Understanding the ESG and Financial Performance Relationship: Different Metrics Matters
DOI:
https://doi.org/10.24246/persi.v7i3.p298-314Keywords:
Environmental Social and Governance (ESG), CSR, Financial Performance, ReturnAbstract
Studies on the relationship between environmental, social, and governance (ESG) and a firm's financial performance remain largely inconclusive. This study attempts to provide empirical evidence that the disagreement among ESG ratings lead to the different results of firm-level studies on the relationship between ESG and financial performance. Tests of multiple models using different ESG rating uncover three types of variations: statistical significance, directionality, and magnitude. This study also indicates that the effect is greater in studies on accounting-based financial performance measures and studies applying composite ESG score. Social dimension consistently presents the highest number of variations compared to environmental and governance dimensions.
Downloads
References
Atz, Ulrich, Tracy Van Holt, Zongyuan Zoe Liu, and Christopher C. Bruno. 2023. “Does Sustainability Generate Better Financial Performance? Review, Meta-Analysis, and Propositions.” Journal of Sustainable Finance & Investment 13(1):802–25. https://doi.org/10.1080/20430795.2022.2106934
Berg, F., J. F. Kölbel, and R. Rigobon. 2022. “Aggregate Confusion: The Divergence of ESG Ratings*.” Review of Finance 26(6):1315–44. https://doi.org/10.1093/rof/rfac033
Billio, M., M. Costola, I. Hristova, C. Latino, and L. Pelizzon. 2021. “Inside the ESG Ratings: (Dis)Agreement and Performance.” Corporate Social Responsibility and Environmental Management 28(5):1426–45. https://doi.org/10.1002/csr.2177
Bird, R., F. Momenté, and F. Reggiani. 2012. “The Market Acceptance of Corporate Social Responsibility: A Comparison across Six Countries/Regions.” Australian Journal of Management 37(2):153–68. https://doi.org/10.1177/0312896211416136
Cajias, M., F. Fuerst, and S. Bienert. 2014. “Can Investing in Corporate Social Responsibility Lower a Company’s Cost of Capital?” Studies in Economics and Finance 31(2):202–22. https://doi.org/10.1108/SEF-05-2013-0067
Cao, J., S. Titman, X. Zhan, and W. Zhang. 2023. “ESG Preference, Institutional Trading, and Stock Return Patterns.” Journal of Financial and Quantitative Analysis 58(5):1843–77. https://doi.org/10.1017/S0022109022000916
Chatterji, A. K., R. Durand, D. I. Levine, and S. Touboul. 2016. “Do Ratings of Firms Converge? Implications for Managers, Investors and Strategy Researchers.” Strategic Management Journal 37(8):1597–1614. https://doi.org/10.1002/smj.2407
Chatterji, A. K., D. I. Levine, and M. W. Toffel. 2009. “How Well Do Social Ratings Actually Measure Corporate Social Responsibility?” Journal of Economics and Management Strategy 18(1):125–69. doi: https://doi.org/10.1111/j.1530-9134.2009.00210.x
Chava, S. 2014. “Environmental Externalities and Cost of Capital.” Management Science 60(9):2223–47. https://doi.org10.1287/mnsc.2013.1863
Christensen, D. M., G. Serafeim, and A. Sikochi. 2022. “Why Is Corporate Virtue in the Eye of The Beholder? The Case of ESG Ratings.” Accounting Review 97(1):147–75. https://doi.org10.2308/TAR-2019-0506
Dorfleitner, G., G. Halbritter, and M. Nguyen. 2015. “Measuring the Level and Risk of Corporate Responsibility - An Empirical Comparison of Different ESG Rating Approaches.” Journal of Asset Management 16(7):450–66. https://doi.org10.1057/jam.2015.31
Drempetic, S., C. Klein, and B. Zwergel. 2020. “The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review.” Journal of Business Ethics 167(2):333–60. https://doi.org10.1007/s10551-019-04164-1
Ferrero-Ferrero, I., M. Fernández-Izquierdo, and M. J. Muñoz-Torres. 2016. “The Effect of Environmental, Social and Governance Consistency on Economic Results.” Sustainability (Switzerland) 8(10). https://doi.org10.3390/su8101005
Gillan, S. L., A. Koch, and L. T. Starks. 2021. “Firms and Social Responsibility: A Review of ESG and CSR Research in Corporate Finance.” Journal of Corporate Finance 66. https://doi.org10.1016/j.jcorpfin.2021.101889
Halbritter, G., and G. Dorfleitner. 2015. “The Wages of Social Responsibility - Where Are They? A Critical Review of ESG Investing.” Review of Financial Economics 26:25–35. https://doi.org10.1016/j.rfe.2015.03.004
Hedesström, M., U. Lundqvist, and A. Biel. 2011. “Investigating Consistency of Judgement across Sustainability Analyst Organizations.” Sustainable Development 19(2):119–34. https://doi.org10.1002/sd.511
Huang, D. Z. X. 2021. “Environmental, Social and Governance (ESG) Activity and Firm Performance: A Review and Consolidation.” Accounting and Finance 61(1):335–60. https://doi.org10.1111/acfi.12569
Khan, M., G. Serafeim, and A. Yoon. 2016. “Corporate Sustainability: First Evidence on Materiality.” Accounting Review 91(6):1697–1724. https://doi.org10.2308/accr-51383
Kong, Y., A. Antwi-Adjei, and J. Bawuah. 2020. “A Systematic Review of the Business Case for Corporate Social Responsibility and Firm Performance.” Corporate Social Responsibility and Environmental Management 27(2):444–54. https://doi.org10.1002/csr.1838
Li, Y., M. Gong, X. Y. Zhang, and L. Koh. 2018. “The Impact of Environmental, Social, and Governance Disclosure on Firm Value: The Role of CEO Power.” British Accounting Review 50(1):60–75. https://doi.org10.1016/j.bar.2017.09.007
López-Arceiz, F. J., A. J. Bellostas, and P. Rivera. 2018. “Twenty Years of Research on the Relationship Between Economic and Social Performance: A Meta-Analysis Approach.” Social Indicators Research 140(2):453–84. https://doi.org10.1007/s11205-017-1791-1
Makni, R., C. Francoeur, and F. Bellavance. 2009. “Causality between Corporate Social Performance and Financial Performance: Evidence from Canadian Firms.” Journal of Business Ethics 89(3):409–22. https://doi.org10.1007/s10551-008-0007-7
Mattingly, J. E. 2017. “Corporate Social Performance: A Review of Empirical Research Examining the Corporation–Society Relationship Using Kinder, Lydenberg, Domini Social Ratings Data.” Business and Society 56(6):796–839. https://doi.org10.1177/0007650315585761
Ng, A. C., and Z. Rezaee. 2015. “Business Sustainability Performance and Cost of Equity Capital.” Journal of Corporate Finance 34:128–49. https://doi.org10.1016/j.jcorpfin.2015.08.003
Nollet, J., G. Filis, and E. Mitrokostas. 2016. “Corporate Social Responsibility and Financial Performance: A Non-Linear and Disaggregated Approach.” Economic Modelling 52:400–407. https://doi.org10.1016/j.econmod.2015.09.019
Singal, M. 2014. “The Link between Firm Financial Performance and Investment in Sustainability Initiatives.” Cornell Hospitality Quarterly 55(1):19–30. https://doi.org10.1177/1938965513505700
Widyawati, L. 2021. “Measurement Concerns and Agreement of Environmental Social Governance Ratings.” Accounting and Finance 61(S1):1589–1623. https://doi.org10.1111/acfi.12638
Wong, C., A. Brackley, and E. Petroy. 2019. “Rate the Raters 2019: Expert Views on ESG Ratings.” Https://Sustainability.Com/Wp-Content/Uploads/2019/02/SA-RateTheRaters-2019-1.Pdf.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Perspektif Akuntansi
This work is licensed under a Creative Commons Attribution 4.0 International License.
Perspektif Akuntansi is licensed under a Creative Commons Attribution 4.0 International (CC BY 4.0) License
