Environmental, social, and governance (ESG) practice and firm performance: an international evidence
Abstract
This article attempts to bring quantitative evidence of a firm’s sustainability reporting in terms of non-financial voluntary disclosures. The disclosures are made available through the annual report and Corporate Social Responsibility (CSR) and Global Reporting Initiatives (GRI) report. ESG score is a quantitative measure developed and disseminated by Bloomberg, covering about 120 Environmental, Social, and Governance aspects. The study’s research problem is to examine the effects of non-market transnational sustainability strategy on firm performance. The study presents an analysis of nearly 510 firm’s ESG scores across 17 countries for 2010–2018. The descriptive and inductive statistical analysis shows that ESG compliance is more pronounced in European companies. Simultaneously, Asian firms are more disciplined concerning the energy sector, and the Asiapacific counterpart is more inclined toward technology firms. The study shows that GRI and nonGRI companies differ significantly in their accounting performance (ROA and ROE) and market valuations (Tobin’s-Q). The environmental dimension appears intimidating across accounting and market-based firm performance, while the social dimension contributes adversely, and governance positively affects operational efficiency.
Keyword : environmental, social, governance, ESG score, sustainability, firm performance
How to Cite
Shaikh, I. (2022). Environmental, social, and governance (ESG) practice and firm performance: an international evidence. Journal of Business Economics and Management, 23(1), 218–237. https://doi.org/10.3846/jbem.2022.16202
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Broadstock, D. C., Matousek, R., Meyer, M., & Tzeremes, N. G. (2020). Does corporate social responsibility impact firms innovation capacity? The indirect link between environmental & social governance implementation and innovation performance. Journal of Business Research, 119, 99–110. https://doi.org/10.1016/j.jbusres.2019.07.014
Cek, K., & Eyupoglu, S. (2020). Does environmental, social and governance performance influence economic performance? Journal of Business Economics and Management, 21(4), 1165–1184. https://doi.org/10.3846/jbem.2020.12725
Chen, H.-Y., & Yang, S. S. (2020). Do Investors exaggerate corporate ESG information? Evidence of the ESG momentum effect in the Taiwanese market. Pacific-Basin Finance Journal, 63, 101407. https://doi.org/10.1016/j.pacfin.2020.101407
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Cornell, B. (2021). ESG preferences, risk and return. European Financial Management, 27(1), 12–19. https://doi.org/10.1111/eufm.12295
Crews, D. E. (2010). Strategies for implementing sustainability: Five leadership challenges. SAM Advanced Management Journal, 75(2), 15–21.
Duque-Grisales, E., & Aguilera-Caracuel, J. (2021). Environmental, social and governance (ESG) scores and financial performance of multilatinas: Moderating effects of geographic international diversification and financial slack. Journal of Business Ethics, 168, 315–334. https://doi.org/10.1007/s10551-019-04177-w
Escrig-Olmedo, E., Muñoz-Torres, M. J., & Fernandez-Izquierdo, M. A. (2010). Socially responsible investing: Sustainability indices, ESG rating and information provider agencies. International Journal of Sustainable Economy, 2(4), 442–461.
Fatemi, A., Glaum, M., & Kaiser, S. (2018). ESG performance and firm value: The moderating role of disclosure. Global Finance Journal, 38, 45–64. https://doi.org/10.1016/j.gfj.2017.03.001
Fiskerstrand, S. R., Fjeldavli, S., Leirvik, T., Antoniuk, Y., & Nenadić, O. (2020). Sustainable investments in the Norwegian stock market. Journal of Sustainable Finance & Investment, 10(3), 294–310. https://doi.org/10.1080/20430795.2019.1677441
Flammer, C. (2015). Does corporate social responsibility lead to superior financial performance? A regression discontinuity approach. Management Science, 61(11), 2549–2568. https://doi.org/10.1287/mnsc.2014.2038
Galbreath, J. (2013). ESG in focus: The Australian evidence. Journal of Business Ethics, 118(3), 529–541. https://doi.org/10.1007/s10551-012-1607-9
Gallego‐Álvarez, I., García‐Sánchez, I. M., & da Silva Vieira, C. (2014). Limate change and financial performance in times of crisis. Business Strategy and the Environment, 23(6), 361–374. https://doi.org/10.1002/bse.1786
Goll, I., & Rasheed, A. A. (2004). The moderating effect of environmental munificence and dynamism on the relationship between discretionary social responsibility and firm performance. Journal of Business Ethics, 49(1), 41–54. https://doi.org/10.1023/B:BUSI.0000013862.14941.4e
Gregory, A., Whittaker, J., & Yan, X. (2016). Corporate social performance, competitive advantage, earnings persistence and firm value. Journal of Business Finance & Accounting, 43(1–2), 3–30. https://doi.org/10.1111/jbfa.12182
Hamilton, J. T. (1995). Pollution as news: Media and stock market reactions to the toxics release inventory data. Journal of Environmental Economics and Management, 28(1), 98–113. https://doi.org/10.1006/jeem.1995.1007
Hart, S. L., & Ahuja, G. (1996). Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Business Strategy and the Environment, 5(1), 30–37. 3.0.CO;2-Q> https://doi.org/10.1002/(SICI)1099-0836(199603)5:1<30::AID-BSE38>3.0.CO;2-Q
Huang, D. Z. (2021). Environmental, social and governance (ESG) activity and firm performance: A review and consolidation. Accounting & Finance, 61(1), 335–360. https://doi.org/10.1111/acfi.12569
Hummel, K., & Schlick, C. (2016). The relationship between sustainability performance and sustainability disclosure – Reconciling voluntary disclosure theory and legitimacy theory. Journal of Accounting and Public Policy, 35(5), 455–476. https://doi.org/10.1016/j.jaccpubpol.2016.06.001
Hussain, N., Rigoni, U., & Cavezzali, E. (2018). Does it pay to be sustainable? Looking inside the black box of the relationship between sustainability performance and financial performance. Corporate Social Responsibility and Environmental Management, 25(6), 1198–1211.
https://doi.org/10.1002/csr.1631
Jaggi, B., & Freedman, M. (1992). An examination of the impact of pollution performance on economic and market performance: Pulp and paper firms. Journal of Business Finance & Accounting, 19(5), 697–713. https://doi.org/10.1111/j.1468-5957.1992.tb00652.x
Judge, W. Q., & Douglas, T. J. (1998). Performance implications of incorporating natural environmental issues into the strategic planning process: An empirical assessment. Journal of Management Studies, 35(2), 241–262. https://doi.org/10.1111/1467-6486.00092
Khan, M. (2019). Corporate governance, ESG, and stock returns around the world. Financial Analysts Journal, 75(4), 103–123. https://doi.org/10.1080/0015198X.2019.1654299
Khanna, M., & Damon, L. A. (1999). EPA’s voluntary 33/50 program: Impact on toxic releases and economic performance of firms. Journal of Environmental Economics and Management, 37(1), 1–25. https://doi.org/10.1006/jeem.1998.1057
King, A. A., & Lenox, M. J. (2001). Does it really pay to be green? An empirical study of firm environmental and financial performance: An empirical study of firm environmental and financial performance. Journal of Industrial Ecology, 5(1), 105–116. https://doi.org/10.1162/108819801753358526
Konar, S., & Cohen, M. A. (2001). Does the market value environmental performance? Review of Economics and Statistics, 83(2), 281–289. https://doi.org/10.1162/00346530151143815
Lee, K.-H., & Saen, R. F. (2012). Measuring corporate sustainability management: A data envelopment analysis approach. International Journal of Production Economics, 140(1), 219–226. https://doi.org/10.1016/j.ijpe.2011.08.024
Li, Y., Gong, M., Zhang, X.-Y., & Koh, L. (2018). The impact of environmental, social, and governance disclosure on firm value: The role of CEO power. The British Accounting Review, 50(1), 60–75. https://doi.org/10.1016/j.bar.2017.09.007
Link, S., & Naveh, E. (2006). Standardization and discretion: Does the environmental standard ISO 14001 lead to performance benefits? EEE Transactions on Engineering Management, 53(4), 508–519. https://doi.org/10.1109/TEM.2006.883704
Luo, X., & Bhattacharya, C. B. (2006). Corporate social responsibility, customer satisfaction, and market value. Journal of Marketing, 70(4), 1–18. https://doi.org/10.1509/jmkg.70.4.001
Maiti, M. (2020). Is ESG the succeeding risk factor? Journal of Sustainable Finance & Investment, 1–15. https://doi.org/10.1080/20430795.2020.1723380
Makni, R., Francoeur, C., & Bellavanc, F. (2009). Causality between corporate social performance and financial performance: Evidence from Canadian firms. Journal of Business Ethics, 89(3), 409. https://doi.org/10.1007/s10551-008-0007-7
Minutolo, M. C., Kristjanpoller, W. D., & Stakeley, J. (2019). Exploring environmental, social, and governance disclosure effects on the S&P 500 financial performance. Business Strategy and the Environment, 28(6), 1083–1095. https://doi.org/10.1002/bse.2303
Morioka, S. N., & Carvalho, M. M. (2016). A systematic literature review towards a conceptual framework for integrating sustainability performance into business. Journal of Cleaner Production, 136, 134–146. https://doi.org/10.1016/j.jclepro.2016.01.104
Orens, R. W., & Cormier, D. (2010). Web‐based non‐financial disclosure and cost of finance. Journal of Business Finance & Accounting, 37(9–10), 1057–1093. https://doi.org/10.1111/j.1468-5957.2010.02212.x
Orsato, R. J., Garcia, A., Mendes-Da-Silva, W., Simonetti, R., & Monzoni, M. (2015). Sustainability indexes: Why join in? A study of the “Corporate Sustainability Index (ISE)” in Brazil. Journal of Cleaner Production, 96, 161–170. https://doi.org/10.1016/j.jclepro.2014.10.071
Pava, M. L., & Krausz, J. (1996). The association between corporate social-responsibility and financial performance: The paradox of social cost. Journal of Business Ethics, 15(3), 321–357. https://doi.org/10.1007/BF00382958
Pérez-Calderón, E., Milanés-Montero, P., Meseguer-Santamaría, M.-L., & Mondéjar-Jiménez, J. (2011). Eco-efficiency: Effects on economic and financial performance. Evidences from Dow Jones sustainability Europe index. Environmental Engineering & Management Journal, 10(12), 1801–1808. https://doi.org/10.30638/eemj.2011.243
Porter, M. E. (1991). America’s green strategy. Scientific American, 264(4), 168. https://doi.org/10.1038/scientificamerican0491-168
Prado-Lorenzo, J.-M., Gallego-Álvarez, I., García-Sánchez, I.-M., & Rodríguez-Domínguez, L. (2008). Social responsibility in Spain: Practices and motivations in firms. Management Decision, 46(8), 1247–1271. https://doi.org/10.1108/00251740810901417
Renneboog, L., Simons, T., & Wright, M. (2007). Why do public firms go private in the UK? The impact of private equity investors, incentive realignment and undervaluation. Journal of Corporate Finance, 13(4), 591–628. https://doi.org/10.1016/j.jcorpfin.2007.04.005
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