Adapting to Ecological, Social, and Governance to achieve financial performance in IT companies

Climate change, carbon footprint, and the environment are top of the head topics in today's time that even corporate companies have considered environmental issues in their agenda. Ecological, Social and Governance (ESG) has become a priority in many companies, such as accounting firms, banks and even Information Technology (IT) companies. It seems like climate change is happening faster than we think, if corporate companies are investing their time in environmental matters.

Research focused on a companies financial performance on ESG in the IT sector

An article written by Markovicha, Alexandra Alekseevnab and Daria Alekseevna on ScienceDirect have done research on a company's financial performance regarding ESG in the IT sector. The research focused on sustainable development to enhance business practice to achieve a greater financial performance particularly in the IT sector. To source the information. 43 companies were analysed through panel data from the time frame of 2004 to 2020. The method that is used in this study is the OLS regression to determine which ways were more suitable to practices that aligned with sustainable developments measures.

An integral part of market analysis in today's time is ESG practices in investing to enhance the decision making processes. Researchers have found that having a greater ESG score is probably bringing investors a long term return and sustainable investments. With that said, some challenges have arisen as the components on ESG rating sometimes do not have a strong impact to finalise an effective plan for implementation in a company. Since, all sectors are not the same, the ESG ratings method will not work or achieve the same results for all the sectors. ESG ratings is not a one size fits all solution. Hence, research taken out by Markovicha, Alexandra  Alekseevnab and Daria Alekseevna, have focused on how ESG impacts the financial performance of an IT sector.

About Ecological, Social and Governance

Ecological, Social and Governance also known as ESG for short is a prominent concept in corporations, public schedules and in legal firms. Our impact on the environment has become a vital act where governments, investors, society and multiple stakeholders are demanding that companies track their lineage on the environment. The companies lineage through their contribution to the public, work and climate change. In meaning, the companies need to be environmentally conscious on their impact on the environment. Further, socially, taking the health and well being of their employees and where employees should take part in social initiatives and acts of giving. Lastly, governance must be practiced in the workplace where one can achieve sustainable growth economically and to increase financial performance through economic development. Since, companies are pressured to increase the financial demand through ESG related issues there becomes a cross road as assessing the financial return on investments gets lost in the matter.

Further, the research article mentions that a relationship that needs more attention is the impact financial performance with ESG rating relating to countries and industries. Additionally, the article states, “when analysing this relationship based on the total sample, the authors obtained a negative significant score between the company's complex VR and Tobin's VR, as well as the P/B multiple. Further in the paper, the influence of the industry was considered, but in this section it is necessary to dwell on the two sectors under consideration: industry and IT.” The results showed that the ESG ratings for an IT company is more than for an industry and the research took into account the origin of a company's country and continent. The results were as follows, “the authors concluded that in companies from Asia, Europe, and North America, ESG liability has a negative impact on q-Tobin. At the same time, a significant estimate for the P/B multiplier was obtained only in a sample of Asian companies, however, in this case, the relationship is negative.” The results were also found to be similar in other sectors, such as the energy sectors where the comprehensive assessment of ROA, ESG and q-tobin showed an insignificant relationship. Other companies that showed an insignificant relationship were companies in Germany, transport firms, tourism, hotels and leisure companies. Therefore, due to companies having a different approach, ESG rating matching a companies financial performance can achieve a positive or a negative response.

The methodology of the study

The methodology of the study was based on two indicators:

1. H1. ESG rating has a positive effect on the financial performance of an IT company.

2. H2. Social and corporate governance scores have the biggest impact on IT companies, while environmental assessments have the least impact.

The study was conducted on 43 different countries that are associated with the IT industry with a panel data method and the data was collected from 2022 to 2022. The targeted countries with organisation were from Europe, America and Asia. Since hypothesis testing has been done, three methods are fixed individual effects (FE), random individual effects (RE) model and end-to-end regression. The other methods were, sampling, data and explanatory variables, and model specification for hypothesis testing.

The results of the study

The results of the study to test the hypothesis were on the ESG rating regression, on the financial performance of companies, which concluded to have a positive effect. The regression on environmental, social and corporate governance score, the results showed, “social and corporate governance scores have the biggest impact on IT companies, while environmental assessments have the least impact”.

The conclusion of the study

The overall ESG rating for IT companies does not have a great impact on financial performance. Further, the article found that, “with an increase in the environmental indicator by one unit, the effectiveness of the use of capital (ROA) decreases, which implies a decrease in the return on investment in company assets. Nevertheless, the investment attractiveness of the company is increasing, which allows it to approach the industry average and increase the volume of investments in it. In addition, a higher social valuation of a company allows IT companies to increase their financial performance, which means that more socially responsible companies can attract investments more easily. The prospects of this study include: consideration of the specifics of the influence of companies' sectoral affiliation on the relationship between the components of each of the factors E, S and G and financial indicators, expanding the sample to a larger number of sectors, examining the impact of crises on the relationships obtained. In addition, one can consider the influence of the country of origin of companies on the relationship between ESG components and the financial performance of companies.” In summary, the study tool accounts for the financial indicators and factors of ecological, social and governance. Further, the research assured that ESG components with the influence of the country of origin of companies can lead to the outcome of the financial performance of a specific company.