Does Good ESG Lead to Better Financial Performances by Firms? Machine Learning and Logistic Regression Models of Public Enterprises in Europe

Abstract

<jats:p>The increasing awareness of climate change and human capital issues is shifting companies towards aspects other than traditional financial earnings. In particular, the changing behaviors towards sustainability issues of the global community and the availability of environmental, social and governance (ESG) indicators are attracting investors to socially responsible investment decisions. Furthermore, whereas the strategic importance of ESG metrics has been particularly studied for private enterprises, little attention have received public companies. To address this gap, the present work has three aims—1. To predict the accuracy of main financial indicators such as the expected Return of Equity (ROE) and Return of Assets (ROA) of public enterprises in Europe based on ESG indicators and other economic metrics; 2. To identify whether ESG initiatives affect the financial performance of public European enterprises; and 3. To discuss how ESG factors, based on the findings of aims #1 and #2, can contribute to the advancements of the current debate on Corporate Social Responsibility (CSR) policies and practices in public enterprises in Europe. To fulfil the above aims, we use a combined approach of machine learning (ML) techniques and inferential (i.e., ordered logistic regression) model. The former predicts the accuracy of ROE and ROA on several ESG and other economic metrics and fulfils aim #1. The latter is used to test whether any causal relationships between ESG investment decisions and ROA and ROE exist and, whether these relationships exist, to assess their magnitude. The inferential analysis fulfils aim #2. Main findings suggest that ML accurately predicts ROA and ROE and indicate, through the ordered logistic regression model, the existence of a positive relationship between ESG practices and the financial indicators. In addition, the existing relationship appears more evident when companies invest in environmental innovation, employment productivity and diversity and equal opportunity policies. As a result, to fulfil aim #3 useful policy insights are advised on these issues to strengthen CSR strategies and sustainable development practices in European public enterprises.</jats:p>

Disclosure Dynamics and Non-Financial Reporting Analysis. The Case of Romanian Listed Companies

“…Sustainable Development Goals (SDGs) are designed to help companies meet several challenges: reputational risk management, responding to phenomena such as globalization and digitalization, proper communication with stakeholders, and meeting investor requirements for greater reporting transparency [34]. Climate change, human capital issues [6], and the increasingly visible associated risks cause more and more companies and regulators to become aware of the importance of environmental, social, and governance activities and disclosures [35]. Acting in the direction of these three dimensions, any company demonstrates what is called "corporate social responsibility".…”

“…The downward trend in the non-financial disclosure index for the majority of them is confirmed once again, but most companies have improved their disclosure metrics during the analyzed period. In terms of performance, most studies identify positive relationships between sustainability practices and financial indicators [6,[48][49][50][51] or between CSR and companies' financial performance [52][53][54][55][56]. In their analysis of a considerable number of listed British companies, Li et al [50] found a positive association between the level of environmental, social, and corporate governance disclosure and the value of the company, suggesting that improved transparency and accountability and increased stakeholder trust play a significant role in increasing the value of the company.…”

“…While traditional corporate reporting contains numerous reports, not connected and static, integrated reporting focuses on the process of creating company value over time, bringing together financial and non-financial information [9]. At the same time, De Lucia [6] observed that the changing behavior of companies receptive to the sustainability problems of the global community and the availability of environmental, social, and governance indicators in their reports, attract investors to socially responsible investment decisions. Ielasi [63] specifies that pension funds are encouraged by regulations to integrate environmental, social, and governance issues, both in risk analysis and in investment policies.…”

“…Companies are becoming more and more responsible because investors are also urged to make socially responsible investment decisions [6]. As the company reaches a certain size and the business consolidates, it becomes attractive to creditors or investors [7].…”

Sustainable Investing Model for Decision Makers (Based On Research of Manufacturing Industry in the Czech Republic)

“…The relationship between environmental reporting, environmental performance, and economic performance has been the subject of research by [50], whose study using structural modelling confirmed that better environmental performance leads to significantly better economic performance and also to providing more extensive quantified environmental information. The positive relationship between social responsibility and economic performance has been discussed, described [51][52][53][54], and also confirmed by research [55,56]. Emilsson and et al confirmed a positive relationship between social responsibility and economic added value in a sample of Swedish companies [57].…”