ESG RATINGS AND THE INVESTOR DECISION-MAKING PROCESS: A COMPARATIVE ANALYSIS OF RATING AGENCIES' DATA AND ITS EFFECT ON FINANCIAL PERFORMANCE

Purpose- The purpose of this study is to engage in scholarly research in order to examine the correlation between environmental, social, and governance performance (ESGP) and financial performance (FP) across various industries. The aim is to enhance the overall comprehension of how variations in ESG scores from two rating agencies can potentially impact the relationship between ESGP and FP. Methodology- This study undertakes a comparative and descriptive analysis of panel data comprising 464 companies operating in environmentally sensitive sectors worldwide. The dataset covers the period from 2011 to 2020 and incorporates ESG ratings from Bloomberg and Refinitiv databases, as well as the financial performance metric return on assets (ROA) sourced exclusively from Refinitiv covering the times series of 2012 to 2021. Findings- According to our research, there is evidence of a relationship between ESG scores and return on assets (ROA), with distinct correlations depending on the rating agencies employed. Specifically, Refinitiv ESG scores demonstrate a negative correlation with ROA, while Bloomberg ESG scores reveal a positive correlation. Additionally, our study highlights a positive correlation specifically between the Bloomberg environmental score and ROA. Conclusion- Previous scholarly studies have already established a correlation between the level of information disclosure displayed by corporations and the aforementioned matter being investigated. However, our research suggests that the varying findings documented in existing academic papers may also stem from the utilization of ESG score data sourced from various rating agencies.

Keywords:

ESG performance, financial performance, ROA, panel data analysis rating agencies,

PDF

___

Arvidsson, S., & Dumay, J. (2022). Corporate ESG reporting quantity, quality, and performance: Where to now for environmental policy and practice? Business Strategy and the Environment, 31(3), 1091–1110. https://doi.org/10.1002/bse.2937
Caldera, H. T. S., Desha, C., & Dawes, L. (2019). Evaluating the enablers and barriers for successful implementation of sustainable business practice in ‘lean’ SMEs. Journal of Cleaner Production, 218, 575–590. https://doi.org/10.1016/j.jclepro.2019.01.239
Carroll, A. B., Buchholtz, A. K., & Shabana, K. M. (2017). The Institutionalization of Corporate Social Responsibility Reporting. Business and Society, 56(8), 1107–1135. https://doi.org/10.1177/0007650316628177
Choi, J., & Wang, H. (2009). Stakeholder relations and the persistence of corporate financial performance. Strategic Management Journal, 30(8), 895–907. https://doi.org/10.1002/smj.759
Clark, G. L., Feiner, A., & Viehs, M. (2015). From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (SSRN Scholarly Paper No. 2508281). https://doi.org/10.2139/ssrn.2508281
Collins, E., Roper, J., & Lawrence, S. (2010). Sustainability practices: Trends in New Zealand businesses. Business Strategy and the Environment, 19(8), 479–494. https://doi.org/10.1002/bse.653
Demirbag, M., Wood, G., Makhmadshoev, D., & Rymkevich, O. (2017). Varieties of CSR: Institutions and Socially Responsible Behaviour. International Business Review, 26(6), 1064–1074. https://doi.org/10.1016/j.ibusrev.2017.03.011
Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The Impact of Corporate Sustainability on Organizational Processes and Performance. Management Science, 60(11), 2835–2857.
Escrig-Olmedo, E., Fernández-Izquierdo, M. Á., Ferrero-Ferrero, I., Rivera-Lirio, J. M., & Muñoz-Torres, M. J. (2019). Rating the Raters: Evaluating how ESG Rating Agencies Integrate Sustainability Principles. Sustainability, 11(3), Article 3. https://doi.org/10.3390/su11030915
Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: Aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), 210–233. https://doi.org/10.1080/20430795.2015.1118917
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
Kim, S., & Li, Z. (Frank). (2021). Understanding the Impact of ESG Practices in Corporate Finance. Sustainability, 13(7), Article 7. https://doi.org/10.3390/su13073746
Kotsantonis, S., & Serafeim, G. (2019). Four Things No One Will Tell You About ESG Data. Journal of Applied Corporate Finance, 31(2), 50–58. https://doi.org/10.1111/jacf.12346
Manrique, S., & Martí-Ballester, C.-P. (2017). Analyzing the Effect of Corporate Environmental Performance on Corporate Financial Performance in Developed and Developing Countries. Sustainability, 9(11), Article 11. https://doi.org/10.3390/su9111957
Marcus, J., Kurucz, E. C., & Colbert, B. A. (2010). Conceptions of the Business-Society-Nature Interface: Implications for Management Scholarship. Business & Society, 49(3), 402–438. https://doi.org/10.1177/0007650310368827
Peiró-Signes, A., Segarra-Oña, M., Mondéjar-Jiménez, J., & Vargas-Vargas, M. (2013). Influence of the Environmental, Social and Corporate Governance Ratings on the Economic Performance of Companies: An overview. International Journal of Environmental Research, 7(1). https://doi.org/10.22059/ijer.2012.590
Porter, M. E., & Kramer, M. R. (2011, January 1). Creating Shared Value. Harvard Business Review. https://hbr.org/2011/01/the-big-idea-creating-shared-value
Ram Nidumolu, C. K. P. (2009, September 1). Why Sustainability Is Now the Key Driver of Innovation. Harvard Business Review. https://hbr.org/2009/09/why-sustainability-is-now-the-key-driver-of-innovation
Sustainable Finance Progress Report. (2019). https://wedocs.unep.org/xmlui/handle/20.500.11822/34534
Velte, P. (2017). Does ESG performance have an impact on financial performance? Evidence from Germany. Journal of Global Responsibility, 8(2), 169–178. https://doi.org/10.1108/JGR-11-2016-0029
Yu, E. P., Guo, C. Q., & Luu, B. V. (2018). Environmental, social and governance transparency and firm value. Business Strategy and the Environment, 27(7), 987–1004. https://doi.org/10.1002/bse.2047