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Towards a more ethical market: the impact of ESG rating on corporate financial performance

Towards a more ethical market: the impact of ESG rating on corporate financial performance This paper fits in a research field dealing with the impact of Corporate Ethics Assessment on Financial Performance. The authors argue how environmental, social and governance (ESG) paradigm, meant to measure corporate social performance by rating issuance, can impact on abnormal returns of Italian firms listed on Financial Times Stock Exchange Milano Indice di Borsa (FTSE MIB) Index, developing a panel data analysis which runs from 2007 to 2015.Design/methodology/approachThis study aims at exploring whether socially responsible investors outperform an excess market return on Italian Stock Exchange because of their investment behavior, testing statistically the relationship between the yearly ESG assessment issued by Standard Ethics Agency on FTSE MIB’s companies and their abnormal returns. To verify the impact of an ESG Rating on a company’s abnormal return, the authors developed a panel data analysis through a Fixed Effects Model. They measured abnormal returns via Fama–French approach, running a yearly Jensen’s Performance Index for each company under investigation.FindingsThe empirical results denote in Italy both a growing interest to corporate social responsibility (CSR) and sustainability by managers over the past decade, as well as an improving quality in ESG assessments because of a reliable corporate disclosure. Thus, despite investors have been applying ESG criteria in their stock – picking operations, the authors found a not positive and statistically significant impact in terms of market premium, when they have been undertaking a socially responsible investment (SRI).Practical implicationsThe findings described above show that ethics is not yet a reliable fundraising tool for Italian-listed companies, despite SRIs having a positive growth rate over past decade. Investors seem to be not pricing CSR on Stock Exchange Market; therefore, listed companies cannot be rewarded with a premium price because of their highly stakeholder oriented behavior.Originality/valueThis paper explores, for the first time in Italy, when market extra-returns (if any) are related to corporate social performance and how managers leverage ethics to build capital added value. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Social Responsibility Journal Emerald Publishing

Towards a more ethical market: the impact of ESG rating on corporate financial performance

Landi, Giovanni; Sciarelli, Mauro
Social Responsibility Journal , Volume 15 (1): 17 – Feb 20, 2019
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References (87)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1747-1117
DOI
10.1108/srj-11-2017-0254
Publisher site
See Article on Publisher Site

Abstract

This paper fits in a research field dealing with the impact of Corporate Ethics Assessment on Financial Performance. The authors argue how environmental, social and governance (ESG) paradigm, meant to measure corporate social performance by rating issuance, can impact on abnormal returns of Italian firms listed on Financial Times Stock Exchange Milano Indice di Borsa (FTSE MIB) Index, developing a panel data analysis which runs from 2007 to 2015.Design/methodology/approachThis study aims at exploring whether socially responsible investors outperform an excess market return on Italian Stock Exchange because of their investment behavior, testing statistically the relationship between the yearly ESG assessment issued by Standard Ethics Agency on FTSE MIB’s companies and their abnormal returns. To verify the impact of an ESG Rating on a company’s abnormal return, the authors developed a panel data analysis through a Fixed Effects Model. They measured abnormal returns via Fama–French approach, running a yearly Jensen’s Performance Index for each company under investigation.FindingsThe empirical results denote in Italy both a growing interest to corporate social responsibility (CSR) and sustainability by managers over the past decade, as well as an improving quality in ESG assessments because of a reliable corporate disclosure. Thus, despite investors have been applying ESG criteria in their stock – picking operations, the authors found a not positive and statistically significant impact in terms of market premium, when they have been undertaking a socially responsible investment (SRI).Practical implicationsThe findings described above show that ethics is not yet a reliable fundraising tool for Italian-listed companies, despite SRIs having a positive growth rate over past decade. Investors seem to be not pricing CSR on Stock Exchange Market; therefore, listed companies cannot be rewarded with a premium price because of their highly stakeholder oriented behavior.Originality/valueThis paper explores, for the first time in Italy, when market extra-returns (if any) are related to corporate social performance and how managers leverage ethics to build capital added value.

Journal

Social Responsibility Journal – Emerald Publishing

Published: Feb 20, 2019

Keywords: Corporate financial performance; Socially responsible investments; Impact investing; Corporate social performance; Environmental; social and governance (ESG); Jensen’s alpha

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