Value Relevance of Environmental, Social and Governance ... · Value Relevance of Environmental, Social and Governance Disclosure Zuraida Zuraida Victoria University of Wellington

Value Relevance of Environmental, Social and Governance Disclosure

Zuraida Zuraida

Victoria University of Wellington and Syiah Kuala University

&

Noor Houqe and Tony van Zijl

School of Accounting and Commercial Law

Victoria Business School

Victoria University of Wellington

Date: 20/02/2014

Value Relevance of Environmental, Social and Governance Disclosure

ABSTRACT

This paper investigates the extent to which Environmental, Social and Governance disclosure (ESG)

by companies around the world impacts on market value. Using a large sample of non-financial

companies listed in 41 countries during the period 2008 2012, we test for value relevance by

employing the modified Ohlson (1995) model. We find support for the value relevance of disclosure

of ESG and its individual components. These findings support the view of disclosure theory where

companies disclosing more information such as ESG factors are valued higher. We also find that the

benefits received by companies disclosing ESG are stronger in Common Law countries. The results

are robust to several alternative tests.

Keywords: Value relevance, non-financial information, ESG.

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1. INTRODUCTION

In recent years there has been increasing focus in capital markets on Environmental, Social and

Governance disclosure (ESG) in assessment of corporate opportunities and risks. It has been argued

that financial information has limited usefulness to investors as it provides only historical-oriented

information, which is considered insufficient to assess the company's ability to generate future profits.

This study is therefore motivated to explore the extent to which Non-financial information, such as

that provided by ESG disclosure, can usefully supplement traditional sources of information.

The role of ESG information in business has undergone many changes in the course of history. Eccles

and Viviers (2011), for example, report that ESG factors have been discussed in the academic

literature for more than 35 years. However, it is apparent that the role of ESG has changed over time.

In past decades, some economists claimed that businesses have no social responsibilities and therefore

should not expend company resources engaging in socially responsible activities (Friedman, 2007).

More recently the pendulum has swung in the opposite position, actively encouraged by public

expectations and regulatory pressure, to the point at which sustainability issues have assumed a

central role in the management of business (Panwar, Rinne, Hansen, & Juslin, 2006). The area of

concern has also enlarged somewhat. To remain acceptable to wider society today, it appears that

companies must satisfy an array of interests. This means that, in carrying out their activities, firms

must desist from activities such as damaging the environment, harming the health of consumers, or

violating the rights of employees, and they should have concern for sustainability and their overall

contribution to social welfare.

Despite this ideal view of the business-society relationship, the extent to which markets actually

favourably recognise companies that operate in this manner remains an open question. Research to

date on the actual relevance of ESG information to the markets is still in the early stage of

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investigation as research on the effects of ESG disclosure on the market value of companies has

largely been limited to developed countries and regions such as the European Union (

). Comparative international studies have also been confined to specific

industries, such as the financial sector (Cheung & Mak, 2010), or addressed only specific ESG

components such as corporate governance (Ammann, Oesch, & Schmid, 2011). Consequently, the

effects of ESG disclosure on the market value of companies requires further research.

This study addresses the gap by examining the value relevance of ESG factors relative to the future

financial performance of companies (CSR Europe, 2003; Maier, 2007). Specifically, the present study

addresses this matter by assessing the effects of disclosure of ESG and its individual components on

the stock price of companies.

Using a large sample of non-financial companies listed in 41 countries during the period 2008 2012,

we investigate the value relevance of ESG disclosure worldwide. Bloomberg disclosure scores are

used as a proxy for ESG disclosure and a modified Ohlson (1995) model is employed to measure

value relevance. We find strong evidence that ESG and its individual components have positive and

significant associations with market value. The results are robust to several alternative tests. These

findings support the view of disclosure theory that companies disclosing ESG are valued higher

(Healy & Palepu, 2001; Verrecchia, 2001). We also find that the impact is stronger in Common Law

countries.

This paper contributes to our understanding of the benefits of ESG disclosure in three areas. First we

extend previous studies in terms of country coverage. Previous studies such as Balatbat, Siew, &

Carmichael (2012) have focused on single countries, while previous international studies such as

) have only focused on the European region. Second, to the best

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of our knowledge, our study is the first to investigate the issues using the ESG disclosure scores

provided by Bloomberg. This is important as the Bloomberg data is comprehensive and standardised

as it is collected using a consistent methodology across national boundaries. Third, we control for

common and code law institutional factors, which reduces the potential for misspecification errors.

The rest of this paper is organized as follows. Section two presents the theoretical framework

concerning the value relevance of the disclosure of ESG and its individual components. Section three

describes the models, the data and the variables employed. Section four presents the empirical results

and the analysis of the results with several robustness checks. Section five concludes and outlines the

contributions, and limitations of the study.

2. THEORETICAL FRAMEWORK

This section reviews the existing literature and develops the hypotheses for the study. Four types of

disclosure affecting market values are of particular interest, namely environmental factors, social

factors, governance factors and the aggregate of these factors (ESG). Each of these sets of factors will

be considered in turn; but first, it is necessary to examine briefly what indicators are considered as

ESG factors.

The term ESG was first used by the United Nations Principles of Responsible Investment and has

since became popular among investment communities associated with socially responsible

investment (Eccles & Viviers, 2011; ). Other terms have enjoyed

(Eccles & Viviers, 2011) but many researchers have increasingly use ESG because it

refers to a broader set of corporate activities (Boston College Centre for Corporate Citizenship, 2009;

Derwall, 2007).

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In its widest sense, ESG is a generic term for a subset of non-financial indicators used by capital

markets to evaluate corporate sustainability. In effect, ESG provides the additional information

employed by investors to better assess the risks and opportunities relating to corporate social

responsibility and behaviour impacting on performance (Bassen & Kovács, 2008). In essence, ESG

is part of those responsible corporate practices that aim to deliver higher risk-adjusted financial

returns (Eccles & Viviers, 2011).

The importance of ESG for capital markets is gaining recognition. Major international bodies1 have

recently been involved in a global dialog resulting in five stock exchanges and a large number of

global investors declaring support for ESG practices (White, 2012). Capital market recognition of

ESG has also motivated several information services (Such as Bloomberg, Thomson Reuters/Asset4,

EIRIS and others) to provide ESG ratings.

ESG is composed of three factors which are combinations of non-financial indicators that are used to

and governance. Sustainable development is expected to balance the three elements so as to ensure

that meeting the needs of the present is not accompanied by sacrificing the ability of future

generations to meet their needs.

Embracing ESG policies entails both costs and benefits for the companies affected. In terms of

complying with the ESG agenda, companies are restricted with regard to certain activities. They are

discouraged, for instance, from doing business with companies that abuse workers or employ children.

1The international bodies include: Global Compact; the United Nations Conference on Trade and Development (UNCTAD); United Nation Principles for Responsible Investment (UN-PRI); and the UN Environment Program Finance Initiative UNEP FI).

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Companies may incur additional costs to maintain green operations or to invest in energy-efficient

machinery. On the other hand, companies may also benefit from compliance by creating a good

reputation and brand loyalties that help ensure long-term survival. On balance, it is increasingly

thought that favourable ESG factors contribute to financial performance, and for this reason ESG

factors are being progressively integrated into the process of investment analysis and decision-making

(UNEP, 2007).

Environmental factors are perhaps the most researched of the three elements of ESG and the most

consistent in respect of the results obtained. This is not surprising, for the steady deterioration of some

environmental factors has put increasing pressure on companies by regulation, peers, and society as

a whole to adopt sustainable operations. However, while the majority of studies on the effects of

environmental factors on market value of companies have reported a positive relationship, it is

important to recognise that some studies have reported the relationship to be either neutral or negative.

Hassel, Nilsson, & Nyquist (2005) classify this type of research into two schools. First the competitive

advantage school, which argues that an environmental effort improves

because of the increased competitive advantage. Second, the cost-concerned school, which argues

closure of environmental information lowers the market value because of

increased costs depressing profit.

The first of these schools is generally founded on the perceived downstream effects of the good

reputation created by transparency and responsiveness to public demands. Environmental disclosure

is considered to increase transparency which in turn creates a positive profile for the company

(Azzone, Manzini, & Noci, 1998)

competitiveness due to the stimulus it provides for product innovation (Brännlund & Lundgren, 2009;

Porter & Linde, 1995). Environmental disclosure also encourages the recognition of company assets

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and liabilities (Barth & McNichols, 1994); and finally, improved environmental performance (as

revealed by environmental disclosure) leads to the perception that the company is complying with

environmental regulation and anticipating future obligations (Porter & Linde, 1995). Thus

environmental factors are value relevant for investors.

The second of the schools noted above, concerning the possibility of a negative relationship between

environmental efforts and market value, appears to have rather less support in the literature. Brammer,

Brooks & Pavelin (2012) have suggested environmental efforts increase costs and are therefore

destructive to shareholder value which echoes the conclusions of the earlier study by Hughes (2000)

who found a negative relationship between firm value and SO2 emissions.

Some doubt however, has arisen concerning the exact nature of the differences between the two

schools of thought. It has been argued, for instance, that the divergence of results arises not so much

from empirical differences as from differences in the methodology used. For instance, UNEP (2007)

dimension and the length of the period over which the study was conducted. More specifically, UNEP

ed with those from the similar but somewhat

longer study of Derwall, Geunster, Bauer, & Koedijk (2005) which indicated environmentally

efficient companies had superior shareholder returns. Furthermore, it has also been suggested by

Cheung & Mak (2010) that the period over which the study has been conducted may affect the results.

Finally it is apparent that some empirical measures are subject to significant measurement error (Boyd,

Gove, & Hitt, 1999). Examples include NFI measures of customer satisfaction, brand and human

capital measures that rely on informal survey data, subjective conceptual frameworks, and other

imprecise measures such as number of employees (Wyatt, 2008). The inconclusive findings may also

have been the result of different disclosure instruments measuring different types of disclosure.

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Overall then, and despite the existence of empirical findings to the contrary, it would appear that the

literature supports the existence of a positive relationship between environmental disclosure and the

market value of firms. The first hypothesis therefore is:

H1: Environmental disclosure is positively associated with company market value.

Stakeholder theory supports a positive relationship between social and financial performance

(Orlitzky, Schmidt, & Rynes, 2003). Companies that have sustainable relationships with a number of

stakeholders, such as employees, customers, suppliers, and investors will increase their

competitiveness. For example, motivated employees can create value by improving productivity, and

adopting a customer oriented approach. Hillman and Keim (2001) state that good relationships with

key stakeholders raise intangible value, which contributes to market returns.

But the overall impact of the relationship with the stakeholders on stock returns varies. On the one

hand, good relationships with employees increase productivity and job satisfaction. In addition, good

relationships with the community strengthen a

other hand, research findings suggest that increased public relation results in poor investment returns

(Brammer, Brooks, & Pavelin, 2006). This is partly because the impact of social performance is

highly dependent on the type of business enterprise (Brammer et al., 2006).

Edmans (2011) suggests that although there is a positive association between employee satisfaction

and stock returns in the long run, the stock market still does not fully value intangibles and

consequently only selected ESG factors improve stock returns . However, Bauer, Otten, and Rad

(2006) find that although there is no significant difference between the risk adjusted returns of ethical

and conventional funds, there are differences across periods of time. Between 1992 and 1996, the

conventional funds appear to outperform ethical funds, but during the period from 1997 to 2003, the

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two investment approaches show similar performance. The authors concluded that a learning period

was required before the market was able to truly appreciate ethical screening. This could be another

explanation for the medium to long-term impact of ESG factors on firm performance, and thus market

price of firms, reported in other studies (Balatbat et al., 2012; CSR Europe, 2003; Maier, 2007).

In summary, research evidence from previous studies on the effect of social disclosure and financial

performance has been mixed. However, increasing awareness among capital market investors of the

importance of social factors as an indication of potential future risk and return has prompted greater

attention to these factors when making investment decisions. This study predicts, therefore, that

market participants reactions to current and future social performance will be reflected in changes to

the stock price. Thus the following hypothesis is proposed.

H2: Social disclosure is positively associated with company market value.

Corporate governance has received much attention due to major financial scandals such as Enron and

Lehman Brothers and has led to demands in many countries for reform of corporate governance

systems. In relation to the demands for improved corporate governance, much research has been

conducted to evaluate corporate governance in many organizations. Consistent with stakeholder

theory, the literature linking governance measures to firm value suggests that good corporate

governance is associated with higher market value (Bebchuk & Cohen, 2005; Brown & Caylor, 2006;

Cremers & Nair, 2005; Gompers, Ishii, & Metrick, 2003).

A positive association can also be supported by basic reasoning. For example, Gompers, et al. (2003)

reported that companies with stronger shareholder rights (as a form of good corporate governance)

had higher value, due to higher profits and sales growth, but lower capital expenditures. Similarly,

Maher and Andersson (2000) stated that good governance reduces agency conflicts between

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managers and shareholders. Quality management creates productivity enhances the creativity of the

company, and produces innovative products. Good governance also creates efficiency because it can

suppress waste in the production process and reduce potential conflicts with other stakeholders, thus

avoiding the cost of conflict. All of this ultimately reduces operational costs, thus increasing profits,

and enhancing shareholder value.

Researchers have found that both internal and external governance has a positive relat ionship with

the value of the company (Bebchuk & Cohen, 2005; Brown & Caylor, 2006). However, Cremers &

Nair, (2005) and Brown and Caylor (2006) have reported that not all measures of good governance

are associated with firm value. This applies especially to factors that have not received extensive

determines whether investors consider these factors as a basis for stock valuation.

Corporate governance is a broad and diverse concept. It encapsulates all the mechanisms that

determine the procedure for determining the direction of the firm (Schmidt, 2003). A broad definition

also indicates a lack of clarity of the concept (Webb, Pollard, & Ridley, 2006). Because of the abstract

nature, corporate governance is also not easily measured, or compared between companies. It is tied

to specific organizational contexts as it also involves discretion in selecting policies deemed most

appropriate for specific circumstances. Therefore, despite the consensus among financial

communities of the strong benefits of good corporate governance, the findings of previous studies

have been inconsistent. Some studies suggests a weak to neutral relationship between governance

attributes and firm market value (Bauer, Guenster, & Otten, 2004).

However, the findings of a weak relationship may also be attributed to small sample size; the

measurement metrics used, or possibly the relatively minor importance of the corporate governance

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factor studied compared to other factors in the industry. As suggested by Brown and Caylor (2009),

effective corporate governance measures require broad measures including both internal and external

governance mechanisms to enhance the robustness of findings.

Taken together, the strong support for the positive association between good governance and market

value and the limitations of previous studies, in both the measurement model and the choice of

variables, this study predicts a positive relationship between governance and market value. This leads

to the next hypothesis:

H3: Governance disclosure is positively associated with company market value.

Stakeholder theory suggests that stakeholder expectations play an important part in setting financial

goals. Consequently, the financial goals of a company reflect the combined expectations of all its

stakeholders. Stakeholder expectations may differ from one to another, creating the potential for

conflicts of interest. Maintaining a good balance, therefore, between stakeholder interests is essential

to achieving company financial goals (Balatbat et al., 2012; Donaldson & Preston, 1995). Companies

with ESG policies may be more likely to have superior management and more capable of running a

successful business (Alexander & Buchholz, 1978).

ESG disclosure increases company transparency giving the company a positive profile (Azzone et al.,

1998). The resulting environmental and social engagement increases profits by reducing the cost of

conflict with the community, improving relationships with regulators, increasing employee

productivity and increasing efficiency due to reductions in the amount of waste (Heal, 2005). There

is also evidence that good corporate governance (as manifested by ESG disclosure) reduces conflict

of interest between managers and shareholders, and results in improvements to the quality of

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management, efficiency, and productivity, and ultimately, the value of the company (Maher &

Andersson, 2000).

Furthermore, in the real world, there are a variety of internal and external influences that determine

the orientation of different managerial approaches. Deegan, et al., (2002), suggest that each

organization is part of the social system that affects or is affected by the environment. Therefore, the

question of whether all firms will be affected equally by good behaviours in meeting stakeholder

expectations is yet to be answered, especially for companies operating under different institutional

influences such as in a global market. Mahmoudian, Nazari, and Herremans (2012) show that not all

organizations are affected by organizational pressure in the same way. For example, larger

organizations tend to receive higher institutional pressure from the diverse stakeholders, leading to

better compliance with expectations. This is explained by institutional theory that proposes that there

are certain organizational aspects governed by other institutions, which means those aspects are

beyond the control of the members of the organization.

In addition, the two investor perception surveys on ESG reviewed above, have reported that 80 to 90%

of investors believe ESG indicators have a financial impact on the value of the company in the

medium to long term (CSR Europe, 2003; Maier, 2007). Such findings suggest the financial

community favours companies with ESG policies. Similar sentiments are exposed in the United

Nations Principles of Responsible Investment (U

and corporate governance (ESG) issues can affect the performance of investment portfolios (to

(In Balatbat et

al., 2012, p. 2). This illustrates the tendency of the mainstream financial community to include ESG

factors when evaluating the market value of the company.

So the final hypothesis, therefore, is:

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H4: ESG disclosure is positively associated with company market value.

3. RESEARCH DESIGN

3.1. Sample and data

The sample for this study comprises non-financial companies listed on worldwide stock exchanges

during the five-year period 2008-2012. This particular period has been chosen because

comprehensive Bloomberg ESG Disclosure Scores have only been available from 2008 - prior to that,

data was limited in terms of both country and sector coverage.

Samples companies for this study are selected according to the availability of

Disclosure scores. Bloomberg provides disclosure scores for voluntary environmental, social, and

governance (ESG) disclosure ranges from 0.1, to 100, and are tailored according to country, industry,

sector and other criteria; making it possible to compare scores for companies selected according to

different types of criteria. The selection of the companies for this study began by screening the

countries. Only countries with at least five companies consistently disclosing ESG over the study

were included in the sample. Financial companies were excluded from the sample because of their

different nature and regulatory requirements with regard to ESG issues (Goodwin & Ahmed, 2006;

Guenster, 2012; Xiao-Hong & Yu-Hong, 2008). The final sample of company year observations

meeting the criteria for selection covered 41 countries.

This study employs a modified Ohlson (1995) price model that expresses the market value of equity

as a function of book value of equity, accounting earnings and other information. Hence we use price

per share at the end of financial period as the dependent variable of this study. We use Earnings per

share (EPS) as the measure of accounting earnings. The other information is the Bloomberg

Environmental, Social and Governance scores.

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All the financial and the non-financial data were collected from the Bloomberg database. The

Bloomberg ESG disclosure scores reflect the relevant disclosure data available in the public domain.

Several other sources of such data are available and some have been used in previous studies including:

Thomson Reuters (Ioannou & Serafeim, 2010b), Domini Social Index (Evans & Peiris, 2010),

Corporate Monitor (CAER or EIRIS) (Balatbat et al., 2012). A number of studies have already

employed the Bloomberg ESG Disclosure Scores for different research problems (Cheung & Mak,

2010; Eccles et al., 2011; ; Mahmoudian et al., 2012; Wimmer,

2012). To date however, no other international study has investigated value relevance using the

Bloomberg ESG Disclosure scores.

Bloomberg provides a much richer dataset than the sets used in earlier studies. It comprises 247 non-

financial metrics that break down into five groups: Carbon Disclosure Project (CDP), Environmental

metrics, Social metrics, Governance metrics and ESG Disclosure metrics. The last four metrics

measure the degree of transparency of the overall ESG metrics and its components (Eccles et al.,

2011). Bloomberg screening of the ESG Disclosure Score is based on the GRI framework. This is

reflected in the survey result of Levy, Duca, & Alma (2012) showing that 70% of GRI compliant

companies have a Bloomberg ESG Disclosure Score of over 50 and the fact that 79% of the

companies that scored below 50 are not GRI compliant. Except Portugal, all other sample countries

in this study are GRI framework adopters and all of the sample countries except the US have signed

the Kyoto Protocol agreement.

We also use two other firm level variables in addition to the main variables included in the Ohlson

(1995) model. This is to control for variables that have been identified in previous value relevance

studies as impacting on company value. These variables

represents a market based measure of profitability. Profitability has been identified as a driver of price

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and therefore it is included in our model. Applied beta represents relevant risk factors that adversely

impact price. Companies that successfully utilise a degree of leverage may also have higher potential

growth, which is preferred by some investors. Thus companies with high risk may also signal

potential growth. Accordingly, we include applied beta as a control variable in our models.

A number of other cross-country value relevance studies have suggested that country differences have

persisted even after accounting harmonization (Joos & Lang, 1994), due to, for example, their capital

market size (Veith & Werner, 20102) or legal origins (Devalle, Onali, & Magarini, 2010; Hung, 2000;

Veith & Werner, 2010). Wanderley et al. (2008), in fact, found that country of origin had a stronger

influence than industry sector. The above studies suggest that value relevance is influenced by

institutional factors such as political, cultural, legislation and socioeconomic factors. Therefore this

study, include the common law and code law distinction to represent the legal institutional factors

that are used to classify countries (La Porta et. al., 1998). We code countries adopting common law

as 1 and otherwise 0. We also include year and industry dummies in our model to control for year

and industry effects.

3.2. Model Specification

The objective of this study is to investigate the value relevance of ESG disclosure. Two tests are

commonly used in value relevance research which is based on return or price models (Barth, 2000;

Barth, Beaver, & Landsman, 2001; Ota, 2003). This study uses price models, where stock prices are

2 Thirteen firms listed in Canada, Denmark, France, Germany, Ireland, Japan, the Netherlands, Norway, Singapore, Sweden, Switzerland, the United Kingdom and the United States. These countries represent a fair balance of large and small as well as of common and code law countries.

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regressed on book value per share and earnings per share. There has been some debate as to which is

the better model (as outlined in Kothari & Zimmerman, 1995), but several points support the decision

to use the price model in this study. First, the model has been widely adopted by researchers in the

prior value relevance studies (e.g. Amir & Lev, 1996; Bao & Chow, 1999; Hirschey, Richardson, &

Scholz, 2001; Hughes, 2000; Lo & Lys, 2000; Sami & Zhou, 2004). Second, previous studied that

have investigated value relevance using both models, obtained similar results (Bao & Chow, 1999;

Sami & Zhou, 2004). Third, unlike the return model, there is empirical evidence to suggest that the

estimated slope coefficient of the variable tested in the price model is unbiased, which means that

value relevance only persists if there is new information to affect stock returns (Chen, Chen, & Su,

2001; Kothari & Zimmerman, 1995).

Four models are used in this study. The first three models are used to investigate the relationship of

the individual components of environmental, social and governance factors to market value. In the

fourth model, the variable of interest is the aggregate ESG measure. The individual models are listed

below:

Pxit 0 + 1Envit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed .. 1)

Pxit 0 + 1Socit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed

Pxit = 0 + 1Govit + 2BVit + 3 EPSit + 4Tobins_Qit + 5Betait + 6Commom_Lawit + Year fixed

.. .. (3) Pxit = 0 + 1ESGit + 2BVit + 3 EPSit + 4Tobins_Qit + 5Betait + 6Commom_Lawit + Year fixed

4)

Where, Pxit = Price of a share of firm i, at date t

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Envit = Environment disclosure of firm i at date t Socit = Social disclosure of firm i at date t Govit = Governance disclosure of firm i at date t ESGit = ESG disclosure score of firm i at date t BVit = Book value per share of firm i at time date t EPSit = Earnings per share of firm i at date t Tobins_Qit = i at date t Betait = Bloomberg applied of firm i at date t Commom_Lawit = a dummy variable takes the value 1 for common law country and 0

otherwise Detailed definitions of all of the variables are presented in Table 1.

(Insert Table 1 here)

4. RESULTS

4.1. Descriptive statistics

Table 2 provide descriptive statistics of the main variable in this study. The table shows that

Environmental scores ranges from .78 to 85.27 with mean value is 22.31; Social scores ranges from

3.13 to 94.74 with mean value is 22.57; Governance scores ranges from 3.57 to 85.71 with mean

value is 45.95; while the aggregate ESG scores ranges from 3.31 to 79.34 with mean value is 20.72.

The data indicates that on average the disclosure level of ESG and its individual components is quite

low within our sample companies.


Table 3 presents the Pearson correlations matrix. The table shows that among the ESG variables, the

governance factor has the strongest positive correlation with price (r=0.2926, p<0.001), followed by

the environment factor (r=0.22.58, p<0.001), ESG factor (r=0.2790, p<0.001) and finally by the

weakest variable, social factor (r=0.2125, p<0.001).


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4.2.Main Results

Table 4 shows the results of the basic regressions. The coefficients of ESG and its component are

positive and significant (t-stat of Env = 14.77, p<0.001; t-stat of Soc = 5.04, p<0.001; t-stat of Gov =

19.36, p<0.001; t-stat of ESG = 18.29, p<0.001) and the regressions all have a high adjusted R2. Of

the test variables the governance component has the strongest t values (19.36) and social (5.04) has

the lowest. Similarly, in all regressions the book value and earnings variables have the expected sign

and are significant. The significant positive coefficient on applied beta and common law supports the

expectation that ESG disclosures are more relevant if a company has a higher business risk and if the

company environment characterised by the common law variable. The results thus

strongly support all of hypotheses 1 to 4.


Table 5 to 8 reports the results of the various robustness tests. Table 5 shows the results with the year

2008 excluded from the data set. Table 6 excludes both the years 2008 and 2009 (the GFC years).

Table 7 excludes the 2012 year. Table 8 reports the results of excluding observations from countries

with less than 5 observations in any year (resulting in the exclusion of 12 countries, mainly from

Eastern Europe and East Asia). For the key variables, ESG and its components and book value and

earnings, the results remained qualitatively similar to the full sample results.

(Insert Table 5, 6, 7 & 8)

5. CONCLUSION AND FUTURE RESEARCH

In this study, we use the modified Ohlson (1995) model to investigate the relationship between ESG

disclosure and market value. We source our ESG and financial data from the Bloomberg database

and the legal data from the World Bank. We find that both ESG and the individual components have

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a positive significant relationship with market value. Our results are robust and consistent across a

number of alternative tests.

Despite the earlier views on ESG factors and the mixed results in the literature, our results suggest

that in recent years, investors have become more appreciative of ESG information. Our results also

suggest that the most significant effect is on common law countries. Thus, countries that have the

strongest institutions tend to benefit the most from regard for ESG factors..

Although our results are strong and consistent, they should be interpreted with some caution. The

variables may be subject to measurement error. For example, many companies are multinational and

therefore their operations do not reflect national boundaries in respect of the legal tradition.

Furthermore, our results are not tested on alternative data provided by other suppliers of ESG ranks.

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25

Table 1: Variable definition

Variable Measure Description of Variable PX Price per share Last price for the security as provided by the exchange.

Env Environmental

disclosure score Proprietary Bloomberg score based on the extent of a company's environmental disclosure as part of Environmental, Social and Governance (ESG) data. The score ranges from 0.1 for companies that discloses minimum amount of ESG data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures.

Soc Social disclosure score

Proprietary Bloomberg score based on the extent of a company's social disclosure as part of Environmental, Social and Governance (ESG) data. The score ranges from 0.1 for companies that discloses minimum amount of social data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with workforce data carrying greater weight than other disclosures. The score is also tailored to different industry. In this way, each company is only evaluated in terms of the data that is relevant to its industry sector.

Gov Governance disclosure score

Proprietary Bloomberg score based on the extent of a company's governance disclosure as part of Environmental, Social and Governance (ESG) data. The score ranges from 0.1 for companies that disclose minimum amount of governance data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with board of data carrying greater weight than other disclosures. The score is also tailored to different industry sectors. In this way, each company is only evaluated in terms of the data that is relevant to its industry sector.

ESG Environmental, social and governance disclosure score

Proprietary Bloomberg score based on the extent of a company's Environmental, Social, and Governance (ESG) disclosure. The score ranges from 0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures. The score is also tailored to different industry sectors. In this way, each company is only evaluated in terms of the data that is relevant to its industry sector.

BV Book value per share

Total Common Equity / Number of Shares Outstanding.

26

ESP Earnings per share

Net Income Available to Common Shareholders divided by the Basic Weighted Average Shares outstanding.

Tobins_Q Tobins Q (Market Cap + Liabilities + Preferred Equity + Minority Interest) / Total Assets

Beta Applied Beta Percentage change in the price of an equity given a one percent change in its benchmark index.

Common_Law

Common law dummy

A dummy to represent country clusters using Common law (1) and Code law (0)

27

Tabl

e 2:

Des

crip

tive

stat

istic

s

Vari

able

(s)

PX

Env

Soc

G

ov

ESG

B

V

EP

S T

obin

s_Q

Ap

plie

d Be

ta

Com

mon

_Law

Mea

n 12

.65

22.9

8 26

.25

47.4

4 29

.41

8.02

0.

74

1.39

0.

95

0.39

Med

ian

5.67

17

.83

22.8

1 46

.43

26.8

6 4.

64

0.29

1.

15

0.94

0

SD

16.4

7 15

.99

16.2

4 9.

61

12.1

4 9.

30

1.30

0.

72

0.29

0.

49

Min

imum

0.

02

0.78

3.

51

3.57

3.

31

0.01

-4

.9

0.34

-0

.8

0

Max

imum

10

7.35

85

.27

94.7

4 85

.71

79.3

4 64

.83

8.58

5.

83

2.66

1

Not

e: V

aria

ble

defin

ition

s of a

ll of

the

varia

bles

are

pre

sent

ed in

Tab

le 1

.

28

Tabl

e: 3

Cor

rela

tion

mat

rix

V

aria

ble(

s)

P X

E

nv

So

c

Gov

ESG

BV

E

PS

T

obin

s_Q

Ap

plie

d Be

ta

Com

mon

_Law

P X

1

Env

0.22

58

(0.0

00)

1

Soc

0.21

25

(0.0

00)

0.56

77

(0.0

00)

1

Gov

0.

2926

(0

.000

) 0.

2805

(0

.000

) 0.

4472

(0

.000

) 1

ESG

0.

2790

(0

.000

) 0.

9320

(0

.000

) 0.

7953

(0

.000

) 0.

5208

(0

.000

) 1

BV

0.76

23

(0.0

00)

0.25

66

(0.0

00)

0.41

23

(0.0

00)

0.14

47

(0.0

00)

0.25

66

(0.0

00)

1

EPS

0.78

73

(0.0

00)

0.20

93

(0.0

00)

0.18

32

(0.0

00)

0.24

73

(0.0

00)

0.20

93

(0.0

00)

0.62

39

(0.0

00)

1

Tobi

ns_Q

0.

2228

(0

.000

) -0

.021

0 (0

.023

2)

0.10

44

(0.0

00)

0.18

49

(0.0

00)

-0.0

210

(0.0

232)

-0

.173

9 (0

.000

) 0.

1511

(0

.000

) 1

Appl

ied

Beta

-0

.007

2 (0

.438

5)

0.04

61

(0.0

00)

0.00

04

(0.9

621)

0.

1019

(0

.000

) 0.

0461

(0

.000

) 0.

0076

(0

.410

3)

-0.0

335

(0.0

003)

-0

.065

7 (0

.000

) 1

Com

mon

_Law

0.

0622

(0

.000

) -0

.181

1 (0

.000

) -0

.150

0 (0

.000

0)

0.28

03

(0.0

00)

-0.1

811

(0.0

00)

-0.1

445

(0.0

00)

0.08

87

(0.0

00)

0.16

41

(0.0

00)

-0.0

131

(0.1

574)

1

Not

e: V

aria

ble

defin

ition

s of a

ll of

the

varia

bles

are

pre

sent

ed in

Tab

le 1

.

29

Table 4: Regression analysis

Pxit = 0 + 1Envit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects + Industry

Pxit = 0 + 1Socit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects +Industry

Pxit 0 + 1Govit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects + Industry

Pxit 0 + 1ESGit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects + Industry

Variable(s) Model 1 Model 2 Model 3 Model 4

Estimates (p value)

t-stat. Estimates (p value)



t-stat.

Env 0.064154 (0.000)

14.77

Soc 0.020625 (0.000)

5.04

Gov 0.116095 (0.000)

19.36

ESG 0.076397 (0.000)

18.29

BV 0.968178 (0.000)

65.95 1.06929 (0.000)

76.60 0.995387 (0.000)

87.81 1.006693 (0.000)

89.65

EPS 4.95323 (0.000)

40.54 4.530087 (0.000)

41.04 4.569497 (0.000)

50.82 4.495366 (0.000)

50.10

Tobins_Q 5.798423 (0.000)

41.46 6.024855 (0.000)

44.94 4.087038 (0.000)

50.49 4.204005 (0.000)

52.40

Beta 0.774178 (0.000)

4.02 1.254225 (0.000)

6.44 1.020449 (0.000)

7.11 1.32178 (0.000)

9.25

Common_Law 2.630045 (0.000)

20.07 3.052548 (0.000)

23.25 2.964053 (0.000)

29.94 3.955117 (0.000)

40.07

Intercept -10.88035 (0.000)

-37.08 -10.10318 (0.000)

-32.65 -12.62397 (0.000)

-43.90 -8.9615 (0.000)

-39.49

Year effects Yes Yes Yes Yes Industry effects Yes Yes Yes Yes Adj.R2 0.8243 0.7922 0.7690 0.7689 N 13,616 16,634 25,126 25,179

Note: Coefficient p-values are two-tail and based on asymptotic Z-statistic robust to heteroskedasticity. For clarity in presentation the coefficients on year and industry dummies have not been reported.

Variable definitions of all of the variables are presented in Table 1.

30

Additional analysis

Table 5: Excluding 2008 financial year

Pxit 0 + 1Envit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed


Pxit 0 + 1Govit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed

Pxit 0 + 1ESGit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed

Variable(s) Model 1 Model 2 Model 3 Model 4 Estimates (p value)




t-stat.

Env 0.0641604 (0.000)

12.36

Soc 0.0262833 (0.000)

5.93

Gov 0.1260817 (0.000)

18.58

ESG 0.0796129 (0.000)

17.56

BV 0.9768471 (0.000)

55.64 1.044871 (0.000)

68.16 0.9949881 (0.000)

81.14 1.003333 (0.000)

82.02

EPS 5.252191 (0.000)

34.91 4.914148 (0.000)

38.57 4.70241 (0.000)

46.81 4.684208 (0.000)

46.51

Tobins_Q 4.78739 (0.000)

32.29 4.994105 (0.000)

37.23 3.956771 (0.000)

46.97 4.118957 (0.000)

48.91

Beta 1.233446 (0.000)

5.24 1.506854 (0.000)

7.05 1.153972 (0.000)

7.23 1.437636 (0.000)

9.07

Common-Law 2.957052 (0.000)

19.03 3.462071 (0.000)

24.06 3.244348 (0.000)

30.19 4.218815 (0.000)

38.97

Intercept -8.761952 (0.000)

-24.19 -8.865215 (0.000)

-27.15

-12.09338 (0.000)

0.324603 -9.257741 (0.000)

-38.28

Year effects Yes Yes Yes Yes Yes Industry effects

Yes Yes Yes Yes Yes

Adj.R2 0.8138 0.7936 0.7722 0.7720 N 11306 13654 21207 21229



31

Table 6 Excluding both 2008 and 2009 financial years



Pxit 0 + 1Govit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed effe Pxit 0 + 1ESGit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed





t-stat.

Env .0568872 (0.000)

9.70

Soc .0182626 (0.000)

3.56

Gov .1232448 (0.000)

15.57

ESG 0706343 (0.000)

13.73

BV .9037559 (0.000)

43.56 .9855265 (0.000)

54.53 .9504578 (0.000)

67.80 .959312 (0.000)

68.48

EPS 5.825471 (0.000)

32.35 5.397549 (0.000)

35.61 5.047585 (0.000)

43.61 5.033348 (0.000)

43.32

Tobins_Q 4.690147 (0.000)

27.59 4.916236 (0.000)

32.16 3.968917 (0.000)

42.03 4.095341 (0.000)

43.30

Beta .95677 (0.000)

3.55 1.188506 (0.000)

4.97 .949247 (0.000)

5.37 1.209523 (0.000)

6.89

Common_Law 2.837789 (0.000)

16.02 3.520316 (0.000)

21.38 3.519678 (0.000)

29.10 4.359192 (0.000)

35.54

Intercept -8.218811 (0.000)

-19.80 -8.83722 (0.000)

-24.81 -12.55797 (0.000)

-31.81 -9.163499 (0.000)

33.98




32

Table 7 Excluding 2012 financial year



Pxit 0 + 1Govit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed

Pxit 0 + 1ESGit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year fixed





t-stat.

Env 0.0645475 (0.000)

13.35

Soc 0.020599 (0.000)

4.66

Gov 0.1141083 (0.000)

17.57

ESG 0.0768364 (0.000)

16.79

BV 0.9997477 (0.000)

62.49 1.085318 (0.000)

71.55 1.018173 (0.000)

81.45 1.029351 (0.000)

83.32

EPS 4.711283 (0.000)

36.60 4.305068 (0.000)

36.89 4.386276 (0.000)

45.24 4.308179 (0.000)

83.72

Tobins_Q 5.873143 (0.000)

38.34 5.994896 (0.000)

41.40 .3.921908 (0.000)

45.58 4.05199 (0.000)

47.52

Beta 0.7657594 (0.000)

3.61 1.256426 (0.000)

5.80 0.947256 (0.000)

5.90 1.262293 (0.000)

7.89

Common_Law 2.622087 (0.000)

18.04 2.863028 (0.000)

19.70 2.728292 (0.000)

25.03 3.739288 (0.000)

34.43

Intercept -9.44974 (0.000)

-28.53 -9.460804 (0.000)

-28.68 -12.10815 (0.000)

-39.45 -9.731465 (0.000)

-41.12




33

Table 8 Excluding countries with small number of observations Pxit 0+ 1Envit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects + Industry

Pxit 0+ 1Socit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects + Industry

Pxit 0+ 1Govit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects + Industry

Pxit 0+ 1ESGit 2BVit 3 EPSit 4Tobins_Qit 5Betait 6Commom_Lawit + Year effects + Industry





t-stat.

Env 0.0675473 (0.000)

15.20

Soc 0.0214598 (0.000)

5.09

Gov 0.12399 (0.000)

20.04

ESG 0.078946 (0.000)

18.49

BV 0.9742199 (0.000)

65.29 1.078589 (0.000)

76.46 1.001975 (0.000)

87.73 1.012835 (0.000)

89.49

EPS 4.87302 (0.000)

39.31 4.449838 (0.000)

39.91 4.494754 (0.000)

49.73 4.430789 (0.000)

49.10

Tobins_Q 5.859427 (0.000)

39.31 6.102443 (0.000)

44.87 4.120378 (0.000)

50.18 4.053075 (0.000)

52.11

Beta 5.859427 (0.000)

41.53 1.327728 (0.000)

6.77 1.038769 (0.000)

7.19 1.357853 (0.000)

9.44

Common_Law 2.769975 (0.000)

20.84 3.134195 (0.000)

23.65 3.033559 (0.000)

30.38 4.053075 (0.000)

40.70

Intercept -10.75274 (0.000)

-34.33 -11.52614 (0.000)

-39.35 -11.977 (0.000)

-40.00 -9.211809 (0.000)

-40.28

Year effects Yes Yes Yes Yes Industry effects Yes Yes Yes Yes Adj.R2 0.8260 0.7933

0.7940 0.7700

N 13,185 16,162 24,530 24,582 Note: Coefficient p-values are two-tail and based on asymptotic Z-statistic robust to heteroskedasticity. For clarity in presentation the coefficients on year and industry dummies have not been reported.


Value Relevance of Environmental, Social and Governance ... · Value Relevance of Environmental, Social and Governance Disclosure Zuraida Zuraida Victoria University of Wellington

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