ESG disclosure and technological innovation capabilities of the Chinese listed companies

The main objective of this study is to explore how ESG disclosure effectively promotes technological innovation capabilities (TIC) and also in different industries (green vs. high-tech). Further, examine the role of financing constraint (FC) in the relationship between the ESG disclosure and TIC. We employed the panel regression model, Causal step approach, Bootstrap mediation effect test, 2SLS, and GMM model. We used Bloomberg’s ESG disclosure score of China’s A-share listed companies from 2011 to 2019 (1); we found that the ESG disclosure has a significant relationship with corporate innovation indicators (OTI, STI, NSTI) and play a significant role in promoting TIC at different levels of corporate innovation (2) ESG disclosure of non-green (high-tech) industry is more effectively promote TIC than green (non-high tech) industry (3) ESG disclosure can promote corporate innovation by reducing the level of corporate financing constraints, and FC has a partial intermediary role between ESG and TIC.     

When ESG talks: ESG tone of 10-K reports and its significance to stock markets

Since the ESG topic consistently gains on importance in the investment universe, companies provide investors with information regarding recent and future ESG activities through different reporting channels. The most recent research finds relevance of ESG-related corporate activities for formation of investors' opinion regarding companies' valuations and growth prospects. Based on a sample of more than seventeen thousand unique 10-K reports of US companies filed with SEC in period 2013 to 2019 and the word-power methodology proposed by Jegadeesh and Wu (2013), this study also shows evidence for significant relation of ESG textual tone of 10-K reports to stock market returns of filing companies around the report filing dates. Using the ESG linguistic dictionary recently proposed by Baier, Berninger, and Kiesel (2020), this study shows evidence for significant relation of social and governance-related topics disclosure to stock returns, while environmental narratives being ignored by the markets. When looking at individual words from the ESG lexicon, such words as “community”, “health”, “control” imply positive reaction of markets, while “discrimination”, “embezzlement”, and “crime” are related to negative returns. The robustness analysis based on the inverse document frequency word weightings and actual ESG performance scores confirms the significance of ESG information disclosure of 10-K reports for investors. Thus, this study sheds light on the mechanics of ESG information perception and its influence on capital markets.     

Sustainability priorities,corporate strategy,and investor behavior

Using a sequential experiment, this study examines whether integration of material environmental, social, and governance (ESG) priorities into corporate strategy impacts investors’ short‐ and long‐term stock price assessments and investment allocation. In our examination, we consider the potential moderating effect of financial performance. We find that integration of ESG priorities into strategy does not have a significant effect on investors’ price assessments or investment allocation. This is true regardless of the trend in the company's financial performance. Our results hold across various demographics and the levels of investment knowledge and investment experience. Investors’ perception of relevance and reliability of material ESG information, however, has a mediating effect on their long‐term price assessment and investment allocation. Overall, our findings suggest that any future requirements on disclosure of ESG information by regulators and standard setters should aim to improve investors’ perception of the relevance and reliability of that information.     

Do ESG ratings promote corporate green innovation? A quasi-natural experiment based on SynTao Green Finance's ESG ratings

Corporate efforts in green technology improvements are critical for enhancing sustainability; consequently, how to promote green innovation has attracted scholarly attention. This study explores whether and how environment, social, and governance (ESG) ratings influence corporate green innovation by using an independent third-party rating agency's (SynTao Green Finance) ESG ratings in China as a quasi-natural experiment. We find companies covered by the ESG rating agency significantly increase green innovation output by 3.9%, mainly as an increase in green invention patents. ESG ratings' positive effects on green innovation are more pronounced for firms whose investors are less short-sighted, non-state-owned enterprises and firms with higher degree of financial constraints. Additionally, we find ESG ratings' impact can also increase the green innovation quality and synergetic green innovation. Thus, ESG ratings from third-party institutions can effectively increase corporate green innovation, which has important implications for companies to achieve green transformation and for emerging markets to improve ESG rating systems.     

ESG Integration in Investment Management: Myths and Realities

The number of public companies reporting ESG information grew from fewer than 20 in the early 1990s to 8,500 by 2014. Moreover, by the end of 2014, over 1,400 institutional investors that manage some $60 trillion in assets had signed the UN Principles for Responsible Investment (UNPRI). Nevertheless, companies with high ESG “scores” have continued to be viewed by mainstream investors as unlikely to produce competitive shareholder returns, in part because of the findings of older studies showing low returns from the social responsibility investing of the 1990s. But studies of more recent periods suggest that companies with significant ESG programs have actually outperformed their competitors in a number of important ways. The authors’ aim in this article is to set the record straight on the financial performance of sustainable investing while also correcting a number of other widespread misconceptions about this rapidly growing set of principles and methods: Myth Number 1: ESG programs reduce returns on capital and long‐run shareholder value. Reality: Companies committed to ESG are finding competitive advantages in product, labor, and capital markets; and portfolios that have integrated “material” ESG metrics have provided average returns to their investors that are superior to those of conventional portfolios, while exhibiting lower risk. Myth Number 2: ESG is already well integrated into mainstream investment management. Reality: The UNPRI signatories have committed themselves only to adhering to a set of principles for responsible investment, a standard that falls well short of integrating ESG considerations into their investment decisions. Myth Number 3: Companies cannot influence the kind of shareholders who buy their shares, and corporate managers must often sacrifice sustainability goals to meet the quarterly earnings targets of increasingly short‐term‐oriented investors. Reality: Companies that pursue major sustainability initiatives, and publicize them in integrated reports and other communications with investors, have also generally succeeded in attracting disproportionate numbers of longer‐term shareholders. Myth Number 4: ESG data for fundamental analysis is scarce and unreliable. Reality: Thanks to the efforts of reporting and investor organizations such as SASB and Ceres, and of CDP data providers like Bloomberg and MSCI, much more “value‐relevant” ESG data on companies has become available in the past ten years. Myth Number 5: ESG adds value almost entirely by limiting risks. Reality: Along with lower risk and a lower cost of capital, companies with high ESG scores have also experienced increases in operating efficiency and expansions into new markets. Myth Number 6: Consideration of ESG factors might create a conflict with fiduciary duty for some investors. Reality: Many ESG factors have been shown to have positive correlations with corporate financial performance and value, prompting ERISA in 2015 to reverse its earlier instructions to pension funds about the legitimacy of taking account of “non‐financial” considerations when investing in companies.     

Stock market reactions to adverse ESG disclosure via media channels

This study examines the value relevance of corporate reputation risks (CRR) from adverse media coverage of environmental, social and governance (ESG) issues on stock performance at the firm level. Empirical results advance signalling theory and resource-based view by providing evidence that corporate reputation is considered a valuable intangible asset by investors and adverse ESG disclosure via media channels have a significant and negative impact on firm valuation. The research is extended using various factors and indicates that heightened CRR have a substantially negative corollary effect on stock price of smaller and less liquid firms that are typically not S&P500 constituents. Further analysis using industry classifications reveals that stock performance of companies in the ‘sin’ triumvirate (i.e., alcohol, tobacco, and gaming) is not significantly affected by negative ESG media coverage. Instead, firms in candy & soda, steel works, banking, and insurance industries are the most susceptible to investors' repercussion from undesirable media spotlight. These findings provide new insights and indicate that beyond the type and delivery method of ESG disclosures, firm characteristics, corporate reputation status and industry explain differences in investors' reaction to ‘bad’ news.     

Analysts' Roundtable on Integrating ESG into Investment Decision‐Making

In this third of the three discussions that took place at the SASB 2016 Symposium, practitioners of a broad range of investment approaches—active as well as passive in both equities and fixed‐income—explain how and why they use ESG information when evaluating companies and making their investment decisions. There was general agreement that successful ESG investing depends on integrating ESG factors with the methods and data of traditional “fundamental” financial statement analysis. And in support of this claim, a number of the panelists noted that some of the world's best “business value investors,” including Warren Buffett, have long incorporated environmental, social, and governance considerations into their investment decision‐making. In the analysis of such active fundamental investors, ESG concerns tend to show up as risk factors that can translate into higher costs of capital and lower values. And companies' effectiveness in managing such factors, as ref lected in high ESG scores and rankings, is viewed by many fundamental investors as an indicator of management “quality,” a reliable demonstration of the corporate commitment to investing in the company's future. Moreover, some fixed‐income investors are equally if not more concerned than equity investors about ESG exposures. ESG factors can have pronounced effects on performance by generating “tail risks” that can materialize in both going‐concern and default scenarios. And the rating agencies have long attempted to reflect some of these risks in their analysis, though with mixed success. What is relatively new, however, is the frequency with which fixed income investors are engaging companies on ESG topics. And even large institutional investors with heavily indexed portfolios have become more aggressive in engaging their portfolio companies on ESG issues. Although the traditional ESG filters used by such investors were designed mainly just to screen out tobacco, firearms, and other “sin” shares from equity portfolios, investors' interest in “tilting” their portfolios toward positive sustainability factors, in the form of lowcarbon and gender‐balanced ETFs and other kinds of “smart beta” portfolios, has gained considerable momentum.     

Innovation in Stock Exchanges: Driving ESG Disclosure and Performance

Stock exchanges are in a unique position to promote ESG transparency and leverage their institutional capacity to build more sustainable capital markets. To facilitate the quick uptake of material ESG disclosure and raise the quality and comparability of the data, the Athens Stock Exchange has created ESG guidelines for listed companies that will be published in the summer of 2019. One important feature of the guidelines is their degree of sectoral specificity and emphasis on materiality. The guidelines and supporting metrics they propose are based on reporting practices endorsed by international sustainability standards like the SASB's industry standards. This materiality‐oriented approach will help issuers focus on the sustainability value drivers inherent in their business, and so ensure that corporate ESG disclosures satisfy the demand of investors for comparable quantitative and accounting metrics that help companies communicate their commitment to long‐term value creation.     

Audit 4.0-based ESG assurance: An example of using satellite images on GHG emissions

As Environment, Social, and Governance (ESG) information has become an essential resource for investors, regulators have attempted to assure its quality. While more companies offer ESG disclosure, it is usually not fully substantiated with supporting information. Assurance is needed to verify that ESG reports are free of substantive errors. However, traditional financial audit approaches are less effective in providing ESG assurance due to the difference in the nature of evidence, difficulty in measuring and verifying ESG measures, and ever-changing ESG performance. To increase the effectiveness of ESG audit approaches, this study proposes Audit 4.0-based ESG assurance, which uses Big Data and emerging technologies of Audit 4.0 to capture evidence from the physical world and provide accurate assurance on ESG reports in a timely manner. We further perform a case study as a proof of concept of the proposed approach, which explores the integration of satellite-based methane estimation as ESG audit evidence. The use of satellite images provides opportunities for regulators and companies to monitor and assure ESG reports in a continuous manner.     

Four Things No One Will Tell You About ESG Data

As the ESG finance field and the use of ESG data in investment decision‐making continue to grow, the authors seek to shed light on several important aspects of ESG measurement and data. This article is intended to provide a useful guide for the rapidly rising number of people entering the field. The authors focus on the following:

1. The sheer variety, and inconsistency, of the data and measures, and of how companies report them. Listing more than 20 different ways companies report their employee health and safety data, the authors show how such inconsistencies lead to significantly different results when looking at the same group of companies.
2. ‘Benchmarking,’ or how data providers define companies' peer groups, can be crucial in determining the performance ranking of a company. The lack of transparency among data providers about peer group components and observed ranges for ESG metrics creates market‐wide inconsistencies and undermines their reliability.
3. The differences in the imputation methods used by ESG researchers and analysts to deal with vast ‘data gaps’ that span ranges of companies and time periods for different ESG metrics can cause large ‘disagreements’ among the providers, with different gap‐filling approaches leading to big discrepancies.
4. The disagreements among ESG data providers are not only large, but actually increase with the quantity of publicly available information. Citing a recent study showing that companies that provide more ESG disclosure tend to have more variation in their ESG ratings, the authors interpret this finding as clear evidence of the need for ‘a clearer understanding of what different ESG metrics might tell us and how they might best be institutionalized for assessing corporate performance.’

What can be done to address these problems with ESG data? Companies should ‘take control of the ESG data narrative’ by proactively shaping disclosure instead of being overwhelmed by survey requests. To that end, companies should ‘customize’ their metrics to some extent, while at the same time seeking to self‐regulate by reaching agreement with industry peers on a ‘reasonable baseline’ of standardized ESG metrics designed to achieve comparability. Investors are urged to push for more meaningful ESG disclosure by narrowing the demand for ESG data into somewhat more standardized, but still manageable metrics. Stock exchanges should consider issuing—and perhaps even mandating—guidelines for ESG disclosures designed in collaboration with companies, investors, and regulators. And data providers should come to agreement on best practices and become as transparent as possible about their methodologies and the reliability of their data.     

ESG Investing in Graham & Doddsville

The author describes how and why the world's best “business value investors” have long incorporated environmental, social, and governance (ESG) considerations into their investment decision‐making. As the main source of value in companies has increasingly shifted from tangible to intangible assets, many followers of Graham & Dodd have delivered exceptional investment results by taking an “earnings‐power” approach to identifying high‐quality businesses—businesses with enduring competitive advantages that are sustained through significant ongoing investment in their core capabilities and, increasingly, their important non‐investor “stakeholders.” While the ESG framework may be relatively new, it can be thought of as providing a lens through which to view the age‐old issue of “quality.” Graham & Dodd's 1934 classic guide to investing, Security Analysis, and Phil Fisher's 1958 bestseller, Common Stocks and Uncommon Profits, both identify a number of areas of analysis that would today be characterized as ESG. Regardless of whether they use the labels “E,” “S,” and “G,” investors who make judgments about earnings power and sustainable competitive advantage are routinely incorporating ESG considerations into their decision‐making. The challenge of assessing a company's sustainable competitive advantage requires analysis based on concepts such as customer franchise value, as well as intangibles like brands and intellectual property. For corporate managers communicating ESG priorities, and for investors analyzing ESG issues, the key is to focus on their relevance to the business. In this sense, corporate reporting on sustainability issues should be viewed as analogous to and an integral part of financial reporting, with a management focus on materiality and relevance (while avoiding a “promotional” approach) that is critical to credibility.     

The Evolution of Integrating ESG Analysis into Wealth Management Decisions

Retail investors rely heavily on the advice of their financial advisors. But relatively few of those advisors have begun to incorporate investment strategies based on environmental, social and governance (ESG) factors for their client's portfolios. The author attributes this lack of interest to the disappointing returns of the “first generation” of ESG retail investment products, which approached the topic through a “socially responsible investing” (SRI) lens with mandates to exclude companies and industries viewed as having negative impact on society. These early “negative screening” directives had the effect of reducing the size of the manager's investable universe, which effectively ensured that SRI portfolio would underperform the overall market. The author, who is himself a practicing financial advisor, proposes that an innovative evolutionary process is underway in which investment managers are shifting away from a penchant for “negative screening” to a more inclusive approach he refers to as “best‐in‐class ESG Factor Integration.” And he identifies three main catalysts for this evolution: (1) greater disclosure of ESG data by public companies; (2) the growing accuracy and accessibility of ESG research, from commercial as well as academic sources; and (3) the inclusion of ESG factors with the traditional value drivers emphasized by the fundamental and quantitative methods used by portfolio managers. Although such integration is yet in its early stages, the author is optimistic that this growing trend will become an important part of an overall sustainable investing movement. No longer confined to large institutional investors, ESG factor integration is now available through a growing number of products and investment platforms.     

The end of ESG

ESG is both extremely important and nothing special. It's extremely important because it's critical to long-term value, and so any academic or practitioner should take it seriously, not just those with “ESG” in their research interests or job title. Thus, ESG doesn't need a specialized term, as that implies it's niche—considering long-term factors isn't ESG investing; it's investing. It's nothing special since it's no better or worse than other intangible assets that create long-term financial and social returns, such as management quality, corporate culture, and innovative capability. Companies shouldn't be praised more for improving their ESG performance than these other intangibles; investor engagement on ESG factors shouldn't be put on a pedestal compared to engagement on other value drivers. We want great companies, not just companies that are great at ESG.     

The impact of institutional investors on ESG: Evidence from China

This paper studies the influence of institutional ownership on the Chinese A-shares' ESG performance. Findings reveal the positive improvement from institutional investors, and this impact is stronger in firms with better-expected ESG performance and low initial ESG performance. Besides, heterogeneous institutional investors have different influences, and only a pressure-resistant institution plays the promotion role. Further studies based on the period following the financial crisis and when emphasising the environmental protection policy reveal that financial motivation and reputation motivation could be the reason for institutional holding. Our findings are robust after using the instrumental variable analysis, controlling for firm fixed effects, and replacing institutional holdings, and could be beneficial for the governance of firms in China.     

Private Equity 4.0: Using ESG to Create More Value with Less Risk

A growing number of private equity firms have responded to the increased focus on climate change, social issues, and technology disruption by broadening their corporate mission to encompass all important stakeholders, as well as their limited partners. And in the process, the management of ESG risks and pursuit of ESG opportunities have become increasingly fundamental to the staying power and value creation potential of PE firms by reducing the risk of their investments, discovering new sources of growth, and increasing their resilience to changes in the political and regulatory environment. This article tells the story of how the Nordic PE firm, Summa Equity, has turned its ESG approach into a core competence and a source of competitive advantage that has enabled the firm to distinguish itself from its competitors and bring about significant improvements in the financial performance of its portfolio companies while providing benefits for their stakeholders. Using the U.N. Sustainable Development Goals to guide them, the firm invests in companies they perceive to be addressing major environmental or social challenges in an innovative and commercially successful way. This has led to investments in significant growth opportunities in areas such as health care, education, waste management, and acqua‐culture. And the firm's returns to its investors have been high enough—and the perceived social benefits large enough—that the firm recently closed its second fund (which was significantly oversubscribed) for 650 million euros, and received the ESG award at the 2019 Private Equity Awards in London.     

ESG投资能够促进银行创造流动性吗?——兼论经济政策不确定性的调节效应

当前在我国致力于实现“碳达峰、碳中和”目标的大背景下,银行能否通过ESG投资促进流动性创造,进而推动高质量发展具有重大战略意义。本文利用2009年第一季度至2020年第二季度中国36家上市银行的面板数据,实证分析ESG投资对银行流动性创造的影响,并将其置于经济政策不确定性条件下予以讨论。研究发现:第一,ESG投资整体上促进流动性创造,表现为对资产端和负债端流动性创造的促进作用,以及对表外流动性创造的抑制作用。从ESG投资结构看,环境保护投资和社会责任投资均抑制流动性创造,而公司治理投资则促进流动性创造。异质性分析表明,地方性银行和资本短缺银行的ESG投资对流动性创造具有更强的促进作用。第二,中介机制分析发现,ESG投资主要通过“盈利”和“风险”渠道促进流动性创造。第三,在经济政策不确定性上升时期,ESG投资对流动性创造的促进作用更加显著。从ESG投资分项看,经济政策不确定性会增强环境保护投资和社会责任投资对流动性创造的抑制作用,以及公司治理投资对流动性创造的促进作用。本文结论为充分发挥ESG投资作用并以此推动高质量发展提供了政策启示。     

The wages of social responsibility — where are they? A critical review of ESG investing

This paper contributes both to investigating the link between the corporate social and financial performance based on environmental, social and corporate governance (ESG) ratings and to reviewing the existing empirical evidence pertaining to this relationship. The sample used includes ESG data of ASSET4, Bloomberg and KLD for the U.S. market from 1991 to 2012. The econometrical framework applies an ESG portfolio approach using the Carhart (1997) four-factor model as well as cross-sectional Fama and MacBeth (1973) regressions. Previous empirical research indicates a relationship between ESG ratings and returns. As against this, the ESG portfolios do not state a significant return difference between companies with high and low ESG ratings. Although the Fama and MacBeth (1973) regressions reveal a significant influence of several ESG variables, investors are hardly able to exploit this relationship. The magnitude and direction of the impact are substantially dependent on the rating provider, the company sample and the particular subperiod. The results suggest that investors should no longer expect abnormal returns by trading a difference portfolio of high and low rated firms with regard to ESG aspects.     

Business sustainability factors and stock price informativeness

This paper investigates whether and how business sustainability performance and disclosure factors affect stock price informativeness (SPI). We find that non-financial environmental, social, and governance (ESG) sustainability performance factors are positively associated with idiosyncratic volatility (our proxy for SPI) after controlling for financial-economic performance. We further show that the association between sustainability performance factors and SPI is stronger for firms with higher sustainability disclosure. We find that the association between ESG sustainability performance factors and SPI is stronger when economic performance is weaker, suggesting that investors tend to pay more attention to ESG performance factors when firms are financially underperforming. This study shows that investors pay attention to both firm economic performance (corporate profitability and growth prospect) and ESG sustainability performance and disclosure factors, which have implications for policymakers, regulators, investors, businesses, and researchers.     

Secret Recipe of IPO survival: ESG disclosure and performance

While ESG initiation and disclosure may help newly listed companies maintain a social license to operate, mitigate information asymmetry, and attract investor attention, it may impose significant costs on initial public offering (IPO) firms and magnify agency problems. Using a sample of 1102 IPOs issued in the U.S and the ESG data from MSCI between 1999 and 2016, the paper empirically tests the competing hypotheses and examines the influence of ESG disclosure and performance on the survivability of IPOs. We document that (1) voluntary ESG disclosure reduces IPO failure risks and improves long-run performance of IPO; (2) the sooner ESG information is disclosed after the IPO, the greater the likelihood of survival and better long-run performance; and (3) IPOs with better ESG score are less likely to fail, with the impact largely attributable to the company's social and governance performance. Our findings identify new failure risks for IPOs, supply evidence of value-relevance of ESG, and provide practical guidance for managers.     

ESG Controversies,ESG Disclosure and Analyst Forecast Accuracy

We investigate whether an environmental social governance (ESG) disclosure moderates the relation between ESG controversies and analyst forecast accuracy. The previous literature has shown that ESG controversies increase uncertainty about a firm's future prospects, while ESG disclosure decreases this uncertainty. We therefore take the next step and integrate ESG controversies, ESG disclosure and uncertainty into one model. Our study is based on 8,369 firm-year observations across 51 countries from 2008 to 2017, containing data from RepRisk, Bloomberg and the Institutional Brokers' Estimate System. We find that analyst forecast errors are generally higher for firms with higher exposure to ESG controversies. More importantly, we establish ESG disclosure as a moderator that mitigates the strength of the relation between ESG controversies and analyst forecast errors. Additionally, we identify that the most important pillar for the relation derives from social controversies and disclosure.