two dimensions of firm behaviour. We furthermore show that corporate responses depend on managers’ beliefs regarding the material benefits of adjusting to and scoring well on ESG ratings and their alignment with corporate strategy. In doing so, we challenge the idea that organisational ratings homogenise organisations and draw attention to the agency underlying corporate responses. Our findings also contribute to debates about the impact of ESG ratings, calling into question claims about their positive influence on companies’ sustainability performance. We conclude by discussing the wider empirical, theoretical and ethical implications of our paper.
The rising sustainability awareness among regulators, consumers and investors results in major sustainability risks of firms. We construct three ESG risk factors (Environmental, Social and Governance) to quantify the ESG risk exposures of firms. Taking these factors into account significantly enhances the explanatory power of standard asset pricing models. We find that portfolios with pronounced ESG risk exposures exhibit substantially higher risks, but investors can compose portfolios with lower ESG risks while keeping risk-adjusted performance virtually unchanged. Moreover, investors can measure the ESG risk exposures of all firms in their portfolios using only stock returns, so that even stocks without qualitative ESG information can be easily considered in the management of ESG risks. Indeed, strategically managing ESG risks may result in potential benefits for investors.
Nonfinancial performance measures, such as environmental, social, and governance (ESG) measures, are potentially leading indicators of companies’ financial performance. In the study reported here, I drew on prior academic literature and the concept of ESG materiality to develop new corporate governance and ESG metrics. The new metrics predicted stock returns in a global investable universe over the tested period, which suggests potential investment value in the ESG signals.
EU regulations mandate that short sellers disclose short positions as of 0.2% to authorities, which publicly disclose positions as of 0.5%. In January 2017, the Netherlands Authority for the Financial Markets accidentally disclosed confidential positions. Using the entire register, we show that small positions forecast future underperformance. We use the accidental disclosure as natural experiment to analyze the effect of publishing this information. Abnormal returns are positive after the disclosure. A possible explanation is that perceived short-selling risk on disclosed positions increased, which reduced the appetite for shorting. This is consistent with a post-event drop in abnormal short sales costs.
Low credit risk firms realize higher returns than high credit risk firms. This is puzzling because investors seem to pay a premium for bearing credit risk. The credit risk effect manifests itself due to the poor performance of low-rated stocks (which account for 4.2% of total market capitalization) during periods of financial distress. Around rating downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. The evidence for the credit risk effect points towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.
Environmental, social, and corporate governance (ESG) scores are frequently involved in investment-related decision-making, e.g. for red-flagging or to manage risks. The increasing interest in ESG data raises the question about their validity from various sources. Therefore, we explore the consistency and convergent validity of the well recognized ESG data providers. Exploratory factor analysis of S&P Global 1200 index demonstrates considerable uncertainty across extracted latent factors. Further factor analyses show that the consistency and convergent validity across ESG data significantly depend on the industry type and the country of domicile. These findings are supported by confirmatory factor analyses. Thus, the stakeholders are encouraged to incorporate the company sector and domicile aspects into their decisions. Otherwise, naive use of primary ESG scores may provide a misleading clue.
This study analyzes whether investors take risks related to environmental, social and governance (ESG) factors into account when making portfolio decisions. We exploit the new Morningstar’s ESG risk indicators – introduced at the end of 2019 – to estimate the effect of ESG risk perception on investment fund flows. Our exercise, related to the early phase of the Covid-19 crisis when uncertainty skyrocketed, shows that investors have preferred low-ESG-risk funds, with environmental risks remaining a top concern.
This paper investigates the role of the intensity and relevance of ESG materiality in equity returns. Adopting the classifications of materiality provided by the Sustainability Accounting Standards Board (SASB), the paper introduces the concept of the financial relevance and financial intensity of ESG materiality in order to estimate how it explains equity returns. The results of the analysis, based on a large sample of U.S. companies included in the Russell 3000 from January 2008 to July 2019 show that not only do ESG rating changes (ESG momentum) have a consistent impact on equity performance, but also that the market seems to reward more those companies operating in industries with a high level of concentration of ESG materiality. The implication is that the equity premium of listed companies is better explained by the concentration of material issues (i.e. the Gini index) than by the ESG momentum.
We examine the role of ESG performance during market-wide financial crisis, triggered in response to the COVID-19 global pandemic. The unique circumstances create an inimitable opportunity to question if investors interpret ESG performance as a signal of future stock performance and/or risk mitigation. Using a novel dataset covering China’s CSI300 constituents, we show (i) high-ESG portfolios generally outperform low-ESG portfolios (ii) ESG performance mitigates financial risk during financial crisis and (iii) the role of ESG performance is attenuated in ’normal’ times, confirming its incremental importance during crisis. We phrase the results in the context of ESG investment practices.
This paper examines the impact of environmental, social and governance (ESG) certification on Malaysian firms. The analysis shows that ESG certification lowers a firm's cost of capital, while Tobin's Q increases significantly. These findings, while consistent with existing studies in developed economies, demonstrate the value enhancement from corporate social responsibility disclosure by firms in emerging and developing nations. Overall, the study confirms the benefits to stakeholders from firms pursuing an ESG agenda.
This paper analyses the increasing practice of considering environmental, social, and governance (ESG) factors by conventional pension funds. We study whether the SRI (Social Responsible Investing) concerns are affecting traditional management. In an initial sample of 22 SRI and 221 conventional UK domestic equity pension funds from 2016 to 2018, we apply the nearest-neighbour matching to account for fund-characteristic differences, selecting 20 matched conventional funds. We then analyse the influence of fund characteristics on ESG fund scores, and the ESG-score impact on performance and flows with linear models. Our results show that the ESG scores of conventional and SRI funds are influenced by some common characteristics (age/turnover and expenses negatively/positively influence ESG scores), which are consistent with SRI features. Additionally, a higher ESG screening intensity provides greater return and larger flows. Nonetheless, SRI funds do not lose their identity, positively influencing into ESG scores to a greater extent and outperforming.
This study examines environment, social, governance (ESG) consideration in rating reports published by credit rating agencies. 3,719 Moody's credit rating reports between 2004 and 2015 are examined and the ESG consideration is analyzed using a latent dirichlet allocation (LDA) approach. We further analyze the stock returns and credit default swap (CDS) spread changes to check whether ESG consideration has an effect on the capital market reactions. We find a small but present consideration of ESG in rating decisions. Within ESG, corporate governance plays the most important role. Moreover, the results reveal that ESG consideration is a significant determinant in the stock return and CDS spread around the rating announcement. We find that all ESG criteria are important for equity and debt investors.
This study investigates the presence of political risk premia among 298 listed companies from 59 Russian regions over a five-year period (10/2012–09/2017). Using a regional political stability score not available in the literature, this paper applies panel data approach to evidence the pricing of regional political risk in forms of long-term political instability premium (up to 2.20% monthly) and short-term impact-shock premium. The findings indicate that regional political risk is more impactful than countrywide or international risk and that regional political processes are crucial for the understanding of the synchronisation of stock returns with broader markets.
type="main"> 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%.
Using a sample of target firms that do not delist from the stock market after a majority takeover, we investigate the effect of the target CEO's departure on their firms’ subsequent financial performance. We find that CEO departures have a positive effect on the target firms’ long-run operating performance, measured by firms’ operating return on assets and return on equity. However, we do not find a significant effect of CEO turnover on target stock returns in the post-takeover period. These results are consistent with the predictions of the inefficient management hypothesis, which contrast with those of the valuable management hypothesis.
This paper contributes both to investigating the link between the corporate social and financial performance based on environmental, social and corporate governance (ESG) ratings and to reviewing the existing empirical evidence pertaining to this relationship. The sample used includes ESG data of ASSET4, Bloomberg and KLD for the U.S. market from 1991 to 2012. The econometrical framework applies an ESG portfolio approach using the Carhart (1997) four-factor model as well as cross-sectional Fama an MacBeth (1973) regressions. Previous empirical research indicates a relationship between ESG ratings and returns. As against this, the ESG portfolios do not state a significant return difference between companies with high and low ESG ratings. Although the Fama an MacBeth (1973) regressions reveal a significant influence of several ESG variables, investors are hardly able to exploit this relationship. The magnitude and direction of the impact are substantially dependent on the rating provider, the company sample and the particular subperiod. The results suggest that investors should no longer expect abnormal returns by trading a difference portfolio of high and low rated firms with regard to ESG aspects.
A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF, 1993). The five-factor model's main problem is its failure to capture the low average returns on small stocks whose returns behave like those of firms that invest a lot despite low profitability. The model's performance is not sensitive to the way its factors are defined. With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine.
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%.
This study provides evidence on the relationship between corporate social responsibility (CSR) and firms’ credit ratings. We find that credit rating agencies tend to award relatively high ratings to firms with good social performance. This pattern is robust to controlling for key firm characteristics as well as endogeneity between CSR and credit ratings. We also find that CSR strengths and concerns influence credit ratings, and that the individual components of CSR that relate to primary stakeholder management (i.e., community relations, diversity, employee relations, environmental performance, and product characteristics) matter most in explaining firms’ creditworthiness. Overall, our results suggest that CSR performance conveys important non-financial information that rating agencies are likely to use in their evaluation of firms’ creditworthiness, and that CSR investments — particularly those that extend beyond compliance behavior to reflect what is desired by society — can lead to lower financing costs resulting from higher credit ratings.
A rapidly growing literature claims to reject the efficient market hypothesis by producing large estimates of long-term abnormal returns following major corporate events. The preferred methodology in this literature is to calculate average multiyear buy-and-hold abnormal returns and conduct inferences via a bootstrapping procedure. We show that this methodology is severely flawed because it assumes independence of multiyear abnormal returns for event firms, producing test statistics that are up to four times too large. After accounting for the positive crosscorrelations of event-firm abnormal returns, we find virtually no evidence of reliable abnormal performance for our samples.
We study the impact credit rating revisions have on stock returns of Australian firms rated by Standard & Poor's and Moody's. Our evidence is consistent with that documented in the USA showing that only downgrades contain price-relevant information. The reaction is most significant when the downgrade: (i) is unanticipated; (ii) is for an unregulated firm; and (iii) reduces the firm's rating by more than one category.
The evidence in this paper suggests that downgrades by both Moody's and Standard and Poor's are associated with negative abnormal stock returns in the two-day window beginning the day of the press release by the rating agency. Significant negative abnormal performance can still be detected after eliminating observations containing obvious concurrent (potentially contaminating) news releases. There is little evidence of abnormal performance on announcement of an upgrade. Significant abnormal returns are associated with announcements of additions to the Standard and Poor's Credit Watch List, if either a potential downgrade or a potential upgrade is indicated.
A rapidly growing literature claims to reject the efficient market hypothesis by producing large estimates of long-term abnormal returns following major corporate events. The preferred methodology in this literature is to calculate average multiyear buy-and-hold abnormal returns and conduct inferences via a bootstrapping procedure. We show that this methodology is severely flawed because it assumes independence of multiyear abnormal returns for event firms, producing test statistics that are up to four times too large. After accounting for the positive cross-correlations of event-firm abnormal returns, we find virtually no evidence of reliable abnormal performance for our samples. Copyright 2000 by University of Chicago Press.
Using a sample free of survivor bias, the author demonstrates that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns. Darryll Hendricks, Jayendu Patel, and Richard Zeckhauser's (1993) 'hot hands' result is mostly driven by the one-year momentum effect of Narasimham Jegadeesh and Sheridan Titman (1993), but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers. Copyright 1997 by American Finance Association.
Corporate social responsibility and credit ratings
- Attig
ESG rating disagreement and stock returns. European Corporate Governance Institute -finance working Paper No
- R Gibson
- P Krueger
- N Riand
- P S Schmidt
Gibson, R., Krueger, P., Riand, N., Schmidt, P.S. (2019). ESG rating disagreement and stock returns. European Corporate Governance Institute -finance working Paper
No. 651/2020.
- F Kiesel
- F Lucke
Kiesel, F., & Lucke, F. (2019). ESG in credit ratings and the impact on financial markets.
Financial Markets, Institutions & Instruments, 28(3), 263-290.