ESG impact on financial corporate performance and portfolio returns: evidence of Australia and Japan
DOI:
https://doi.org/10.29105/vtga7.2-5Palabras clave:
ESG, Fixed-effects model regression, Portfolio, Sharpe ratio, Jensen alphaResumen
Environmental, Social, and Governance investing has undergone a radical shift; companies and investors have focused on the impact of the disclosure of the practices and policies related to the environment, social responsibility, and governance in their operational strategies and investment. The purpose of this paper is to demonstrate the impact that the ESG policies have on public companies' stock returns in Australia and Japan. Accounting and market-based measures are used to determine the impact ESG practices have on stock market index returns. The annual data used is of companies from Australia's S&P/ASX Index and Japan's Nikkei 225 Index, covering the period from 2005 to 2019. Fixed effect model regression was used to test the significant relationship between companies' stock returns and ESG score, accounting, and market-based measures. Portfolios were created to analyze the risk/return relationship between companies with and without ESG across countries. The findings indicate mixed results. Australia´s non-ESG portfolios outperform the S&P500 and ESG portfolios. Japan´s portfolio has positive returns but underperforms the benchmark. Low market capitalization portfolios with and without ESG outperform the higher capitalization portfolios.
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Alessandrini, F., & Jondeau, E. (2019). ESG Investing: From sin stocks to smart beta. In Research Paper Series, 19–16. DOI: https://doi.org/10.2139/ssrn.3357395
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Brammer, S., Brooks, C., & Pavelin, S. (2006). Corporate social performance and stock returns: UK evidence from disaggregate measures. Financial Management, 35(3), 97–116. https://doi.org/10.1111/j.1755-053X.2006.tb00149.x
Calvo, C., Ivorra, C., & Liern, V. (2014). Finding socially responsible portfolios close to conventional ones. International Review of Financial Analysis, 40, 52–63. https://doi.org/10.1016/j.irfa.2015.03.014
CFA Institute. (2018). Positions on Environmental, Social, and Governance Integration. https://www.cfainstitute.org/-/media/documents/article/position-paper/cfa-institute-position-statement-esg.ashx
Chelawat, H., & Trivedi, I. V. (2016). The business value of ESG performance: the Indian context. Asian Journal of Business Ethics, 5(1–2), 195–210. https://doi.org/10.1007/s13520-016-0064-4
Chow, C. W., & Wong-Boren, A. (1987). Voluntary Financial Disclosure by Mexican Corporations. The Accounting Review, LXII(3).
Clarke, C., & Friedman, H. H. (2016). Maximizing Shareholder Value: A theory Run Amok. SSRN Electronic Journal, 1–34. https://ssrn.com/abstract=2796836
Cochran, P. L., & Wood, R. A. (2014). Corporate Social Responsibility and Financial Performance. The Academy of Management Journal, 27(1), 42–56.
Cuadrado-Ballesteros, B., Garcia-Sanchez, I. M., & Martinez Ferrero, J. (2016). How are corporate disclosures related to the cost of capital? The fundamental role of information asymmetry. Management Decision, 54(7), 1669–1701. https://doi.org/10.1108/MD-10-2015-0454
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Ionescu, G. H., Firoiu, D., Pirvu, R., & Vilag, R. D. (2019). The impact of ESG factors on market value of companies from travel and tourism industry. Technological and Economic Development of Economy, 25(5), 820–849. https://doi.org/10.3846/tede.2019.10294
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Le Maux, J., & Le Saout, E. (2004). The Performance of Sustainability Indexes. Finance India, April-May, 737–750. http://dx.doi.org/10.1016/j.jaci.2012.05.050
Liagkouras, K., Metaxiotis, K., & Tsihrintzis, G. (2020). Incorporating environmental and social considerations into the portfolio optimization process. Annals of Operations Research. https://doi.org/10.1007/s10479-020-03554-3
Lin, K. C., & Dong, X. (2018). Corporate social responsibility engagement of financially distressed firms and their bankruptcy likelihood. Advances in Accounting, 43(April), 32–45. https://doi.org/10.1016/j.adiac.2018.08.001
Lo, S. F., & Sheu, H. J. (2007). Is corporate sustainability a value-increasing strategy for business? Corporate Governance: An International Review, 15(2), 345–358. https://doi.org/10.1111/j.1467-8683.2007.00565.x
Malik, A. D., & Handono, W. A. (2019). Financial Performance Analysis of Soe and Foreign Capital Cement Companies in Indonesia. PEOPLE: International Journal of Social Sciences, 5(1), 267–294. https://doi.org/10.20319/pijss.2019.51.267294
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MSCI. (2020). MSCI ESG Metrics Calculation Methodology. December.
Nagy, Z., Cogan, D. G., & Sinnreich, D. (2013). Optimizing Environmental, Social and Governance Factors in Portfolio Construction: Analysis of Three ESG-Tilted Strategies. SSRN Electronic Journal, 1–23. https://doi.org/10.2139/ssrn.2221524
Nally, D., & Grygler-Siddons, O. (2014). Technological Breakthroughs. In PwC Global Annual Review. https://doi.org/10.1007/978-1-4899-3496-3_2
Oikonomou, I., Platanakis, E., & Sutcliffe, C. (2018). Socially responsible investment portfolios: Does the optimization process matter? British Accounting Review, 50(4), 379–401. https://doi.org/10.1016/j.bar.2017.10.003
Patel, S. A., & Dallas, G. S. (2005). Transparency and Disclosure: Overview of Methodology and Study Results - United States. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.422800
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
Pedersen, L. H., Fitzgibbons, S., & Pomorski, L. (2020). Responsible Investing : The ESG-Efficient Frontier. SSRN Electronic Journal, March, 1–49. https://ssrn.com/abstract=346641
Razmpa, S., & Kosowski, R. (2020). ESG Integration within minimum variance portfolios (Issue April).
Revelli, C., & Viviani, J.-L. (2015). Financial performance of socially responsible investing (SRI): What have we learned? A meta-analysis. Business Ethics, 24(2), 158–185. Alessandrini, F., & Jondeau, E. (2019). ESG Investing: From sin stocks to smart beta. In Research Paper Series, 19–16.
https://drive.google.com/file/d/1wX1-X8t7K1kSpqzaFT4LvzxDcnYtdTSg/view
Ambec, S., & Lanoie, P. (2007). When and Why Does it Pay to be Green. Research Gate, 33, 0–40.
Amir, A. Z., & Serafeim, G. (2018). Why and how investors use ESG information: Evidence from a global survey. Financial Analysts Journal, 74(3), 87–103. https://doi.org/10.2469/faj.v74.n3.2 DOI: https://doi.org/10.2469/faj.v74.n3.2
Atan, R., Alam, M. M., Said, J., & Zamri, M. (2018). The impacts of environmental, social, and governance factors on firm performance: Panel study of Malaysian companies. Management of Environmental Quality: An International Journal, 29(2), 182–194. https://doi.org/10.1108/MEQ-03-2017-0033 DOI: https://doi.org/10.1108/MEQ-03-2017-0033
Boffo, R., & Patalano, R. (2020). ESG Investing: Practices, Progress and Challenges. http://www.oecd.org/finance/ESG-Investing-Practices-Progress-and-Challenges.pdf
Brammer, S., Brooks, C., & Pavelin, S. (2006). Corporate social performance and stock returns: UK evidence from disaggregate measures. Financial Management, 35(3), 97–116. https://doi.org/10.1111/j.1755-053X.2006.tb00149.x DOI: https://doi.org/10.1111/j.1755-053X.2006.tb00149.x
Calvo, C., Ivorra, C., & Liern, V. (2014). Finding socially responsible portfolios close to conventional ones. International Review of Financial Analysis, 40, 52–63. https://doi.org/10.1016/j.irfa.2015.03.014 DOI: https://doi.org/10.1016/j.irfa.2015.03.014
CFA Institute. (2018). Positions on Environmental, Social, and Governance Integration. https://www.cfainstitute.org/-/media/documents/article/position-paper/cfa-institute-position-statement-esg.ashx
Chelawat, H., & Trivedi, I. V. (2016). The business value of ESG performance: the Indian context. Asian Journal of Business Ethics, 5(1–2), 195–210. https://doi.org/10.1007/s13520-016-0064-4 DOI: https://doi.org/10.1007/s13520-016-0064-4
Chow, C. W., & Wong-Boren, A. (1987). Voluntary Financial Disclosure by Mexican Corporations. The Accounting Review, LXII(3).
Clarke, C., & Friedman, H. H. (2016). Maximizing Shareholder Value: A theory Run Amok. SSRN Electronic Journal, 1–34. https://ssrn.com/abstract=2796836
Cochran, P. L., & Wood, R. A. (2014). Corporate Social Responsibility and Financial Performance. The Academy of Management Journal, 27(1), 42–56. DOI: https://doi.org/10.2307/255956
Cuadrado-Ballesteros, B., Garcia-Sanchez, I. M., & Martinez Ferrero, J. (2016). How are corporate disclosures related to the cost of capital? The fundamental role of information asymmetry. Management Decision, 54(7), 1669–1701. https://doi.org/10.1108/MD-10-2015-0454 DOI: https://doi.org/10.1108/MD-10-2015-0454
Dalal, K. K., & Thaker, N. (2019). ESG and Corporate Financial Performance: A Panel Study of Indian Companies. The IUP Journal of Corporate Governance, 18(1), 44–60. https://search.proquest.com/docview/2258100521?pq-origsite=gscholar&fromopenview=true
DVFA, & EFFAS. (2009). Key Performance Indicators for Environmental, Social and Governance Issues - A Guideline for Corporates on how to Report on ESG and a Benchmark for Investment Professionals on how to integrate ESG into Financial Analysis, 8. https://effas.net/pdf/setter/DVFA criteria for non-financials.pdf
Escrig-Olmedo, E., Fernández-Izquierdo, M. ángeles, Ferrero-Ferrero, I., Rivera-Lirio, J. M., & Muñoz-Torres, M. J. (2019). Rating the raters: Evaluating how ESG rating agencies integrate sustainability principles. Sustainability (Switzerland), 11(3). https://doi.org/10.3390/su11030915 DOI: https://doi.org/10.3390/su11030915
Fabozzi, F. J., Ma, K. C., & Oliphant, B. J. (2008). Sin stock returns. Journal of Portfolio Management, 35(1), 82–94. https://doi.org/10.3905/JPM.2008.35.1.82 DOI: https://doi.org/10.3905/JPM.2008.35.1.82
Fink, L. (Blackrock). (2020). Net zero: a fiduciary approach. https://www.blackrock.com/corporate/investor-relations/blackrock-client-letter
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 DOI: https://doi.org/10.1287/mnsc.2014.2038
Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner´s Guide (4th ed.). John Wiley & Sons, Ltd. DOI: https://doi.org/10.1002/9781119201489
GSIA. (2019). 2018 Global Sustainable Investment Review. In Global Sustainable Investement Alliance. http://www.gsi-alliance.org/wp-content/uploads/2019/06/GSIR_Review2018F.pdf
Hanck, C., Arnold, M., Gerber, A., & Schmelzer, M. (2018). Introduction to econometrics with R.
Henriksson, R., Livnat, J., Pfeifer, P., & Stumpp, M. (2019). Integrating ESG in portfolio construction. Journal of Portfolio Management, 45(4), 67–81. https://doi.org/10.3905/jpm.2019.45.4.067 DOI: https://doi.org/10.3905/jpm.2019.45.4.067
Ionescu, G. H., Firoiu, D., Pirvu, R., & Vilag, R. D. (2019). The impact of ESG factors on market value of companies from travel and tourism industry. Technological and Economic Development of Economy, 25(5), 820–849. https://doi.org/10.3846/tede.2019.10294 DOI: https://doi.org/10.3846/tede.2019.10294
JSIF. (2020). Sustainable Investment Survey. In Japan Sustainable Investment Forum 2019. Edge International, Inc. http://japansif.com/2019survey-en.pdf
Kaiser, L., & Schaller, F. (2019). Environmentally (Un-)Friendly Portfolio Construction INVESTMENT CONSULTING. 43 Journal of Investment Consulting, 19(1), 2019.
Le Maux, J., & Le Saout, E. (2004). The Performance of Sustainability Indexes. Finance India, April-May, 737–750. http://dx.doi.org/10.1016/j.jaci.2012.05.050 DOI: https://doi.org/10.1016/j.jaci.2012.05.050
Liagkouras, K., Metaxiotis, K., & Tsihrintzis, G. (2020). Incorporating environmental and social considerations into the portfolio optimization process. Annals of Operations Research. https://doi.org/10.1007/s10479-020-03554-3 DOI: https://doi.org/10.1007/s10479-020-03554-3
Lin, K. C., & Dong, X. (2018). Corporate social responsibility engagement of financially distressed firms and their bankruptcy likelihood. Advances in Accounting, 43(April), 32–45. https://doi.org/10.1016/j.adiac.2018.08.001 DOI: https://doi.org/10.1016/j.adiac.2018.08.001
Lo, S. F., & Sheu, H. J. (2007). Is corporate sustainability a value-increasing strategy for business? Corporate Governance: An International Review, 15(2), 345–358. https://doi.org/10.1111/j.1467-8683.2007.00565.x DOI: https://doi.org/10.1111/j.1467-8683.2007.00565.x
Malik, A. D., & Handono, W. A. (2019). Financial Performance Analysis of Soe and Foreign Capital Cement Companies in Indonesia. PEOPLE: International Journal of Social Sciences, 5(1), 267–294. https://doi.org/10.20319/pijss.2019.51.267294 DOI: https://doi.org/10.20319/pijss.2019.51.267294
MSCI. (2018). MSCI ESG Ratings Methodology - Executive Summary. MSCI ESG Research, 4.
MSCI. (2020). MSCI ESG Metrics Calculation Methodology. December.
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