Measuring sustainability risks: A rational myth?

The objective of this paper is to investigate the rigorousness and reliability of sustainability rating agencies' evaluation of corporate sustainability risks. Using grounded theory, this study conducts a qualitative analysis of 32 semi‐structured interviews with practitioners involved in this activity and shows the trade‐offs and rational myths underlying this evaluation process. The image of rationality and rigorousness projected by sustainability risk measurements is mostly intended to address the increasing institutional pressures for reliable and comparable information, particularly from institutional investors and socially responsible investment decision makers. Nevertheless, risk analysts face serious challenges due to the lack of reliable information, the unpredictability of sustainability risks, the methodological issues related to the measurement process, and the complexity and context‐dependency of risk assessment. These challenges call into question the official and optimistic rhetoric of rating agencies. This study contributes to the literature on sustainability risks and rational myths in organizations. Managerial implications and avenues for future research are also discussed.     

Toward sustainable corporate behavior: The effect of the critical mass of female directors on environmental,social, and governance disclosure

Boards of directors have recently become more attentive to their stakeholders' concerns, providing more transparent information and adopting more sustainable business strategies. This study investigates the influence of a critical mass of women on boards on the environmental, social, and governance (ESG) disclosure score and its three components separately. Using a sample of the FTSE-MIB listed companies in the 2005–2017 period, we show that reaching a critical mass of female board members—going from one or two women to at least three—enhances the level of ESG disclosure. The results also show that the critical mass of female board members has a positive influence on every component of the ESG score, with the highest contribution of women reaching the governance score. These findings provide insights to shareholders and policymakers and suggest that a critical mass of female board members is particularly effective in improving transparency, and it can be seen as a mechanism to transit to stakeholder governance, fostering more sustainable behavior in firms.     

Where's the greenium?

In this study, we investigate whether investors are willing to trade off wealth for societal benefits. We take advantage of unique institutional features of the municipal securities market to provide insight into this question. Since 2013, states and other governmental entities have issued over $23 billion of green bonds to fund eco-friendly projects. Comparing green securities to nearly identical securities issued for non-green purposes by the same issuers on the same day, we observe economically identical pricing for green and non-green issues. In contrast to a number of recent theoretical and experimental studies, we find that in real market settings investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects. When risk and payoffs are held constant and are known to investors ex-ante, investors view green and non-green securities by the same issuer as almost exact substitutes. Thus, the greenium is essentially zero.     

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.     

Green Innovation and Finance in Asia

Green innovation and green finance are two key components of sustainable development. In the most populous, fastest‐growing region in the world, Asian countries are pressed to maintain economic growth while addressing climate change and environmental externalities. Japan, South Korea, and China have each implemented policies to promote green innovation and finance conducive to such ends. While each country possesses unique capabilities, the extent to which they can promote environmentally adjusted multifactor productivity growth, green patent registrations, green bond issuances, green foreign direct investment, and environmental, social, and governance information disclosures stands to impact on their shifts to sustainable growth paradigms.     

Nonfinancial reporting regulation and challenges in sustainability disclosure and corporate governance practices

This paper aims to investigate how the shift from voluntary to mandatory nonfinancial information started by the European Union (EU) Directive 95/2014 may influence corporate practices. In particular, this research presents a paradigmatic case study to highlight relevant changes in reporting strategy and corporate governance adopted by an Italian listed company that never disclosed sustainability information before the transposition of the EU Directive into the Legislative Decree 254/2016. In this scenario, new obligations on nonfinancial reporting were not perceived as mere additional administrative duties and the nonfinancial statement became an opportunity to communicate company's paths towards sustainability, guaranteeing transparency and greater stakeholders' engagement. Our findings go beyond prior studies pointing out how organisations adopt strategic and tactical responses to the pressure stemming from the external environment. Additionally, it highlights the pivotal function played by the internal audit in setting up the direction of change. This research has theoretical and practical contributions for academic communities, policymakers and practitioners.     

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.     

Commitment Strategies for Sustainability: How Business Firms Can Transform Trade‐Offs Into Win–Win Outcomes

This paper addresses a fundamental problem in corporate sustainability: How can corporations transform trade‐offs through win–win‐oriented governance strategies aimed at creating value? Drawing on new strands of research in business ethics, we employ an ‘ordonomic’ perspective and proceed in four steps. First, we sketch how sustainability semantics has evolved historically from a societal searchlight to a heuristics for business practice. Second, we discuss how business firms can make strategic use of moral commitments as governance contributions by deploying individual or collective self‐commitments as well as commitment services in their stakeholder relations. Third, we combine these four governance strategies with the three ESG (‘ecological, social and governance’) criteria of sustainability. We derive and illustrate with real‐life examples a 12‐box matrix as a tool for the strategic management of corporate sustainability. Fourth, we discuss the specific contribution of our ordonomic approach to the literature. Copyright © 2012 John Wiley & Sons, Ltd and ERP Environment     

The effects of environmental,social and governance disclosure on the cost of capital in small and medium enterprises: The role of family business status

Environmental, social, and governance (ESG) disclosure has become a critical component of corporate reporting. However, the effectiveness of this type of disclosure remains poorly explored among small and medium enterprises (SMEs), despite the fact that these businesses represent the majority of firms around the world. By leveraging on a dataset of Italian listed SMEs, we fill this gap to shed new light on the effects of nonfinancial disclosure on the cost of capital. The study reveals that, in stark contrast with the evidence on large companies, environmental disclosure for SMEs is bound to provoke an increase in the cost of capital. Yet this pattern is capsized when the company is a family SME, as it benefits from environmental disclosure, as large companies do.     

Integrating Alternative Data (Also Known as ESG Data) in Investment Decision Making

ABSTRACT

What is environmental, social, and governance (ESG) data and how do we evaluate its quality and effectiveness? This form of evaluation is important, as it is a precondition for investors trying to integrate ESG in investment decisions. Previous literature describes intrinsic properties of ESG data (e.g. multifaceted-ness and context dependence) and highlights a trade-off between the validity and reliability of ESG data, which is often tied to the lack of theoretical foundations and scarcity of high-quality ESG data. Encouragingly, new data technologies have improved the accessibility, availability, and transparency of ESG data, but an agreed theoretical framework to evaluate ESG data quality is still lacking. This paper seeks to fill that theoretical gap by proposing a ‘user-oriented’ approach to evaluate ESG data. In this framework, we consider ESG data to be a ‘continuous concept with limitless boundaries’ and characterise it in terms of its width and depth. The bearing of width and depth on ESG data quality is ultimately a function of the investment decisions in which such data is used: the approach we endorse is therefore user-centric. This study then shows how ESG data, when it is of high quality, maps onto the investment decision-making processes.