MINISTRY OF EDUCATION AND TRAINING HO CHI MINH UNIVERSITY OF BANKING BACHELOR THESIS THE INFLUENCE OF ESG ON FIRM PERFORMANCE PRECEDING AND FOLLOWING ENGAGEMENT IN THE PARIS AGREEMENT
INTRODUCTION
RESEARCH PROBLEM
The rapid progression of climate change poses significant threats to living environments, natural resources, and future economic development, making sustainable development crucial for mitigating environmental, social, and human losses To support this, economic entities must adhere to sustainable development criteria and report their outcomes through ESG (Environmental, Social, and Governance) reporting, which details their activities and impacts in these areas Recent research indicates that ESG investment has surged, primarily due to global "carbon neutral" initiatives This growing emphasis on ESG data allows companies to improve their brand reputation, attract investment, lower financing costs, and enhance overall valuation.
Achieving climate neutrality, as outlined in the Paris Agreement and the European Green Deal, requires active societal engagement, particularly from large corporations that can significantly impact this goal by adopting ESG criteria in their reporting and operations The United Nations' Principles for Responsible Investment, introduced in 2006, have encouraged investors to incorporate environmental, social, and corporate governance factors into their decision-making Goldman Sachs has since integrated these ESG factors into its strategies, addressing investor concerns and reinforcing the definition of ESG principles As a result, ESG metrics and reporting have become essential in financial investment, with global investors increasingly favoring companies that prioritize ESG values, reflecting the interests of employees, communities, and the broader business landscape.
Recent studies indicate a growing trend where companies voluntarily disclose ESG indicators in their annual reports to showcase sustainability efforts However, this practice can restrict investor choices, as firms may achieve financial success without fully committing to ESG principles While ESG indicators are designed to demonstrate that adherence to these principles can boost corporate performance beyond ethical considerations, the global recognition of their significance remains limited Furthermore, the enforcement of policies aimed at reducing emissions is often inconsistent A report by PwC reveals that 60% of private businesses identify a lack of knowledge as a significant obstacle to adopting ESG practices, yet more than half of these companies do not prioritize ESG training.
The Kyoto Protocol, established in 1997 as the first global agreement to stabilize greenhouse gas emissions, encountered significant challenges, including rising global temperatures and major nations' non-participation in its second phase In response, the international community strengthened its commitment, leading to the Paris Agreement in 2015, which involved 195 countries and aimed to rectify the Kyoto Protocol's deficiencies The COVID-19 pandemic has further underscored the importance of Environmental, Social, and Governance (ESG) criteria for business sustainability, providing a crucial framework for setting sustainable development goals at both global and national levels Recent analyses highlight that key events such as the Paris Agreement, the 2008 global financial crisis, and the COVID-19 pandemic have collectively driven societal transformation and accelerated the adoption of ESG criteria as a new socioeconomic development framework.
As stakeholder pressure, financial market interest, and regulatory scrutiny increase, companies lacking credible ESG plans expose themselves to substantial risks, such as elevated legal and compliance costs, restricted access to capital, and a growing gap with future consumers What were once seen as competitive advantages have now become essential requirements due to changing regulations Consequently, establishing strong ESG strategies is vital for mitigating these risks and ensuring ongoing market competitiveness.
This study investigates the impact of ESG indicators on the performance of non-financial companies in the United States, the UK, Japan, and Canada from 2008 to 2023, highlighting that enhanced public environmental transparency fosters long-term societal trust By linking firm performance, assessed through financial ratios, with improvements in ESG criteria, the research addresses the lack of generalizable knowledge regarding the ESG-performance relationship in Vietnam Consequently, the author has selected the research topic "The influence of ESG on firm performance preceding and following engagement in the Paris Agreement pertaining to climate change" to examine the correlation between ESG factors and corporate performance, providing a comprehensive overview of this critical subject.
RESEARCH OBJECTIVES
This study examines the impact of ESG initiatives on the performance of non-financial firms in the United States, the UK, Japan, and Canada, focusing on the period before and after their commitment to the Paris Agreement on climate change By analyzing how the Paris Agreement has influenced corporate ESG practices, the research aims to propose actionable solutions for enhancing firm performance The findings will also offer valuable recommendations for managers seeking to improve their companies' overall effectiveness.
The author identifies key objectives to achieve overall goals, focusing on understanding the impact of ESG on the performance of non-financial companies Additionally, the study investigates the potential synergies between ESG considerations and capital structure optimization to enhance firm performance.
The subsequent objective is to measure the impact of Environmental, Social, and Governance (ESG) components on these companies
This article aims to analyze the effects of Environmental, Social, and Governance (ESG) factors on the performance of non-financial companies, specifically comparing the period before and after countries joined the Paris Agreement on climate change The findings will provide insights and recommendations to improve firm performance based on the evaluation results.
RESEARCH QUESTIONS
To address the proposed research objectives, the study will investigate the following inquiries:
Firstly, what is the direction (positive, negative, or neutral) of the impact of ESG factors on the performance of non-financial companies?
Secondly, to what extent do ESG components and ESG-capital structure intergration influence the performance of non-financial companies?
This article examines the varying impact of Environmental, Social, and Governance (ESG) factors on the performance of non-financial companies, focusing on the period before and after countries joined the Paris Agreement on climate change It aims to identify key differences in performance linked to ESG practices and offers recommendations for enhancing corporate performance through improved ESG strategies in light of these findings.
RESEARCH SCOPE
The research object is that ESG significantly impacts on firm performance of non-financial businesses
The scope of spatial research on ESG (Environmental, Social, and Governance) focuses on its influence on firm performance in non-financial businesses across the United States, the UK, Japan, and Canada, as it transitions companies from a profit-centric model to one prioritizing environmental protection and social responsibility (Liu et al., 2022) The ongoing debate regarding ESG's impact on corporate financial performance (CFP) has led to an analysis utilizing the ASSET4 database from Thomson Reuters, which is notable for its public and transparent data, encompassing 3,828 companies from 2004 to 2015 (Drempetic, Klein, and Zwergel, 2020) This research targets G7 countries, which collectively represent over 46% of the global economy, and identifies that a significant portion of ESG-focused companies are located in the US (26.54%), Japan (10.27%), the UK (8.31%), and Canada (6.58%) (Almeyda and Darmansyah, 2019) Furthermore, the analysis reveals that more than 50% of these companies belong to three primary sectors: Financials (20.40%), Industrials (18.81%), and Consumer Services (13.43%).
Scope of time research: The research period is chosen to encompass two distinct phases: before joining the Paris Agreement (2008 – 2015) and after joining it
The period from 2016 to 2023 is crucial for analyzing the impact of the Paris Agreement, which was established in 2015 as a global commitment to combat climate change This study examines data from these two periods to identify changes in ESG-related performance and evaluate the effectiveness of the Paris Agreement on firm performance.
Contributions of the study
Limited experimental studies exist on this topic, primarily due to challenges in measurement tools and the need for guidelines that align with both national characteristics and international standards Prior research has established a linear relationship between the variables involved.
This study explores the impact of countries' engagement in the Paris Agreement on climate change on corporate ESG scores and their subsequent influence on corporate value Utilizing the Difference-in-Differences (DiD) methodology, the research analyzes how varying ESG scores affect corporate value before and after joining the Paris Agreement, offering a novel perspective that diverges from prior studies.
RESEARCH STRUCTURE
This chapter outlines the key elements of the research paper, including the rationale behind the chosen topic, the identified research problem, and the objectives of the study It also presents the research questions, delineates the scope and significance of the research, and describes the overall structure of the paper.
LITERATURE REVIEW
THEORETICAL FRAMEWORK
2.1.1 The concept of Environment, Social, and Governance (ESG)
The ESG constitutes a comprehensive set of criteria for evaluating a company's sustainability performance This evaluation encompasses three critical pillars: environmental, social, and governance (Bush, et al., 2020) and (Phùng and Thủy,
In the financial landscape, sustainability is closely linked to concepts such as Socially Responsible Investing (SRI), Sustainable Investing, and Corporate Social Responsibility (CSR), as highlighted by Kadar, Horstad, and Lien (2022) These frameworks, while slightly differing in definitions, collectively emphasize Environmental, Social, and Governance (ESG) issues to enhance the performance of companies and portfolios for all stakeholders (De Spiegeleer et al., 2020) The ESG concept originated in 1953 through American economist Howard Bowen, who introduced CSR, focusing on the social responsibilities of businesses in their operations (Bowen, 1970).
“ESG” was emerged in the United Nations report “Who Cares Wins,” published in
The term "ESG" has transitioned from a niche evaluation criterion for investors to a comprehensive framework utilized by corporate managers and brands to assess the environmental, social, and governance impacts on financial performance According to various studies, including those by Duque-Grisales and Aguilera-Caracuel (2021), EBA (2021), Li et al (2021), and Ghannadighomi, Johansson, and Saliba (2023), ESG standards are categorized into three distinct areas.
Environmental factors play a crucial role in the health and efficiency of natural systems, encompassing climate change, biodiversity, energy use, pollution, and waste management Key elements include greenhouse gas emissions, energy efficiency, air and water quality, and sustainable waste management practices The E score measures a company's environmental responsibility by evaluating its commitment to eco-friendly innovations and adherence to sustainable practices, reflecting its dedication to ecological stewardship.
Social factors (S) emphasize the rights and well-being of individuals and communities, addressing issues like inequality, health, inclusiveness, labor relations, workplace safety, and community impact Key elements include labor rights, child and forced labor, workplace and customer safety, discrimination, diversity, equal opportunity, poverty alleviation, supply chain management, education, and privacy In essence, the S score reflects a company's commitment to its local community and its broader societal influence.
Governance factors in corporate governance focus on executive leadership, compensation, audits, and internal controls, alongside tax practices and board independence Essential elements include codes of conduct, accountability, transparency, board diversity, and anti-bribery measures, all aimed at enhancing stakeholder engagement and protecting shareholder rights while combating corruption.
In other words, the G score assesses how well a company manages its leadership, members, and board executives in the shareholders' best interests
ESG, which stands for Environmental, Social, and Governance, serves as a framework for assessing companies based on their impact in these critical areas This evaluation considers a company's environmental footprint, its social responsibilities towards employees, customers, and communities, and its governance practices, which include ethical conduct, transparency, and accountability.
2.1.2.1 The concept of firm performance
Successful firms play a crucial role in national development, driving economic, social, and political progress To thrive in a competitive market, these firms must excel in performance, with profitability serving as a key indicator Research by Selvam et al (2016) highlights the diverse methodologies used to assess firm performance, although there is a noticeable imbalance Specifically, financial performance, especially accounting measures of profitability, dominates the analysis, accounting for 82% of the studies, with profitability metrics being the preferred method in 52% of cases.
Firm performance is defined as the difference between reasonable costs, including capital and risk, and revenues, reflecting operational efficiency and serving as a source of low-cost capital (Aburime, 2008) A strong profit enables firms to withstand external shocks, enhance their reputation, and contribute to financial system stability Organizational performance encompasses the effective use of resources to achieve objectives, evaluated through three key areas: financial performance, product market performance, and shareholder return Financial performance includes metrics like profits, return on assets, and return on investment, while product market performance focuses on sales and market share Shareholder return is measured by total shareholder return and economic value added (Richard et al., 2009) These accomplishments are crucial for stakeholders and users (Taouab and Issor, 2019).
Firm performance is defined by a business's ability to generate profit, calculated by revenue minus production and operational expenses The ultimate goal of a firm is to maximize shareholder wealth, making superior financial performance vital for investor satisfaction (Chakravarthy, 1986) Profitability, a key indicator of a firm's historical performance in wealth creation (Chet Miller, Washburn, and Glick, 2013), is especially important in the banking sector It measures net earnings from loan interest, minus interest on deposits and operational costs, along with additional income from currency transactions, making it crucial for both investors and banks (Yuanita, 2019).
The ability to predict profit potential is crucial as it not only protects capital but also facilitates market share growth and boosts investor attractiveness Sustained high profitability is essential for generating strong profits, preserving capital, expanding market presence, and enhancing appeal to investors.
Financial performance is crucial for assessing a firm's ability to utilize its assets for profit generation and wealth maximization According to Onuora (2020), effective achievement of financial and operational goals, such as maximizing shareholder profits and enhancing asset returns, is vital for a firm's overall performance Onuora et al (2021) further highlighted that analyzing financial statements can reveal a firm's strengths and weaknesses, making profitability a key measure of performance Commonly used accounting ratios, including profit margin, return on assets, return on equity, earnings per share, and net assets per share, serve as essential tools for evaluating company performance.
In summary, firm performance is viewed from multiple perspectives that complement and coexist with each other Profitability stands out as a vital metric, linking resource utilization to overall performance Measured as profitability, it reflects a company's capacity to generate earnings relative to its expenses and costs over a defined period.
2.1.2.2 The measure of firm performance
According to (Brigham and Houston, 2019), firm performance, particularly in terms of accounting measures of profitability, can be assessed using four key indicators: ROA, ROE, ROIC, and BEP
The BEP ratio, which measures a firm's capacity to generate operating income from its assets, is calculated by dividing EBIT by total assets (Brigham and Houston, 2019) This ratio reflects the profit generated per 100 units of average assets before accounting for interest and taxes, showcasing the raw earning power of the firm and enabling comparisons among companies with varying debt levels and tax circumstances.
Return on Invested Capital (ROIC) is a key financial metric that evaluates the total return a company generates for its investors by comparing after-tax operating income to total invested capital Defined as the ratio of Net Operating Profit After Tax (NOPAT) to the firm's invested capital, ROIC reflects the profit generated for every 100 units of capital invested This increasingly popular measure is crucial for assessing a company's efficiency in utilizing its capital to generate returns.
Return on Assets (ROA) is a key financial metric that indicates a firm's efficiency in generating profit from its assets, calculated as the ratio of net income to total assets It serves as a valuable tool for assessing financial performance over time and benchmarking against industry peers (Ellinger et al., 2002) This widely used accounting measure is defined as the ratio of net operating profit to the total assets reported at the beginning of the year on the balance sheet Notably, ROA highlights the earnings available to common stockholders in relation to the firm's assets, with net profit adjusted to exclude dividends for preference shares and other nonresidual claims (Richard et al., 2009).
EMPIRICAL RESEARCH
There is currently a notable gap in empirical research regarding the relationship between Environmental, Social, and Governance (ESG) factors and Corporate Financial Performance (CFP) in Vietnam, primarily due to challenges in measuring and collecting ESG index data As a result, only a limited number of studies, such as those by Linh et al (2021), Nguyen, Hoang, and Tran (2022), Tuyến and Hưởng (2022), Đoan (2023), and Trần Thị Xuân and Nguyễn Thuỳ (2023), have explored the specific impact of ESG factors on corporate performance.
Recent studies underscore the positive relationship between Environmental, Social, and Governance (ESG) factors and corporate financial performance (CFP) Linh et al (2021) conducted a meta-analysis of 30 empirical studies, confirming that strong ESG performance leads to improved financial outcomes, particularly in the long term, thereby supporting stakeholder theory Similarly, Tuyến and Hưởng (2022) examined the impact of ESG on the financial performance of Vietnamese firms, revealing that different ESG components affect financial results in distinct ways Their findings suggest that in profitable businesses, the financial returns from ESG initiatives surpass their costs, highlighting ESG as a competitive advantage that fosters sustainable development Additionally, Nguyen, Hoang, and Tran (2022) demonstrated that enhanced ESG practices improve financial performance metrics, such as Return on Assets (ROA), Return on Invested Capital (ROIC), and Tobin's Q, among a sample of 57 non-financial S&P 500 companies Their research indicates that while the impact on Tobin's Q is immediate, enhancements in ROA and ROIC yield long-term benefits, making ESG initiatives attractive to investors and boosting market value.
A study by Đoan (2023) analyzed balanced panel data from nine countries, including six developed and three emerging markets, between 2017 and 2021, using 2,145 observations Various econometric methods, such as Pooled OLS, Fixed Effects Models (FEM), and Random Effects Models (REM), were applied to explore the relationship between economic variables, with feasible generalized least squares (FGLS) estimation and a COVID-19 dummy variable included for reliability The findings indicated a positive correlation between ESG practices and corporate performance, particularly in ROA, ROE, and ROIC, suggesting that companies with strong ESG practices perform better overall Similarly, research by Trần Thị Xuân and Nguyễn Thuỳ (2023) examined the impact of ESG factors on the financial performance of companies listed in the VN30 index from 2017 to 2021 Their panel data analysis showed that while ESG investing negatively affects financial performance based on accounting metrics like ROA, it positively influences market indicators, particularly Tobin’s Q.
Research article by (Lee & Isa, 2022) examined the influence of ESG practices on the financial performance of Malaysian Shariah-compliant firms from 2010 to
A study conducted in 2017 utilizing panel regression models on a dataset of 461 firms listed in the World Islamic Index revealed a positive correlation between Environmental, Social, and Governance (ESG) initiatives and financial performance, ultimately enhancing firm value This correlation was consistently observed across three key performance indicators: Return on Assets (ROA), Return on Equity (ROE), and Return on Invested Capital (ROIC).
Another research by (Peng and Isa, 2020), analyzing the effect of ESG practices on the financial performance of MSCI World Islamic Index firms from 2010 to 2017
This study investigates the relationship between ESG engagement and its implications for agency versus stakeholder issues, utilizing data from 461 Shariah-compliant firms across 20 countries from the Thomson Reuters ASSET4 database The findings indicate that effective ESG practices positively impact return on assets (ROA), thereby supporting stakeholder theory, while no evidence is found to connect ESG with agency problems Additionally, the research suggests that integrating ESG and Shariah screenings can boost firm value, promote ethical practices, and enhance transparency, ultimately creating new market opportunities for investors.
Xu et al (2022) analyzed data from 2006 to 2018, utilizing shareholder proposals from the ISS Governance database, which includes Russell 3000 companies Their research employed a regression discontinuity design (RDD) to assess the effects of passing ESG proposals on firm performance The findings indicate that there is no significant improvement in performance for firms that adopted ESG proposals within one to four years following the vote.
Duque-Grisales and Aguilera-Caracuel (2021) investigated the relationship between multinational firm performance and ESG scores in Latin American emerging markets, addressing a significant research gap Utilizing panel data from the Thomson Reuters Eikon database for 104 firms across Brazil, Chile, Colombia, Mexico, and Peru from 2011 to 2015, the study revealed a notable inverse relationship between ESG scores and return on assets (ROA) Further analysis of environmental, social, and governance factors indicated that each consistently adversely affected the financial performance of multilatinas Similarly, Alareeni and Hamdan (2020) examined U.S S&P 500-listed companies and found negative impacts of ESG scores on financial performance metrics; specifically, the environmental component decreased both ROA and return on invested capital (ROIC), while the social component negatively affected both ROA and ROIC Interestingly, the governance aspect showed a mixed influence, positively impacting ROA but negatively affecting return on equity (ROE).
A study by Horváthová (2010) found no correlation between ESG scores and firm performance Additionally, research by Kadar, Horstad, and Lien (2022) analyzed the relationship between ESG metrics and key financial indicators like profitability (ROE, ROIC), firm value (Tobin’s Q), and cost of capital (WACC) in Nordic corporations Using pooled-OLS, random, and fixed effect regressions on data from 340 publicly traded Nordic companies sourced from Thomson Reuters between 2013 and 2019, the study concluded that there is no statistically significant association between ESG metrics and firm profitability, particularly ROE.
In Vietnam, there is a scarcity of experimental studies on the relationship between ESG (Environmental, Social, and Governance) scores and corporate value, primarily due to limitations in measurement tools and a lack of guidelines tailored to national characteristics and international standards Previous research has established a linear relationship between ESG and corporate value; however, this study introduces a new variable: the engagement of countries in the Paris Agreement on climate change, which significantly impacts ESG scores To analyze how varying ESG scores affect corporate value before and after joining the Paris Agreement, the author employed the Difference-in-Differences (DiD) methodology.
2018), diverging from previous preliminary studies
Table 2.1 Synthesizing prior research on the impact of ESG factors alongside others on firm performance
The influence on ROA The influence on ROIC
(Alareeni and Hamdan, 2020); (Peng and Isa, 2020);
(Duque- Grisales and Aguilera- Caracuel, 2021); (Trần Thị Xuân and Nguyễn Thuỳ,
(Duque-Grisales and Aguilera- Caracuel, 2021); (Trần Thị Xuân and Nguyễn Thuỳ, 2023)
(Duque- Grisales and Aguilera- Caracuel,
(Alareeni and Hamdan, 2020); Duque-Grisales and Aguilera- Caracuel, 2021)
(Peng and Isa, 2020); (Tuyến and Hưởng, 2022); (Trần Thị Xuân and Nguyễn Thuỳ,
(Duque- Grisales and Aguilera- Caracuel,
(Alareeni and Hamdan, 2020); Duque-Grisales and Aguilera- Caracuel, 2021)
(Alareeni and Hamdan, 2020); (Peng and Isa, 2020);
(Duque- Grisales and Aguilera- Caracuel,
(Duque-Grisales and Aguilera-Caracuel, 2021); (Trần Thị Xuân and Nguyễn Thuỳ, 2023)
(Trần Thị Xuân and Nguyễn Thuỳ,
(Duque- Grisales and Aguilera- Caracuel,
(Duque-Grisales and Aguilera- Caracuel, 2021); (Trần Thị Xuân and Nguyễn Thuỳ, 2023)
(Trần Thị Xuân and Nguyễn Thuỳ,
(Tuyến and Hưởng, 2022); (Trần Thị Xuân and Nguyễn Thuỳ, 2023)
(Tuyến and Hưởng, 2022); (Trần Thị Xuân and Nguyễn Thuỳ, 2023)
(Linh et al., 2021); (Xu et al., 2022);
This chapter explores the theoretical foundations of Environmental, Social, and Governance (ESG) criteria, firm performance, and the Paris Agreement It examines various factors influencing firm performance based on existing research and organizes these factors to create analytical models for future chapters Our findings indicate that ESG factors significantly affect business activities, especially firm performance, and suggest that engagement with the Paris Agreement may transform these dynamics, prompting critical inquiries into the relationship between corporate operations and sustainability.
RESEARCH MODELS AND METHODOLOGIES
PROCESS EXECUTION
The thesis analyzed panel data from Thomson Reuters Refinitiv Eikon, focusing on financial indicators and ESG metrics of non-financial firms in four countries participating in the Paris Agreement on climate change Data processing was conducted using Python and Stata, transforming raw data into a synchronized panel format via Jupyter Notebook Missing values were imputed using mean or median values, while outliers were managed through the winsorize method in Stata 17 MP to ensure data integrity for hypothesis testing Various statistical regression models, including Pooled-OLS, FEM, and REM, were employed to evaluate hypotheses and assess model significance through regression coefficient tests, F-tests, and R-squared values Additionally, FGLS techniques addressed autocorrelation and heteroscedasticity issues, facilitating a comprehensive examination of ESG factors' impact on non-financial firms' performance The DiD model was also applied to estimate causal impacts by comparing pre- and post-treatment data from treated and control groups, assuming parallel trends in the absence of intervention.
Besides, the detailed procedures are documented as outlined below
Figure 3.1 The detail in research process
(Source: Compiled by the author)
Step 1: Initially, the author defines the main objectives of the study to provide a clear focus and direction for the research
Step 2: After that, the author summarizes the existing theoretical framework and reviews relevant studies conducted in various countries and economies Then, the author identifies research gaps and outlines the primary research direction for the study
Step 3: Subsequently, based on the theoretical and empirical evidence, the author proposes a research model, explains the variables, and formulates hypotheses that the study will test
Step 4: Next, the author selects a research sample and chooses appropriate methods that align with the study's objectives and target population The data is then aggregated and processed according to the proposed research model
Step 5: Following that, the author performs descriptive statistical analysis of the variables in the model and analyzes the correlation matrix to understand relationships between variables
Step 6: Then, three common regression models – Pooled OLS, FEM, and REM, are used to estimate regression coefficients This analysis is performed using Stata 17.0 MP software
Step 7: Next, the author selects the appropriate model based on regression analysis results Especially, the F-test is used in the Pooled OLS model to determine the best fit between Pooled OLS and FEM In addition, the Hausman test is used to choose between FEM and REM
Step 8: After that, the author checks for potential defects in the selected model by conducting tests for autocorrelation and heteroscedasticity
Step 9: If the regression model exhibits defects, the author addresses and corrects them using the FGLS method
Step 10: Subsequently, the author evaluates the impact before and after the event using the DiD method
Step 11: Finally, the author compares the research results with the proposed hypotheses The findings are discussed to draw conclusions based on theoretical and practical foundations Management implications are provided to enhance firm performance through ESG criteria.
RESEARCH MODELS
This thesis presents research models that investigate multiple hypotheses, focusing on the relationship between Environmental, Social, and Governance (ESG) factors and firm performance It further examines how individual components of ESG, along with other related factors, impact overall firm performance.
According to Nguyen (2018), a Difference-in-Differences (DiD) research model reveals that companies contributing to environmental pollution face worse financial performance than their non-polluting peers The financial situation of these environmentally harmful firms worsens further following the ratification of the Kyoto Protocol Additionally, the research team applied the DiD model to assess changes in ESG scores over time and their impact on the operational efficiency of companies participating in the Paris Agreement on climate change, in contrast to those that are not involved.
The author proposes the following research models:
Model 1: FP it = β 0 + β 1 x esgscore it + β 2 x esgdebtcap it + β 3 x control it + ε it
Model 2: FP it = β 0 + β 1 x envscore it + β 2 x socscore it + β 3 x govscore it
+ β 4 x esgdebtcap it + β 5 x control it + ε it
Model 3: FP it = β 0 + β 1 x post it + β 2 x treat it + β 3 x post it x treat it + ε it
Firm performance, denoted as FP, is evaluated for firm i during period t using metrics such as return on assets (ROA) and return on invested capital (ROIC) The variable "post" indicates whether the firm is assessed in the years following its commitment to the Paris Agreement, with a value of 1 for the period from 2008 to 2015 and 0 for the years prior, spanning 2015 to 2023 Additionally, the treatment variable "treat" is defined as 1 for firms with an ESG score between 50 and 100, highlighting the impact of environmental, social, and governance factors on performance metrics.
An ESG score below 50, indicated by "0," reflects a firm's performance in environmental, social, and governance factors, according to Refinitiv.com data for firm i in period t The overall ESG score, environmental score, social score, and governance score for firm i are represented as esgscore_it, envscore_it, socscore_it, and govscore_it, respectively Additionally, the interaction between the ESG overall score and the debt-to-capital ratio is denoted as esgdebtcap_it, which aligns with the Paris Agreement for firm i in period t Control variables include the debt-to-capital ratio (lev_it), firm size (size_it), asset intensity (air_it), current ratio (cr_it), revenue growth (rev_growth_it), long-term debt ratio (ltd_it), and market-to-book ratio (pb_it) Coefficients are represented by β, while ɛ denotes the error term.
Return on Assets (ROA) is determined by dividing net income after tax by total assets, which includes both current and noncurrent assets such as property, plant, and equipment A higher ROA indicates more efficient asset utilization and better overall firm performance (Koundouri, Pittis, and Plataniotis, 2022) The formula for calculating ROA is outlined in studies by Velte (2017), Aydoğmuş, Gülay, and Ergun (2022), and Rahi, Akter, and Johansson (2022).
ROA is calculated using net income, while ROIC relies on NOPAT, highlighting a key difference: net income represents earnings for shareholders only, whereas NOPAT reflects income for both shareholders and debtholders (Brigham and Houston, 2019) When ROIC surpasses WACC, it indicates that reinvested earnings are enhancing shareholder value and fostering sustainable growth without the need for external funding (Baldwin, 2018) This relationship offers crucial insights into returns for both bondholders and shareholders (Mohamad, 2020) Following the methodologies outlined by Aswath (2010), Mukhibad et al (2020), and Munawar and Harianty (2024), the author calculated the relevant metrics accordingly.
The variable denotes a company's participation in the Paris Agreement on climate change for a specific year In this estimation approach, a value of 1 is assigned to companies that are participants, while a value of 0 is given to those that are not involved.
A company's ESG performance is represented by a variable that assigns a score based on its sustainability practices If a company achieves a high ESG score, it is categorized as TREAT = 1, while a low ESG score results in a designation of TREAT = 0.
This is an interaction term demonstrates the relationship between Post and Treat, which is fundamental to the Difference-in-Differences (DID) model
The author introduces a new variable in the research model to explore how ESG factors interact with capital structure and influence firm performance This variable highlights the relationship between ESG scores and capital structure, providing valuable insights into their combined effect on business outcomes.
Where: PA is a dummy variable, in which the firm parktook Paris Agreement on climate change are given the value of 1 and others 0
ESG provides a holistic framework for assessing a company's sustainability and ethical influence, encompassing environmental, social, and governance criteria Environmental factors focus on a company's ecological footprint, social criteria analyze its interactions with stakeholders and communities, and governance evaluates leadership, policies, and accountability Detailed insights into the ESG score range can be found in Refinitiv's 2021 report (Mithilesh & Shilpa, 2024).
Table 3.1 Description of ESG score range ESG Score
From 0 till 25 Indicates poor ESG performance with insufficient transparency in publicly disclosing relevant ESG data
From 26 till 50 Reflects satisfactory ESG performance with moderate transparency in publicly disclosing relevant ESG data
From 51 till 75 Represents good ESG performance with above-average transparency in publicly disclosing relevant ESG data
From 76 till 100 Denotes excellent ESG performance with a high degree of transparency in publicly disclosing relevant ESG data
This study examines the separate effects of the three components of ESG scores—environmental, social, and governance—utilizing data from ASSET4 Previous research by Velte (2017), Drempetic, Klein, and Zwergel (2020), Peng and Isa (2020), Duque-Grisales and Aguilera-Caracuel (2021), Ghannadighomi, Johansson, and Saliba (2023), and Trần Thị Xuân and Nguyễn Thuỳ (2023) supports this analysis.
The Environmental score measures a company's commitment to environmental stewardship through various factors, including pollution control, emissions reduction strategies, and the use of renewable energy It evaluates eco-sustainable product development, environmental investments, and the establishment of standards This composite index provides insights into how effectively a company adopts best practices for managing environmental risks and seizing opportunities, utilizing indicators such as emissions reduction, product innovation, and resource consumption (Duque-Grisales and Aguilera-Caracuel, 2021; El Khoury, Nasrallah, and Alareeni, 2023).
The Social score assesses a company's engagement with societal issues, encompassing health and safety policies, workplace diversity, employee training, labor rights, and both employee and customer satisfaction This score is indicative of the company's reputation, which is vital for sustainable value creation It is derived from evaluations of product responsibility, community impact, human rights, and workforce management (Duque-Grisales and Aguilera-Caracuel, 2021; El Khoury, Nasrallah, and Alareeni, 2023).
The Governance score evaluates how effectively a company’s leadership prioritizes shareholders' interests for sustainable operations Key indicators include transparency in leadership, sustainability reporting, protection of minority shareholders' rights, and executive compensation practices This index underscores a company's ability to manage operations responsibly and uphold sound governance through effective management practices.
The author integrated ESG criteria into the analysis while employing control variables such as leverage (lev), size (size), asset intensity (air), current ratio (cr), revenue growth (rev_growth), long-term debt ratio (ltd), and price-to-book (pb) Each of these variables will be discussed in detail in the following sections.
DATA COLLECTION
Leading agencies like Bloomberg ESG Data Services, Dow Jones Sustainability Index, S&P Global, and Thomson Reuters Eikon are recognized for their reliable ESG ratings, providing valuable assessment resources in the financial industry Refinitiv Eikon stands out for its academic utility, enabling comparative evaluations of companies' ESG performances across sectors with a scoring scale from 0 to 100 Higher ESG scores attract conscientious investors aiming to reduce investment risks through robust corporate governance practices.
In my research, I utilized data from Thomson Reuters Datastream, a premier source for global financial information, covering the period from 2008 to 2023 I labeled the independent variables according to Thomson Reuters' standard format based on the extracted indices' names The data was processed using Python and converted into panel data format, ensuring consistency by identifying observations through company codes and names while addressing missing values to maintain data integrity The dataset was refined by eliminating unnecessary variables and companies with insufficient data, specifically focusing on non-financial firms from the UK, the United States, Japan, and Canada, resulting in a reduction of observations from 16,110 to 14,816.
In my research, I utilized STATA 17 MP, a leading statistical software, to estimate the models aligned with my objectives I sourced data from the ASSET4 database by Thomson Reuters, which is widely recognized among investors and scholars for its transparency and accessibility This database has been extensively referenced in various research studies, including works by Velte (2017), Drempetic et al (2020), Peng and Isa (2020), Duque-Grisales and Aguilera-Caracuel (2021), Ghannadighomi et al (2023), and Trần Thị Xuân and Nguyễn Thuỳ (2023) ASSET4 stands out among ESG databases by offering comprehensive insights through its detailed questions and figures for each data point, making it invaluable for research purposes.
The ASSET4 database from Thomson Reuters, noted for its public and transparent data, is utilized by Drempetic, Klein, and Zwergel (2020) for academic research, encompassing 3,828 companies from 2004 to 2015 due to incomplete ESG scores Almeyda and Darmansyah (2019) examined G7 countries—Canada, Japan, the UK, and the US—to explore the relationship between ESG criteria and firm performance Approximately 70% of businesses, regardless of size, are adopting ESG practices (Thi Thu Thao, 2023) These nations account for over 46% of the global economy in nominal GDP and more than 32% in purchasing power parity (Review, 2024) Notably, over half of the companies are concentrated in the US (26.54%), Japan (10.27%), the UK (8.31%), and Canada (6.58%) (Drempetic, Klein, and Zwergel, 2020), with more than 50% classified in three sectors: Financials (20.40%), Industrials (18.81%), and Consumer Services (13.43%).
RESEARCH RESULTS AND DISCUSSION
DESCRIPTIVE STATISTICS
This thesis employs a descriptive statistical method using the summary command in STATA 17 MP software to analyze research variables, offering insights into total observations, mean, standard deviations, and minimum and maximum values The secondary data, obtained from Thomson Reuters, encompasses non-financial companies across four countries—namely the United States, the UK, Canada, and Japan—spanning the years 2008 to 2023, and is detailed in the accompanying statistical table.
Table 4.1 Descriptive statistics for non-financial companies
Variable Obs Mean Std dev Min Max
ESGSCORE 14,816 50.23758 19.00041 17.47 82.42 ENVSCORE 14,816 45.53252 26.15276 4.070769 87.64 SOCSCORE 14,816 50.06459 21.45887 14.26 88.231 GOVSCORE 14,816 54.94502 20.59625 18.15 88.4235 LEV 14,816 40.40398 24.03798 1.450588 88.52 SIZE 14,816 15.92821 1.398894 13.26035 18.31452 AIR 14,816 2.362196 1.994259 0.5713204 8.362688
(Source: Analysis results from STATA software)
A comprehensive analysis of statistical data from non-financial companies across four countries reveals 14,816 observations, with a mean Return on Assets (ROA) of 5.999001 and a standard deviation of 6.586519 The ROA values range from a low of -8.1125 for Lightspeed Pos Subordinate Voting in 2018 to a high of 19.822 for Osisko Gold Royalties in 2014, indicating overall profitability despite some companies reporting losses The mean Return on Invested Capital (ROIC) stands at 9.02253, with a similar standard deviation and a range from -10.82 for Hewlett Packard Enter in 2012 to 32.1 for Indivior in 2013, highlighting significant variability in investment returns Additionally, ESG scores show considerable variation, with scores spanning from 17.47 for Nissan Chemical in 2008 to 82.42 for Intel in 2010, where the social pillar received the highest ratings Notably, Johnson Controls International achieved the top scores across all three ESG pillars in 2009.
The analysis of diverse capital structure strategies among non-financial companies reveals significant findings For instance, Garmin demonstrates a minimum leverage that surpasses its equity, indicating a frequent reliance on debt for financing In contrast, Domino's Pizza recorded a maximum leverage of 88.52 in 2008, highlighting substantial debt usage relative to equity, which may be indicative of aggressive growth strategies or a higher risk tolerance This high leverage for Domino's Pizza is largely attributed to its 2007 recapitalization, culminating in $1.7 billion in long-term debt by the end of 2008.
2012, significantly increased ongoing interest expenses due to elevated debt levels (Domino’s Pizza, 2009)
The analysis of firm size reveals a spectrum ranging from 13.26 for Puretech Health in 2013 to 18.31 for Berkshire Hathaway 'B' in 2020, highlighting a focus on mid to large-cap companies with substantial market presence Additionally, the mean asset intensity is 23.78798, with values varying from a low of 0.5713204 for Silvercrest Metals in 2019 to a high of 8.362688 for Transalta in 2011, showcasing significant differences in asset utilization among firms A higher asset intensity indicates a greater dependence on assets for revenue generation.
The average current ratio (CR) for non-financial companies is 1.82, indicating they typically hold two units of current assets for every unit of current liabilities Notably, Osisko Mining had the highest CR of 4.82 in 2010, reflecting strong liquidity, while Dixons Carphone reported a low CR of 0.57 in 2009, highlighting liquidity challenges Revenue growth varied significantly, with Parex Resources experiencing a decline of -26.74 in 2008-2009 and a rise of 39.94 in 2010, showcasing the spectrum of revenue fluctuations The mean price-to-book (PB) ratio stands at 3.31, suggesting companies are valued at approximately 3.3 times their book value, with Lamb Weston Holdings having the lowest PB ratio of 0.63 in 2019, and NortonLifeLock reaching the highest at 12.02 in 2020 Additionally, the mean long-term debt (LTD) is 129.46, indicating considerable long-term obligations among non-financial firms, with Spin Master reporting the lowest LTD of 0.42 in 2016 and Quanta Services the highest at 1.14 in 2012.
CORRELATION MATRIX
A correlation matrix is a statistical tool that measures the relationship between two variables through correlation coefficients, which range from -1 to +1 A coefficient of -1 indicates a perfect negative correlation, while +1 represents a perfect positive correlation Additionally, a variable will always have a correlation of 1 with itself, whereas a coefficient close to 0 implies no significant relationship between the variables.
The correlation matrix in Table 4.2 reveals a range of relationships among the variables, indicating both strong and weak correlations Notably, the socscore and esgscore demonstrate a robust correlation of 0.8901, while the envscore and esgscore exhibit a significant correlation of 0.8188 These elevated correlations suggest a considerable potential for multicollinearity.
Glauber, 1967) posited, which may complicate regression analyses by inflating standard errors and biasing coefficient estimates
The correlation analysis revealed significant insights into the relationship between profitability metrics, specifically ROA and ROIC, and various financial and ESG-related variables A notable negative correlation was found between profitability indicators and leverage, as well as the interaction of ESG factors with capital structure, both significant at the 1% level This trend was also evident in correlations with asset intensity and firm size In contrast, the long-term debt ratio showed a positive and significant association with profitability, with ROA significant at the 1% level and ROIC at the 5% level Additionally, ESGSCORE positively correlated with SOCSCORE and GOVSCORE, both significant at the 1% level, while ENVSCORE did not exhibit a statistically significant relationship with ROA or ROIC Interestingly, the current ratio displayed a positive correlation with ROA at the 5% significance level but a negative correlation with ROIC at the 1% significance level Lastly, revenue growth and the price-to-book ratio showed a positive and significant correlation with both ROA and ROIC, significant at the 1% level.
Table 4.2 Correlation matrix between research variables
ROA ROIC ESGSCORE ENVSCORE SOCSCORE GOVSCORE ESGDEBTCAP LEV SIZE AIR CR REV_GROWTH LTD PB
(Source: Analysis results from STATA software)
ESTIMATION RESULTS
4.3.1 Pooled-OLS model and FEM comparison
To identify the most suitable model for this study, the author compares the Pooled-OLS and FEM The hypotheses are as follows:
H0: The Pooled-OLS model is more appropriate for the research variables
H1: The FEM model is more appropriate for the research variables
The analysis of the research data was conducted using STATA 17.0 MP software, with comprehensive results available in Appendix B The findings indicate a Prob > F value of 0.0000, which is significantly below the 0.05 threshold, leading to the rejection of the null hypothesis (H0) This suggests that the Fixed Effects Model (FEM) is the most appropriate choice for the research variables, aligning with the proposed research models.
The author chose the Fixed Effects Model (FEM) over the Pooled Ordinary Least Squares (Pooled-OLS) model and subsequently compared the FEM with the Random Effects Model (REM) using the Hausman test to determine the most suitable research model The hypotheses for the Hausman test were established to facilitate this comparison.
H0: No correlation between the independent variables and the residuals, favoring the REM
H1: Correlation between the independent variables and the residuals, favoring the FEM
The Prob > chi2 value of 0.0000 is significantly below the 0.05 threshold, leading to the rejection of the null hypothesis (H0) and validating that the Fixed Effects Model (FEM) is the most suitable model for this analysis These results align with the proposed research models.
To evaluate the robustness of the selected model, tests for heteroskedasticity and autocorrelation were performed The Wald test for heteroskedasticity yielded a p-value of 0.0000, significantly below the α = 0.01 threshold, confirming the presence of heteroskedasticity due to non-constant residual variability In terms of autocorrelation, the Wooldridge test showed a p-value of 0.0000 when Return on Assets (ROA) was the dependent variable, indicating significant autocorrelation in the model However, when Return on Invested Capital (ROIC) was used as the dependent variable, the p-value exceeded 5%, suggesting no autocorrelation in these models.
4.3.4 Regression results and findings from the DiD model
The analysis and model testing indicated that the Finite Element Method (FEM) is the most appropriate approach for this research However, issues of autocorrelation and heteroskedasticity were identified, confirmed by the Wald and Wooldridge tests The Return on Assets (ROA) as the dependent variable exhibited both problems, while only heteroskedasticity was noted for the Return on Invested Capital (ROIC) To address these issues, the author utilized the Feasible Generalized Least Squares (FGLS) method Data processing and analysis were conducted using STATA 17.0 MP software, with the results summarized in the following tables.
Table 4.3 Results following mitigation of model deficiencies by FGLS
(Source: Analysis results from STATA software)
Note: A correlation is considered significant at the 0.01 level (***), at the 0.05 level
Table 4.4 Preliminary Statistics for DID Execution
Number of groups and treatment time
(Source: Analysis results from STATA software)
Table 4.5 reveals a balanced distribution of firms, with 457 in the control group and 469 in the treatment group, enhancing the reliability of the findings The clear differentiation between the control (did = 0) and treatment (did = 1) groups, based on the time variable, is essential for evaluating the treatment's impact This ample representation of firms in both groups allows for confident conclusions about the effects of the agreement on firm performance.
Table 4.5 Research findings from the DiD model to ROA roa Coefficient Robust std.err t P > |t| [95% conf interval] ATET did
(Source: Analysis results from STATA software)
Table 4.6 Research findings from the DiD model to ROIC roic Coefficient Robust std.err t P > |t| [95% conf interval] ATET did
(Source: Analysis results from STATA software)
The estimated results from the DiD model for Return on Assets (ROA) are shown in Table 4.6, revealing a statistically significant P-value of 0.004, indicating a meaningful DiD effect This suggests that the Paris Agreement on climate change has a measurable impact on firm performance Notably, the analysis shows a significant negative DiD effect at the 1% level, indicating that companies with a high classification level (over 50) experience a 1.600857% decrease in ROA when their country joins the Paris Agreement.
Table 4.7 presents the estimated results of the DiD model for ROIC, revealing a significant DiD effect with a P_value of 0.076, which is below the 5% threshold This finding reinforces the influence of the Paris Agreement on firm performance Notably, the negative DiD effect, significant at the 1% level, indicates that firms classified above 50, whose nations participated in the Paris Agreement, experience a decrease in ROIC by 2.13917%.
The Paris Agreement has a negative impact on Return on Assets (ROA) and Return on Invested Capital (ROIC) due to increased costs and operational changes required for compliance with stricter environmental regulations These costs encompass investments in cleaner technologies, higher energy expenses, and disruptions to existing business practices, all of which can adversely affect profitability and capital efficiency in the short term To illustrate this impact, the author employs tests using a Difference-in-Differences (DiD) model to assess firm performance, utilizing parallel plots as diagnostic tools These plots display mean outcome trends over time and incorporate time-treatment interactions to show predicted values and highlight the pre-treatment period.
Figure 4.1 demonstrates that prior to joining the Paris Agreement, the impact of ESG factors on firm performance was minimal, evidenced by a small gap between control and treatment groups However, after joining the agreement, non-financial firms in the treatment group showed a significantly larger gap, suggesting that the Paris Agreement heightened the influence of ESG factors, ultimately leading to decreased firm performance Therefore, participation in the Paris Agreement seems to adversely affect firm performance by intensifying the effects of ESG considerations.
Figure 4.1 Parallel Trends in Firm Performance for Treatment and Control
(Source: Analysis results from STATA software)
No Variables Expected sign Actual sign Compared to hypothesis Dependent variables
(Source: Compiled by the author)
CONCLUSIONS AND RECOMMENDATIONS
CONCLUSIONS
As climate change becomes increasingly urgent, there is a heightened emphasis on sustainable development and ESG (Environmental, Social, and Governance) factors Global initiatives like the Paris Agreement have propelled ESG practices into the spotlight, highlighting their potential to enhance brand reputation, attract investment, and improve firm performance This study examines the influence of ESG practices on the performance of 14,816 non-financial companies across the UK, US, Japan, and Canada from 2008 to 2023, utilizing STATA 17 for various statistical analyses, including Pooled-OLS, FEM, REM, and FGLS Furthermore, a Difference-in-Differences (DiD) approach is employed to evaluate the impact of the Paris Agreement on firm performance before and after its enactment.
Research indicates that ESG practices typically improve financial performance, evidenced by positive correlations between ESGSCORE, SOCSCORE, and GOVSCORE with metrics such as ROA and ROIC However, the unexpected negative impact of ENVSCORE suggests that implementing environmental initiatives may incur short-term costs Additionally, the varying effects of ESGDEBTCAP reveal the complexities of aligning ESG factors with capital structure, while the Paris Agreement appears to have a detrimental effect on firm performance Among the control variables, REV_GROWTH also plays a significant role.
The study reveals that PB has a positive correlation with firm performance, whereas LEV and AIR exhibit negative associations, and CR and SIZE show inconsistent results The lack of significance of LTD highlights the necessity for additional research to better understand its effects on firm performance In light of these findings, the author intends to propose policy recommendations aimed at enhancing ESG awareness among businesses, which are anticipated to boost the performance of non-financial companies, detailed further in Section 5.2.
GOVERNANCE IMPLICATIONS
5.2.1 Implications for ESG and participating in the Paris Agreement
Research indicates that the social and governance components of ESG significantly enhance the performance of non-financial companies in the four countries analyzed, while the environmental aspect shows a negative impact Based on these findings, the author recommends policy measures to improve firm performance by refining non-financial information, particularly emphasizing ESG criteria.
The ESG score, encompassing Social and Governance pillars, positively influences firm performance, highlighting the need for global cooperation in promoting ESG activities while curbing anti-ESG behaviors Non-financial companies in sectors impacted by non-financial factors should refine their ESG strategies to enhance value creation Investors are encouraged to adjust their evaluation criteria based on the ESG risk levels of their portfolio companies By integrating ESG initiatives into corporate strategies, firms not only reap significant benefits but also boost their appeal to potential investors Non-financial firms adopting sustainable practices and aiming for high ESG scores are likely to achieve superior performance, reinforcing the importance of sustainability in attracting future investors It is recommended that companies focus on social and governance pillars to gain economic advantages, although the environmental pillar may negatively impact performance, indicating that the effects of green innovation can vary To enhance green innovation performance, governments should consider incentives or regulations that encourage management's focus on environmental responsibility.
Participation in the Paris Agreement has negatively affected firm performance, particularly in Asia and China, due to high initial investment costs While environmental investments can increase short-term expenses, they generally enhance medium- and long-term ESG performance Policymakers must provide government support to ease the financial burden and encourage sustainable practices, focusing on strengthening corporate resilience to manage economic shocks related to climate change Although ESG activities positively influence Return on Assets (ROA) while negatively impacting Return on Invested Capital (ROIC), effective policy support and ESG-focused regulations are crucial for improving corporate performance, fostering stakeholder engagement, and mitigating financial risks associated with leverage.
Senior management must revise business strategies to attract customers, which can significantly enhance revenue growth and market value Research indicates that increased revenue and market value contribute to improved Return on Assets (ROA) and Return on Invested Capital (ROIC), ultimately leading to better overall firm performance This robust foundation not only strengthens the company's financial standing but also improves its capacity to meet Environmental, Social, and Governance (ESG) standards, further driving performance enhancement.
Firms with high debt ratios should limit their debt usage to enhance the effectiveness of ESG investments and mitigate risks Managing asset intensity is crucial, as lower intensity correlates with improved financial performance Although expanding firm size and maintaining liquidity are typically beneficial, they do not always ensure superior performance; for example, an excessively high current ratio may indicate underinvestment in ESG initiatives Therefore, managers must strike a balance between liquidity and strategic investments in ESG and long-term growth Allocating funds to environmental and social initiatives can improve ESG scores, while resources that detract from corporate value should be redirected towards green R&D, promoting sustainable development and aligning with core company values.
Managers should view ESG activities as a strategic investment rather than a mere cost, particularly in environmentally sensitive sectors such as transportation and manufacturing Although the initial implementation may pose challenges, the long-term benefits include improved firm performance, enhanced reputation, and increased competitiveness Furthermore, ESG practices can provide tax advantages, unlike traditional CSR initiatives like charitable donations, which can negatively impact firm performance Therefore, investors should focus on companies with strong ESG commitments, as these organizations are more likely to achieve sustainable growth and fulfill their obligations effectively (Pham et al., 2022).
LIMITATIONS AND FURTHER RESEARCH DIRECTIONS
Isolating the impact of Environmental, Social, and Governance (ESG) factors on firm performance is challenging due to various influencing variables, such as industry-specific dynamics and macroeconomic conditions Furthermore, the subjective nature of ESG assessments arises from the differing scores provided by various rating agencies, which utilize diverse methodologies and weighting systems This inconsistency in ESG scores complicates cross-comparisons and hinders consistent interpretations, making it difficult to evaluate the true impact of ESG on corporate performance.
The study evaluates only two proxies for firm performance, overlooking other potential indicators that could yield more precise results Additionally, it focuses exclusively on the impact of the 2015 Paris Agreement on climate change, ignoring two significant events in recent history—the 2008 global financial crisis and the COVID-19 pandemic—that have collectively shaped societal transformation.
This study exclusively analyzes top-performing non-financial firms from economically developed countries, which introduces selection bias due to their superior performance metrics compared to lower-ranked firms As a result, the findings may not be generalizable to the broader market, especially regarding lower-ranked non-financial entities Therefore, the conclusions drawn may not be applicable across different firm types or varying economic conditions and performance levels.
Future research should explore various innovation types, including internal, external, and collaborative, to better understand their moderating effects on the relationship between ESG and firm performance It is also essential to utilize a range of performance indicators like ROE, ROS, and ROIC, as these metrics can provide valuable insights for investors and enhance decision-making To increase the relevance of findings, future studies should consider lower-tier firms and focus on financial institutions in emerging and developing economies Additionally, examining the effects of significant historical events, such as the 2008 global financial crisis and the COVID-19 pandemic, will further enrich the analysis.
19 pandemic, is essential, given that these events have collectively driven substantial societal transformations and may have influenced the dynamics between ESG factors and firm performance
This chapter synthesizes key conclusions from the regression analysis and DiD model presented in Chapter 4, providing policy recommendations aimed at improving firm performance, particularly for non-financial enterprises It emphasizes the importance of integrating ESG factors with traditional financial metrics Furthermore, the chapter acknowledges the study's limitations and suggests avenues for future research to deepen the understanding of the effects of ESG on firm performance.
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Linh et al (2021) conducted a meta-analysis to explore the relationship between sustainable reporting and financial performance Their findings, published in the Journal of Science and Technology, highlight the significance of integrating sustainability practices into financial strategies The study emphasizes that organizations adopting sustainable reporting can enhance their financial outcomes, suggesting a positive correlation between these two aspects For further details, the article is available at https://tapchikhcn.haui.edu.vn.
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El Ghoul, S et al (2011) ‘Does corporate social responsibility affect the cost of capital?’, Journal of Banking and Finance, 35(9), pp 2388–2406 Available at: https://doi.org/10.1016/j.jbankfin.2011.02.007
The study by El Khoury, Nasrallah, and Alareeni (2023) explores the relationship between Environmental, Social, and Governance (ESG) factors and the financial performance of banks in the MENAT region, revealing distinct concavity and convexity patterns The findings indicate that banks with strong ESG practices tend to exhibit superior financial outcomes, underscoring the importance of integrating sustainability into financial strategies For further details, refer to the article published in the Journal of Sustainable Finance and Investment.
Fama, E.F and Jensen, M.C (1983) Separation of ownership and control Available at: http://www.journals.uchicago.edu/t-and-c
Farrar, D.E and Glauber, R.R (1967) Multicollinearity in Regression Analysis: The Problem Revisited, Source: The Review of Economics and Statistics
Fernando and Lawrence (2014) propose a theoretical framework for Corporate Social Responsibility (CSR) practices, integrating legitimacy theory, stakeholder theory, and institutional theory This framework seeks to enhance understanding of CSR by connecting various theoretical perspectives, thereby providing a comprehensive approach to analyzing CSR activities The study is published in "The Journal of Theoretical Accounting" and is accessible at ResearchGate.
Ferrell, A., Liang, H and Renneboog, L (2016) ‘Socially responsible firms’, Journal of Financial Economics, 122(3), pp 585–606 Available at: https://doi.org/10.1016/j.jfineco.2015.12.003