For an environmentally sensitive industry does ESG performance affect the financial performance? A comparison between developed and emerging markets

A term that has become popular in recent years in research and industries is corporate sustainability. With an increase in climate risks and a growing population there is a concern over social and environmental problems. Hence, sustainability practices are put in place to achieve corporate sustainability. 

Business sustainability

Businesses are now focusing on sustainability practices such as carbon reduction, waste management, and improving the operational capacity. These sustainability practices however, need to benefit all stakeholders, whilst increasing a corporation's value. The stakeholder theory mentions the following: “Stakeholder theory (Freeman, 1984) suggests that organizations should not only focus on generating value and profit for owners or stockholders but should also consider the best interests of all the stakeholders engaged with the business. When businesses include ESG practices then this allows for a competitive market and a greater financial performance. 

Stakeholder theory versus the shareholder theory

Further, there is a debate or controversy between the stakeholder theory and the shareholder theory. “Conversely, shareholder theory (Friedmann, 1962) opposes this stance, arguing that socially responsible activities are not a corporation's responsibility or objective. Shareholder theory indicates that corporations should prioritize maximizing owner's value and profit and should conduct business operations only for the benefit of their stockholders or owners (Friedman, 1970) and that socially responsible activities are the responsibility of the relevant shareholder, not the corporation. However, shareholder theory does not restrict socially responsible practices as long as they are economically advantageous to the corporation (Smith, 2003), and previous studies found evidence showing ESG investments as being economically advantageous for the corporation.” 

ESG performance

Research on the impact of ESG remains limited and performance of environmentally sustainable companies needs more research. The objective of the study is: “this study investigates the ESG–financial performance relationship of environmentally sensitive corporations to determine how investment and expenditure made by these corporations to protect the environment and communities affect their corporate financial performance.” Both emerging and developing nations have adopted ESG practices but what is missing is that emerging countries lack adequate penalties, legislation, and ESG practice incentives. Further, the “developed countries are more concerned with economic and environmental sustainability and sociocultural rights. 

The study has five objectives namely:

1. “analyzes whether the impact of ESG controversies on corporate financial performance of environmentally sensitive corporations differs between developed economies' markets and emerging economies' market”

2. “A comprehensive literature review followed by hypothesis development”

3. “Discusses the research design, empirical models, and study methodology, along with sample selection, data collection process, and a detailed description of variables”

4. “The descriptive statistics and empirical findings with discussion.”

5. “Contains the conclusions and some recommendations and suggestions”

ESG practices add on costs for a business. In environmental sustainable industries there has been a positive correlation showing. 

The hypothesis in the study

The hypothesis analysed in the literature review

1. “Hypothesis 1A. Overall ESG performance of corporations from environmentally sensitive industries affects their profitability and market valuation.”

• Studies in the emerging markets are limited.

• ESG performance on environmentally sustainable corporations their financial performance will be affected.

Hypothesis 2A. ESG performance of corporations from environmentally sensitive industries in the developed

“Hypothesis 2B. ESG performance of corporations from environmentally sensitive industries in the emerging countries’ markets affects their profitability and market

Valuation”.

“Hypothesis 3A. ESG controversies of corporations from environmentally sensitive industries affect their profit- ability and market valuation”

An overview of the findings

The study shows that “overall ESG performance of environmentally sensitive corporations have positive and significant relationships with ROE and Tobin's Q, indicating that higher ESG performance positively impacts profitability and contributes to the increase in market value of these corporations.” The company's practices support the stakeholder theory and not the shareholder theory. Further, expanding on ESG practices can bring in financial benefits in focussing on social sustainability and environmental sustainability. The study has found out that,”our findings suggest that ESG performances of environmentally sensitive corporations are more recognized in the developed countries' markets and have a stronger impact on the financial performance of the corporations from developed countries than on those from emerging countries.