The impacts of environmental, social, and governance factors on firm performance

Abstract

Purpose-The ESG factor, which consists of environmental, social, and governance factors, represents the non-financial performance of a company. United Nations Principles for Responsible Investment (UN-PRI) invites investors to consider ESG issues when evaluating the performance of any company. Moreover, nowadays the contribution of corporations towards sustainable development is a major concern of investors, creditors, government, and other environmental agencies. Therefore, the purpose of this paper is to examine the impact of ESG factors on the performance of Malaysian public limited companies in terms of profitability, firm value, and cost of capital. Design/methodology/approach-A total of 54 companies are selected from Bloomberg's ESG database that has complete ESG and financial data from 2010 to 2013. This study conducted panel data regressions such as the pooled OLS, fixed effect, and random effect. Findings-Based on the regression results, there is no significant relationship between individual and combined factors of ESG and firm profitability (i.e., ROE) as well as firm value (i.e., Tobin's Q). Moreover, individually, none of the factors of ESG is significant with the cost of capital (WACC), but the combined score of ESG positively and significantly influences the cost of capital (WACC) of a company. Practical implications-As this is a new study on Malaysia, the findings of this study will be useful to investors, SRI analysts, policy makers, and other related agencies. Originality/value-To the best of the authors' knowledge, this study is among the first empirical study to examine the impact of ESG factors on the performance of Malaysian public limited companies in terms of profitability, firm value, and cost of capital.

The Effect Of Environmental, Social and Governance (ESG) Disclosure on Firm Performance: The Role of Ceo Tenure

“…Companies with good corporate governance concepts and have high profitability will be able to show a high stock return for the company. Atan et al (2018) found that there is no significant association between individual factors and the combined ESG and company profitability namely, ROE. The company requires special attention to the environmental conditions in which the company carries out its activities.…”

“…The most important objective of stakeholder theory and legitimacy theory is assisting manager to understand the stakeholder environment and to manage effectively among the relationships around the companies's environment (Atan et al, 2018). Both stakeholder theory and legitimacy theory can be used to explain why an entity choose to make voluntary disclosures, organizational legitimacy and company disclosures in annual reports as a strategy to maintain the sustainability of the organization.…”

Sustainable development and economic performance: Gaps and trends for future research

“…Their study brought no significant conclusions establishing a relationship between the variables. ESG was once again explored by Ferrero‐Ferrero, Fernández‐Izquierdo, and Muñoz‐Torres () who sought to explore the effects of ESG consistency on economic performance; Aboud and Diab () who found a positive relationship between ESG quality and firm value; Atan, Alam, Said, and Zamri () who found no relationships for the selected sample; Zhao et al () who analyzed power generation companies; and Xie, Nozawa, Yagi, Fujii, and Managi () who showed that most ESG activities have a nonnegative relationship with financial performance.…”

“…Other accounting variables used for financial performance were 3‐year average profit value (Younis et al, ); growth rate of sales (Tan et al, ); average month revenues (Lucato et al, ); revenue, profit, and rate trend (Oh et al, ); asset to total debt ratio (Paun, ); and weighted average cost of capital (Atan et al, ).…”

“…Other studies worth singling out are the ones by Cubas-Díaz and Martínez Sedano (2018) Goel & Misra, 2017;Paun, 2017;Lucato et al, 2017;Ganda & Milondzo, 2018;Atan et al, 2018;Xiao et al, 2018;Krause, 2018). Ten studies either could not find enough evidence to determine the existence of such relationship (Ching et al, 2017;Lean & Nguyen, 2014;Santis et al, 2016;Siew et al, 2013) or found mixed results when comparing different sectors (Ameer & Othman, 2012;Mervelskemper et al, 2013;Cristófalo et al, 2016;Lassala et al, 2017;Charlo et al, 2015;Chang & Kuo, 2008;.…”