Understanding the Impact of ESG Practices in Corporate Finance

This study examines the relationship between environmental, social, and governance (ESG) factors and corporate financial performance. Specifically, we study various individual ESG categories, both ESG strengths and concerns, and aggregate ESG factor and their impact on corporate financial performanc...

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Bibliographic Details
Published in:Sustainability 2021-04, Vol.13 (7), p.3746
Main Authors: Kim, Sang, Li, Zhichuan (Frank)
Format: Article
Language:English
Subjects:
Capital expenditures
Capital markets
Community relations
Corporate governance
Credit ratings
Credit risk
Data collection
Datasets
Economics
Financial performance
Hypotheses
Institutional investments
Investment advisors
Literature reviews
Principles
Profitability
Rating services
Research methodology
Social factors
Social responsibility
Stockholders
Sustainability
Variables
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Summary:This study examines the relationship between environmental, social, and governance (ESG) factors and corporate financial performance. Specifically, we study various individual ESG categories, both ESG strengths and concerns, and aggregate ESG factor and their impact on corporate financial performance including profitability and financial risk. We find a positive effect of ESG factors on corporate profitability, and the effect is more pronounced for larger firms. Among different ESG categories, corporate governance has the most significant impact, particularly for firms with weak governance. We also find that ESG variables generally have a positive influence on credit rating. In particular, the social factor has the most significant impact on credit rating, while environmental score surprisingly has a negative effect. Overall, this research provides a rationale for ESG integration in the context of investment management and portfolio construction to maximize value and minimize risk.
ISSN:2071-1050
2071-1050
DOI:10.3390/su13073746