ESG scores - Is it the new way to build a European portfolio?

The study makes a comparison between the performance of equity portfolios characterized by high ESG score stocks and portfolios with low ESG score stocks. In particular, we analyze three ESG scores: MSCI ESG Rating, Sustainalytics scores and S&P DJI/Robeco ESG Scores, by examining the European stock market in two periods: medium/long term (five years) and short-term (one year). First of all, we associate each component of the index in relation to its MSCI ESG Rating, Sustainalytics score and S&P DJI/Robeco ESG Scores. We build two portfolios: ● first quartile portfolio 1Q (according to MSCI; Sustainalytics; and S&P DJI/Robeco ESG Scores), including securities of companies with the highest ESG score, based on ESG best-in-class screening strategy. ● fourth quartile portfolio 4Q (according to MSCI; Sustainalytics; and S&P DJI/Robeco ESG Scores), including securities of companies with the lowest ESG scores. We aim to answer the following questions: a) do portfolios with higher ESG scores stocks lead to better performances than those including stocks with low ESG scores? b), Are there some sectors that drive the performance within the sector breakdown? Results show a divergence between the composition of the first quartile, whereas there is more homogeneity in the fourth quartil

ESG Rating and Ownership Structure in U.S. Firms

Given the rising interest in the relationship between Environmental, Social and Governance rating (ESG) and its components, this paper investigates the relationship between insider/institutional ownership structure, ESG ratings and financial performance of the firm, using 398 companies in U.S. 2017 obtained from Bloomberg. This paper entails cross-sectional analysis of ESG rating and its components in 10 sectors (Communication, Consumer Discretionary, Consumer Staples, Energy, Financial, Health Care, Industrials, Materials, Technology, and Utilities) and Return on Asset as a matrix for financial performance. The results suggest that ESG rating and performance of the firm is positively and significantly associated, except environmental score. Ownership structure differently affects to ESG rating and its component by the sectors, even when controlling for the firm’s size. The study contributes to research on both the impact of ESG rating and its components to the performance of the firm and the relationship between ownership structure and ESG performance

Evaluating Environmental, Social and Governance (ESG) Practice Among Malaysian Public Listed Construction Companies Using FTSE Russell Rating Model

Implementation of Environmental, Social and Governance (ESG) in company strategy has become critical as it increases investors confident in the company. A company without ESG strategies will have problem on loss of intellectual capital, loss of customers, sales and decline in reputation. Failed to disclose ESG information perceived as having poor investments in high-risk sectors. Therefore, the purpose of this paper is to evaluate current ESG practices disclosed in annual reports and sustainability statements among 55 construction sector companies listed in Bursa Malaysia from 2021 until 2022. The investigation was conducted using content analysis based on ESG pillars and themes of FTSE Russell rating model. The rating model consists of 3 individual pillars and 14 themes. A binary scoring method was used, and the result was analyses in descriptive analysis. Based on the content analysis, the results indicate that social pillar has the highest percentage of ESG practice among the construction company with 64% score with the focus on health & safety. Environmental pillar practice remains the second highest score with 57.45% followed by governance with 55% score. The findings of this study are useful to investors, government agencies such as Bursa Malaysia and Securities Commission, industry, policy makers, and other related agencies. This study is among the first content analysis study on auditing ESG practices of construction sector in Malaysian public listed companies guided by FTSE Russell rating model

Divergent ESG-ratings and their impact on corporate financial performance evidence from Europe

In recent years, stakeholders' interests in companies' socially and responsible behavior have increased significantly. The evolving focus on sustainability within the business has led to several companies implementing ESG aspects as part of their business strategy, resulting in the emergence of ESG-rating agencies. However, evaluating a company's ESG performance is not a standardized approach as each ESG-rating provider has its distinct methodology and framework. Building on the divergence between these rating agencies, this paper aims to investigate if selecting one ESG-rater versus another can impact the results and conclusions obtained in empirical analysis. To do so, this thesis examines whether and how environmental, social, and governance ratings from different ESG-rating agencies influence companies' financial performance, using a sample of STOXX Europe 600 listed companies. Based on correlation and regression analysis, this research finds support for a positive and statistically significant relationship between ESG-score and financial performance for European listed firms. This conclusion holds regardless of Refinitiv Eikon, Bloomberg, or S&P Global being the rating provider. However, the results reveal that the strength of the relationship between ESG performance and financial performance differs slightly between the providers. Moreover, the difference in the strength of influence is minimal, signifying that the results and conclusions drawn in the analysis are not significantly dependent on the chosen ESG-rating provider.Nos anos recentes, o interesse dos stakeholders relativamente aos comportamentos socialmente responsáveis das empresas aumentou significativamente. O referido acréscimo do foco no business sustentability tem levado a que várias empresas incorporem fatores ESG nas suas estratégias de negócio. O renovado interesse levou à emergência das agências de rating ESG. Contudo, a avaliação da performance ESG de uma empresa não está padronizada dado que cada agência de rating ESG utiliza metodologias e estruturas diferentes. Dada a divergência de abordagens entre agências, este estudo tem como propósito investigar caso a seleção de uma particular agência de rating ESG poderá ter impacto nos resultados e conclusões resultantes de uma análise empírica. Esta tese examina se, e de que forma, os ratings atribuídos pelas diferentes agências de rating ESG a fatores ambientais, sociais e de governação influenciam a performance financeira de uma empresa. A análise foi realizada utilizando uma amostra de ações cotadas do Índex STOXX Europe 600. Através de análise de correlações e de regressões lineares, este estudo encontra uma relação positiva estatisticamente significante entre a pontuação ESG e a performance financeira. Independentemente da seleção da agência - Refinitiv Eikon, Bloomberg ou S&P Global - esta descoberta é observável. Os resultados do estudo revelam, também, que a correlação entre a pontuação ESG e performance financeira de uma dada empresa difere ligeiramente entre agências. No entanto, as diferenças nos valores são residuais e, como tal, os resultados e inferências derivadas da análise não são dependentes da seleção de uma particular agência de rating ESG

ESG and Financial Performance: Evidence from Nordic Markets

This study explores the relationship between ESG scores and financial performance in Nordic markets, using ESG scores from Refinitiv and MSCI. We examine the impact of ESG on performance measures such as Revenue change, ROA, ROE, Stock Return, and WACC. The results indicate a significant positive relationship between ESG combined score and ROA in both Refinitiv and MSCI datasets, as well as a positive but not significant relationship of ESG with ROE. Additionally, we find a significant negative relationship of ESG with WACC in MSCI data and with Revenue in the Refinitiv data. The relationship of ESG with the remaining financial factors remain inconclusive. For ESG separate ratings, the results have shown social score being significantly positive for profitability where governance score being significantly negative for profitability in Refinitiv data. Environment score does not have any significant relationship with financial performance. On the other hand, ESG controversy rating enhances firm´s return on equity and reduces WACC according to MSCI data. The results of the study show that the effect of ESG on corporate financial performance is significant for Danish firms and Denmark as country of incorporation proves to be better for financial performance of companies. Additionally, year 2020 was the most significant negative year for financial performance, potentially due to the COVID-19 pandemic. Moreover, increase in firm size proves to significantly increase profitability and reduce WACC

Predictive validity of NLP-based ESG controversy scores

ESG-kontroversvurderinger basert på naturlig språkbehandling (NLP) av medieomtale, ticker-meldinger og selskapsopplysninger anses ofte som et enkelt, billig og bredt anvendelig alternativ til de klassiske ESG-vurderingssystemene som selges av leverandører av finansiell informasjon. Det finnes imidlertid ikke tilstrekkelig forskning på deres prediktive validitet. Målet med forskningen som presenteres i denne avhandlingen, var å undersøke (1) hvor godt klassiske ratingbaserte ESG-poengsummer kan predikeres ut fra NLP-baserte ESG-kontrovers-poengsummer, (2) om det prediktive forholdet varierer etter bransje, og (3) hvor konsistente effektene er når man sammenligner ulike tilnærminger for å konstruere ESG-kontrovers-poengsummer og ratingbaserte ESG-poengsummer. To studier ble gjennomført for å svare på disse spørsmålene. Studie 1 brukte data for OSX-noterte selskaper, hentet fra LSEG/Refinitiv Datastream. Studie 2 fokuserte på unoterte selskaper og reanalyserte et datasett utviklet av Kazinic og Valheim (2020). Resultatene fra studie 1 tyder på at LSEG/Refinitiv ESG-kontroverser ikke har noen vesentlig sammenheng med den faktiske LSEG/Refinitiv ESG-scoren; all forklarbar variasjon skyldtes globale forskjeller mellom bransjer. I finansiell analyse og porteføljeforvaltning ville en så lav prediktiv validitet helt klart være uakseptabel. Det kan derfor ikke anbefales å bruke LSEG/Refinitiv ESG-kontroversscoren som erstatning for klassiske, ratingbaserte ESG-scorer. Resultatene fra studie 2 tyder på at Kazinic og Valheims (2020) kontroversscore er vesentlig bedre enn LSEG/Refinitiv ESG-kontroversscoren, og at den er mye mindre påvirket av bransjeskjevhet, men at den fortsatt er utsatt for betydelig støy. Hvis Kazinic og Valheims kontroverspoeng skulle brukes som erstatning for faktiske ESG-poeng i porteføljeforvaltningen, ville den prediktive validiteten til kontroverspoengene likevel ikke være fullt ut tilstrekkelig. Tilnærmingen kan anbefales som et screeningverktøy i finansiell analyse, men kan ikke erstatte en dypere analyse av et selskaps faktiske ESG-profil før en investeringsbeslutning tas.ESG controversy scores based on natural language processing (NLP) of media coverage, ticker messages and corporate disclosures are often considered a simple, cheap and broadly applicable alternative to the classical ESG rating systems sold by financial information providers. However, there is insufficient research on their predictive validity. The aim of the research presented in this thesis was to investigate (1) how well classical rating-based ESG scores can be predicted from NLP-based ESG controversy scores, (2) if the predictive relationship differs by industry, and (3) how consistent the effects are when compared across different approaches for constructing ESG controversy scores and rating-based ESG scores. Two studies were conducted to address these questions. Study 1 used data for OSX-listed companies, extracted from LSEG/Refinitiv Datastream. Study 2 focused on unlisted companies, re-analysing a data set developed by Kazinic and Valheim (2020). The results of Study 1 suggest that the LSEG/Refinitiv ESG controversies score has no substantial relationship with the actual LSEG/Refinitiv ESG score; all explainable variation was due to global differences between industries. In financial analysis and portfolio management, such a low level of predictive validity would clearly be unacceptable. Using the LSEG/Refinitiv ESG controversies score as a replacement for classical, rating-based ESG scores cannot be recommended. The results of Study 2 indicate that the controversies scoring method developed by Kazinic and Valheim(2020) is substantially better than the LSEG/Refinitiv ESG controversies score and suffers much less from industry bias but is still subject to considerable noise. If Kazinic and Valheim’s controversies scores were to be used as a replacement of actual ESG scores in portfolio management, the predictive validity of the controversies scores would still not be fully sufficient. The approach can be recommended as a screening tool in financial analysis but cannot replace deeper analysis of a company’s actual ESG profile before an investment decision is made

PENGARUH SUSTAINABILITY TERHADAP KINERJA KEUANGAN BANK PASCA PANDEMI COVID-19

Sustainability is a word that has recently been discussed in scientific management articles and scientific forums in general. The banking sector in Indonesia is recovering along with the economy in the wake of the COVID-19 pandemic, as seen by the Indonesian banks' continuous growth in net earnings. Based on previous research, there were a variety of conclusions: some said the ESG (Environment, Social, and Governance) Sustainability Score had an impact on bank financial performance, while others said it did not. Sustainability in this research is measured based on the ESG Score from Sustainanalytics. Sustainanalytics is a private ESG rating company which is a subsidiary of Morningstar. Meanwhile, financial performance is measured by Return on Assets (ROA) and Return on Equity from the bank. The statistical tools used use simple regression with SPSS 22. The sample is 10 banks that are listed on the Indonesian Stock Exchange and have Environmental, Social and Governance (ESG) scores in the scores created by sustananalytics. The results of this research are that the ESG Score has no influence on the bank's ROA financial performance and the ESG Score has a significant negative influence on the bank's ROE financial performance

ESG: The Nexus of Sustainability & Cost of Capital? An empirical study of the relationship between ESG scores and WACC for European firms

This thesis examines the relationship between STOXX Europe 600 firms’ ESG scores and their weighted average cost of capital (WACC) across the 11 Global Industry Classification Standard (GICS) sectors. To investigate this relationship, we have collected ESG scores from Sustainalytics and Refinitiv on an aggregate level, as well as individual ESG pillar scores. The ESG scores have then been averaged to create a proxy ESG score to account for divergence between the two rating agencies. Data on market capitalization, debt to total capital, and GICS sector have been gathered from Bloomberg. We investigate the WACC-ESG score relationship through five hypotheses spanning from a general to more granular assessment. Our findings suggest that although there is a significant negative relationship between WACC and ESG scores on an aggregate level, this does not hold when delving into sector specific differences where only a few sectors show a significant relationship, and only with certain ESG pillars. This implies that we do not find convincing empirical evidence to support the causal conclusion that European firms can benefit from lower average costs of capital by improving their ESG scores without accounting for sector.nhhma

Pengaruh Environmental, Social & Governance (ESG) dan ESG Risk Rating Terhadap Profitabilitas Perusahaan yang Terdaftar di IDX ESG Leaders Tahun 2020-2022

Penelitian ini bertujuan untuk menganalisis terkait Pengaruh Environmental pillar score, Social pillar score & Governance pillar score dan ESG risk rating terhadap profitabilitas perusahaan. Sampel penelitian ini didapatkan melalui metode purposive sampling sehingga diperoleh sampel penelitian sebanyak 21 perusahaan yang terdapat dalam indeks IDX ESG Leaders tahun 2020-2022. Pengolahan data penelitian dengan analisis regresi data panel menggunakan software olah data STATA 14. Hasil penelitian ini menunjukkan bahwa environmental pillar score berpengaruh positif dan signifikan terhadap profitabilitas perusahaan, social pillar score berpengaruh negatif dan tidak signifikan terhadap profitabilitas perusahaan, governance pillar score berpengaruh positif dan tidak signifikan terhadap profitabilitas perusahaan, serta ESG risk rating menunjukkan pengaruh yang negatif dan signifikan terhadap profitabilitas perusahaan

Institutional Investors, Shareholder Activism, and ESG in the Energy Sector

The search for relationships between shareholder activism and environmental, social, and governance (ESG) performance has been a research area that has garnered increased interest in recent years. Specifically, climate change and environmental concerns have been evaluated by private and public sectors around the world, and progress has been made with actions such as the Paris Agreement. Scholars conducted various studies to analyze the relationship between shareholder activism and corporate financial performance (CFP). In addition, scholars have also conducted various studies to analyze the relationship between ESG performance and CFP as well as ESG performance and risk. Given the emergence of ESG in recent years, the adoption of standardized ESG criteria and performance measures across industries and markets is still relatively undeveloped compared to criteria such as SEC reporting criteria for US publicly-traded companies. Therefore, the insights on shareholder activism and ESG adoption and performance remain inconclusive. This study aims to raise awareness and increase studies focusing on how investors can utilize resources such as activism to affect ESG adoption and performance. This paper also continues to raise awareness regarding current discrepancies in ESG ratings by company, industry, as well the discrepancies that are observed between different ESG rating agencies. This study specifically tracks the changes resulting from the formation of the Climate Action 100+ at the One Planet Summit in 2017 by evaluating the Sustainalytics Environmental Score of select energy and power utility companies from the initiative. Given the data, a paired t-test was implemented to gain more knowledge on how Sustainalytics Environmental Scores moved after major ESG-related announcements. In addition, this paper reviews current news and market developments in ESG and shareholder activism as well as academic and scholarly literature researching shareholder activism, ESG, and CFP. The results from this study show minuscule to no benefit to a company’s Sustainalytics Environmental Score given the current Sustainalytics dataset and publicly-available ESG information for students. This paper further reviews how discrepancies between ESG rating data and actual firm ESG performance presents potential challenges for institutional investors, retail investors, and firms. This paper also discusses future research areas and topics that could increase clarity regarding the relationship between shareholder activism and ESG adoption and performance