A systematic literature review of socially responsible investment and environmental social governance metrics

Socially responsible investment (SRI) encompasses both ethical and financial paradigms. This systematic literature review explores three key research themes within the SRI literature, identifying a significant disconnect between themes and a fixation on the financial (as opposed to ethical) paradigm. One of the foundations of SRI is environmental, social, and governance (ESG) metrics. This review confirms the importance of ESG metrics in the SRI field, as they play two crucial roles, namely, as a proxy for sustainability performance and an enabler of the SRI market. However, there are two main issues related to ESG metrics that undermine their reliability: a lack of transparency and a lack of convergence.     

Do environmental,social, and governance activities improve corporate financial performance?

This study investigated the relationship between corporate efficiency and corporate sustainability to determine whether firms concerned about environmental, social, and governance (ESG) issues can also be efficient and profitable. We applied data envelopment analysis to estimate corporate efficiency and investigated the nonlinear relationship between corporate efficiency and ESG disclosure. Evidence shows that corporate transparency regarding ESG information has a positive association with corporate efficiency at the moderate disclosure level, rather than at the high or low disclosure level. Governance information disclosure has the strongest positive linkage with corporate efficiency, followed by social and environmental information disclosure. Moreover, we explored the relationship between particular ESG activities and corporate financial performance (CFP), including corporate efficiency, return on assets, and market value. We found that most of the ESG activities reveal a nonnegative relationship with CFP. These findings may provide evidence about voluntary corporate social responsibility strategy choices for enhancing corporate sustainability.     

Can sustainable investments outperform traditional benchmarks? Evidence from global stock markets

To contribute to overcoming global sustainability challenges, investors have been increasingly interested in making sustainable investments and incorporating environmental, social and governance (ESG) criteria into their portfolio selection decisions and managerial activities. However, these investors and other agents interested in sustainable investment need updated and robust information to support their decision making. We analyzed the performance of several Dow Jones Sustainability Indices (DJSIs) and compared them with their respective market benchmarks from 2013 to 2018. The indices comprise the following regions and countries: the world, the Asia‐Pacific, Europe, emerging markets and the US. The analysis was conducted based on both classic and modern portfolio metrics. The results suggest that sustainable investment performance is still heterogeneous worldwide, but there is a promising opportunity for investors to obtain superior risk‐adjusted returns in certain regions while incorporating sustainable investment practices. The findings are of utmost importance to financial market practitioners, business managers, academics and other stakeholders interested in promoting investments, corporate practices and scientific knowledge to achieve the Sustainable Development Goals (SDGs).     

Environmental,Social and Governance investing: Does rating matter?

In the last decade, the demand for sustainable and social investments has improved. The mutual funds industry has responded to market needs by offering a number of investment products focused on Environmental, Social and Governance (ESG) companies. The aim of this article is to understand if an ESG score can actually be considered a valid criterion that portfolio managers could adopt, along with traditional risk–return optimisation, in selecting asset portfolios. The paper analyses the link between the performance and the ESG score of different sectoral portfolios (one for each sector of the Global Industry Classification Standard), entirely composed of ESG assets, in the search for a clear and strong positive correlation that could suggest an overall advantage to focus on an ex ante choice of assets with high ESG scores.     

The Consolidation of the ESG Rating Industry as an Enactment of Institutional Retrogression

The socially responsible investing (SRI) movement has been aiming to create lasting institutional change by infusing the investment sector with new norms and values. Environmental, social and governance (ESG) rating agencies have emerged in response to the needs of SRI actors for reliable data on the social performance of firms. Since 2005, the ESG rating industry has witnessed a number of national and cross‐border consolidations. Based on a set of 37 interviews and secondary data, the paper explores the driving forces behind this consolidation as well as its impact. Our focus is on four ESG rating agencies, based in the United States, the United Kingdom, France and Switzerland. We conclude that in effect consolidation has at least partially resulted in institutional retrogression, whereby the traditional norms and values have reaffirmed their primacy, thereby somewhat negating the institutional change sought by the SRI movement. Copyright © 2016 John Wiley & Sons, Ltd and ERP Environment     

ESG controversies and bank risk taking

This study investigates how environmental, social, and governance controversies affect bank risk taking. By estimating a dynamic panel data model from 2011 to 2020, we find evidence that banks with fewer ESG controversies take less risk. Banks with a lower number of ESG controversies show their compliance with the implementation of ESG strategies to reduce risk, as evidenced by lower risk-weighted assets and higher Z-scores. The present study supports the recent guidelines on climate-related and environmental risks published by the Basel Committee on Banking Supervision and the European Central Bank. Therefore, the main results strengthen the need for the integration not only of social and governance risks but also of climate-related and environmental risks in banks' risk management framework.     

ESG表现与企业金融化——内外监管双“管”齐下的调节效应

以2011—2018年A股非金融、非房地产上市公司为样本,探讨环境、社会责任及公司治理（ESG）表现对企业金融化的影响效应。研究表明：ESG表现抑制了企业金融化,而企业内部监管会放大ESG表现对企业金融化的负向效应,外部金融监管则弱化了两者之间的负向关系。抑制效应、放大效应和弱化效应在环境、社会责任方面体现较为明显,而在公司治理方面不明显。进一步研究发现,ESG表现以及环境、社会责任能通过融资约束抑制企业金融化行为,融资约束在公司治理对企业金融化的影响中不具有中介作用;异质性分析发现ESG表现以及环境、社会责任对企业金融化的抑制效应在国有企业、研发能力较强企业中较为显著,而公司治理在非国有企业和研发能力较强的企业中表现出正向的金融化效应。研究结果丰富了ESG表现影响企业金融化的理论机制,为完善上市公司监管制度体系、夯实实体经济发展根基提供了依据。     

Exploring environmental,social, and governance disclosure effects on the S&P 500 financial performance

Much of the literature measuring the relationship between environmental, social, and governance (ESG) scores and firm performance treats the score as a measure of sustainability performance. In this study, we treat a firm's ESG score as a demonstration of strategic choice in the level of transparency that results in increased firm performance as measured by Tobin's Q and return on assets. Performance differences are a result of choice moderated by the size of the firm as measured by employees and sales. We analyze 467 firms in the S&P 500 from 2009 to 2015. Applying legitimacy and stakeholder theory, we find that there is significant difference between groups with respect to disclosure and performance. The results of quartile analysis by sales, capitalization, and Tobin's Q are relevant to understand the influence that the ESG score has on financial performance. ESG influences on Tobin's Q are greatest for large firms as measured by sales, as opposed to the ESG affects on Tobin's Q and return on asset for smallest firms as measured by market capitalization.     

Fractal statistical measure and portfolio model optimization under power-law distribution

An effective portfolio selection model is constructed on the premise of measuring accurately the risk and return on assets. According to the reality that the tail of returns on assets obey power-law distribution, this paper firstly builds two fractal statistical measures, fractal expectation and fractal variance, to measure the asset returns and risks, inspired by the method of measuring curve length in the fractal theory. Then, by incorporating the fractal statistical measure into the return-risk criterion, a portfolio selection model based on fractal statistical measure is established, namely the fractal portfolio selection model, and the closed-form solution of the model is given. Finally, through empirical analysis we find that the fractal portfolio selection model is effective and can improve investment performance.     

How does stakeholder engagement through environmental,social, and governance affect eco-efficiency and profitability efficiency? Zooming into Apple Inc.'s counterparts

As global ecological degradation intensifies, a trade-off has arisen between environmental protection and production efficiency to achieve sustainable development for the environment, society, and the company itself. However, the potential reverse causality relationship between environmental, social, and governance (ESG) and corporate efficiency may lead to confusion. This study estimates the eco-efficiency of Apple Incorporated's value-chain counterparts in the first stage and creates values and profitability in the second stage of efficiency evaluation. Results obtained from the (i) directional distance function in the two-stage data envelopment analysis (DEA), (ii) additive efficiency decomposition two-stage network DEA model, and (iii) network slacks-based measure model are consistent. That is, Apple counterparts manage more efficient eco-efficiency than profitability efficiency, implying that eco-efficiency is their competitive advantage. We thus also run a regression analysis to examine how the ESG ratings of Apple counterparts explain their eco-efficiency and profitability efficiency. Although the overall ESG rating positively explains the efficiencies, we found that the individual governance rating shows no statistically significant effect. The regression results provide insight for practitioners on the importance of investing in the three aspects of a firm's collective conscientiousness for societal and environmental governance. This paper integrates companies' eco-efficiency and profitability efficiency to resolve the conflict between environmental issues and production efficiency. It also analyzes in depth the effects of ESG and its three individual factors on eco-, profitability, and average efficiencies. The diversity of research methods also provides new ideas for future research related to firm efficiency.     

Environmental,social and governance disclosure and default risk

We investigate whether environmental, social and governance (ESG) disclosure is related to default risk. Using a sample of US nonfinancial institutions from 2006 to 2017, we find that ESG disclosure is positively related to Merton's distance to default and is negatively related to the credit default swap spread, which suggests that firms with a higher ESG disclosure have lower default risk. Our analysis further indicates that the inverse effect of ESG disclosure on default risk is through increased profitability and reduced performance variability and cost of debt. We also document that the negative impact of ESG disclosure on default risk is existent only for mature and older firms. These results are important for all stakeholders of firms, including shareholders and bondholders to consider firm's ESG disclosure in conjunction with life cycle stage before making their investment decisions.     

Does doing “good” always translate into doing “well”? An eco‐efficiency perspective

Does doing “good” always translate into doing “well”? Debate over the “value” of corporate social responsibility is high on the agenda of corporate finance research. Deeper understanding is required on managers' incentives to pursue and implement corporate social responsibility related strategies, as is more thorough comprehension of the effect of these strategies to firms' performance levels as well as shareholder and wider stakeholder valuations of the firm. This paper provides a new lens by approaching the subject from a different methodological paradigm, grounded in the performance benchmarking methods more commonly applied in operational research. In so doing, we provide novel evidence of the effect of corporate choices on environmental, social, and governance (ESG) strategic investment compliance (i.e., doing good) to firms' eco‐efficiency levels (doing well). In brief, our empirical findings suggest that ESG and firm's eco‐performance are nonlinearly related. Specifically, advanced ESG policies and disclosure levels are associated with a positive affect to firms' eco‐efficiency levels, but only up to a point, after which the effect becomes “neutral,” that is, ESG demonstrates a visible pattern of diminishing marginal returns. Thus, we may humbly conclude that a firm may “do well” by doing good, but it is not clear they should ever expect to “do great” just by “doing good.” The threshold at which this “neutrality” appears varies systematically with the characteristics of the sector in which the firm is operating, as well as dimensions of board diversity. Finally, it is evident that ESG implementation choices can be a source of managerial agency problems.     

Relating Environmental,Social, and Governance scores and sustainability performances of firms: An empirical analysis

Environmental, Social, and Governance (ESG) scores can act as an indicator for sustainability performance of organizations. This paper explores an empirical evidence for the relationship binding ESG scores and sustainability performances of firms. We observe and evaluate the ESG performance scores of 1,820 firms globally for 5 years, from 2014 to 2018 on 10 major themes and over 400 different indicators, as listed by Thomson Reuters and is captured from the Bloomberg terminal data. We posit five hypotheses to check the relations binding ESG scores and the total sustainability performances of firms. A Partial Least Square (PLS) analysis and standard bootstrapping using Smart PLS 3.0 software is used to observe the results and to evidence the direct and moderating effects among latent variables contributing to sustainability performances. We observe a significant and negative moderating effect of ESG performances, independently over the all direct relations, considering their relationship to ESG performances. One of the major implications of this research is in the direction of assigning priorities while considering environmental‐, social‐, and governance‐related themes in the implementation of any strategies or policies into practice.     

Sustainable Development and the Financial System: Society's Perceptions About Socially Responsible Investing

The debate surrounding the financial needs of investors and the impact on society of investment is considered to be an important research topic due to the growth of socially responsible financial markets. The main objective of this research is to study society's perception about socially responsible investing (SRI) and to identify investor's preferences regarding environmental, social and governance criteria, their real‐life investment needs and the most relevant sustainable financial products. To examine society's perception of SRI, we conducted a field survey among Spanish investors. The results show that SRI is at an early stage and Spanish investors need more exact information regarding social, environmental, and governance criteria in order to invest in socially responsible companies and products. This paper offers some guidelines that could be used by Spanish institutions, managers and investors and by foreign managers when approaching the Spanish market, in order to promote the growth of socially responsible financial products. Copyright © 2012 John Wiley & Sons, Ltd and ERP Environment.     

Management practices in Australasian ethical investment products: a role for regulation?

This paper adds to the literatures on socially responsible investment (SRI), investment management, regulation of financial services and social accounting by providing a comprehensive survey of investment methods used in SRI products and regulated social reporting in financial services. Australian and New Zealand regulations require issuers of self‐declarative SRI products to provide details on methods used in portfolio construction. Regulators' objectives to standardize the reporting of portfolio construction and thus improve its comparability were identified by examination of parliamentary debates and other public reports. Portfolio construction styles of 86 SRI products managed by 63 financial institutions in Australia and New Zealand were chosen for analysis. Statistical analysis was conducted to identify associations between styles, construction methods and assessment techniques over a four‐year period: 2004–2007. These aspects were further examined in 18 case studies. Over the period, diversity and intensity of construction methods had increased both within and between investment managers. The non‐standard nature of management consultation used in SRI products, marketing needs to distinguish rather than standardize investment methods and the types of information thought relevant to clients did not reconcile easily with the types of information required by regulation. The more recent products in the sample tended to reference market indexes in portfolio construction, separate social considerations from financial considerations and delegate qualitative assessments of invested companies. Consumer policy implications arise from questions bearing on the integrity of information attached to investment products and the effective monitoring of delegated investment processes. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment.     

Corporate sustainability and institutional shareholders: The pressure of social responsible pension funds on environmental firm practices

This paper analyses the role of social responsible (SR) pension funds as influential institutional shareholders in the corporate sustainability of investee firms. We study the influence of 197 UK SR pension funds on 1,253 firms with 31 environmental, social, and governance (ESG) indicators from 2002 to 2018. According to the indicator nature, we perform logit and ordinary least square (OLS) estimations with panel error correction models to control causality. Our results show that SR pension funds significantly impact on 41.93% of the ESG indicators studied. We find that larger pension‐fund shareholding positively influences on ESG firm performance and encourages proactive behaviour towards environmental practices. Firms with larger pension‐fund shareholding are more likely to use renewable energies and disclose environmental information, increasing the firm transparency towards stakeholders. This study contributes to understand that, besides stakeholders, institutional shareholders (SR pension funds) demand sustainable development and are able to transfer important values for the society and the environment to corporate governance.     

The Market Performance of Socially Responsible Investment during Periods of the Economic Cycle – Illustrated Using the Case of FTSE

The debate about socially responsible investment (SRI) portfolio performance compared with its non‐SRI counterparts remains inconclusive. This paper contributes to the debate by adding a new approach, examining the issue of a full economic circle through economic boom, recession and recovery. We compare stock performance of two value‐weighted investment portfolios: FTSE4Good (SRI portfolios) and FTSE 350 (conventional portfolios) from 2004 to 2011 including 2007 to 2009 financial crash. The results indicate the SRI portfolio performed better and recovered its value quicker in post‐crisis than the non‐SRI portfolio, indicating that SRI portfolios are more resilient to economic turmoil and market shocks. Copyright © 2015 John Wiley & Sons, Ltd.     

Environmental,Social and Governance Reporting in China

What is the current state of environmental, social and governance (ESG) reporting and what is the relation between ESG reporting and the financial performance of Chinese companies? This study analyses corporate ESG disclosure in China between 2005 and 2012 by analysing the members of the main indexes of the biggest Chinese stock exchanges. After discussing theories that explain the ESG performance of firms such as institutional theory, accountability and stakeholder theory we present uni‐ and multivariate statistical analyses of ESG reporting and its relation to environmental and financial performance. Our results suggest that ownership status and membership of certain stock exchanges influence the frequency of ESG disclosure. In turn, ESG reporting influences both environmental and financial performance. We conclude that the main driver for ESG disclosure is accountability and that Chinese corporations are catching up with respect to the frequency of ESG reporting as well as with respect to the quality. Copyright © 2013 John Wiley & Sons, Ltd and ERP Environment     

Risk spillover analysis across worldwide ESG stock markets: New evidence from the frequency-domain

With the increasing global awareness of green environmental protection, the international environmental, social, and governance (ESG) stock markets are developing rapidly together with rising risk linkages across worldwide markets. Therefore, this study explores the risk spillover characteristics of international ESG stock markets in the time and frequency domains and constructs a risk linkage network to further explore the risk contagion mechanism. The results show that in most cases, the developed North American market is the core of outward risk spillover in international ESG stock markets. The entire system presents a small-world structure, and the internal regions display different risk spillover characteristics. Moreover, international ESG markets generally have strong time–frequency spillover and medium-frequency (a month to a year) spillover. In contrast, the high- (a day to a month) and low-frequency (more than one year) spillovers are located at relatively low levels, but they will rise significantly under sudden financial events. The empirical results expand the ESG stock market's theoretical framework and provide a reference for investors and market regulators to reduce the investment risk of ESG.     

Board gender diversity and transparency of environmental,social and governance disclosure: Evidence from Malaysia

This study aims to investigate the effect of board gender diversity on the transparency of environmental, social, and governance (ESG) disclosures in an emerging market such as Malaysia. Dataset is comprised of 568 firm-year observations from 78 firms listed on the Bursa Malaysia. Ordinary least squares regression analysis of the data shows that ESG disclosure scores are significantly improved with the increasing presence of women directors on corporate boards. However, when the individual components are studied, the impact of board gender diversity varies. This study contributes to the limited but growing literature on ESG reporting quality and board gender diversity especially in emerging economies.