Enhancing Market Valuation of ESG Performance: Is Integrated Reporting Keeping its Promise?

Abstract

This paper studies the effectiveness of a firm's strategy to report on its ESG activities with regard to the extent and direction in which the firm's ESG performance is valued by capital market investors. It is the first to disentangle the moderating effects of different types of ESG reporting on market valuation of ESG performance and to analyze whether following the current integrated reporting trend is worth the effort. Results indicate that ESG performance is valued more strongly and in the (desired) positive direction when firms publish an ESG report, irrespective of its type (stand‐alone or integrated). Furthermore, integrated reporting is associated with superior outcomes compared with a stand‐alone report for composite ESG and corporate governance performance. Our findings are important for corporate managers, as they help to understand market valuation of ESG performance in dependence on the reporting type and provide guidance for formulating and evaluating the reporting strategy. Copyright © 2016 John Wiley & Sons, Ltd and ERP Environment

The Value Relevance of Environmental, Social, and Governance Performance: The Brazilian Case

“…It should be noted that in the present study we use four alternative CSR performance variables, following the most recent literature on CSR and value creation [32,41,42]. Specifically, we use an environmental performance variable, a social performance variable, and a corporate governance performance variable.…”

“…In contrast, emission reduction measures the commitment and effectiveness of a company in reducing environmental emissions in the production and operating processes. Product innovation reflects the ability of a company to reduce the environmental costs and burdens of its customers, thus creating new market opportunities through new environmental technologies and processes or ecological products [32,41,42,47].…”

“…Social performance measures aspects relating to the quality of employment, respecting human rights, the relationship with the community, as well as the responsibility of the product. Specifically, it measures: the effectiveness of a company in creating job satisfaction, a healthy and safe workplace, maintaining diversity and equal opportunities; the effectiveness of a company in respecting the fundamental conventions on human rights; the commitment of the company to being a good citizen, protecting public health, and respecting business ethics; the ability of a company to produce quality goods and services that integrate health, safety, integrity, and the privacy of customer data [32,41,42,48]. Finally, corporate governance performance refers to the management of the company (structure and functions of the board of directors, remuneration policy, etc.…”

“…), the rights of the shareholders, and the vision and strategy of the company. Specifically, it measures the commitment and effectiveness of a company when it comes to following the principles of good corporate governance practices, the effectiveness of the company in relation to the equal treatment of shareholders, and the practices of the company to communicate information regarding the economic-financial, social, and environmental dimensions in its decision-making processes [28,32,42,47]. This ESG performance level is the weakest for the Brazilian listed companies, with only the household goods and construction and forestry and paper sectors having a score higher than 50, with Gafisa and Fibria Celulose being the highest-rated companies in each respective sector.…”

“…Table 2 shows the descriptive statistics (mean, maximum, minimum, and standard deviation) and the correlation matrix of the financial variables and the environmental, social, and corporate governance performance variables as well as a general ESG performance measure obtained from the arithmetic mean of the previous three, following Cheng et al [32] and Mervelskemper and Streit [42]. Also, as we indicated in the methodological section, we use a specification of Ohlson's [39] model based on stock prices, as recommended by Barth and Clinch [40], to mitigate any scale effects present in the sample.…”