Investigating the relationship between ESG factors and firm performance in socially challenged jurisdictions relative to developed jurisdictions

Mofokeng, Lebohang

Investigating the relationship between ESG factors and firm performance in socially challenged jurisdictions relative to developed jurisdictions

Thesis / Dissertation

2023

Abstract

This research work investigates the influence of the social factor of ESG on firm performance for firms in jurisdictions with socio-economic challenges versus firms in developed jurisdictions. For this research work, South Africa was used as a proxy for a jurisdiction with socio-economic challenges and Australia was used as a proxy for a developed market. Given socio-economic differences, the expectation was that the social factor is more important for South African firms than Australian firms. The corresponding financial and ESG data was collected from 2010 to 2019. The research work is quantitative, with regression models used to undertake the comparative study. The key dependent variables used for this research are share price performance and return on equity, and the primary independent variable of interest is the social factor of ESG. Fundamental and ESG data used for this research came from Refinitive with supplements from Bloomberg and firms' annual financial statements. The study found that the social factor has a directionally negative relationship with share price performance for South African firms. However, the relationship between the social factor and ROE was found to be positive for South African firms. Secondly, the study found that, by comparing South African firms and Australian firms, the social factor has a directionally more positive relationship with return on equity for South African firms compared with their Australian counterparts. A directionally similar result was obtained for share price performance: South African firms exhibited a less negative effect on share price performance than Australian firms. For South African firms, the study also found that the social factor has a directionally more positive relationship with return on equity than the governance factor. However, the environmental factor exhibited a more positive relationship with return on equity than the social factor. It is recommended that further research is conducted using ESG data from other service providers, given the high level of ESG scoring disagreements amongst data providers, as observed by academic research. As ESG gets more prevalent, an interesting study would be to run a similar analysis using unlisted businesses to capture the entire SA business ecosystem. This research study will contribute toward ESG research on South African firms. The study may also have indirect political and social implications in that if there is a prevalent relevance of the social factor, more firms may be incentivised to invest more in host communities' social development and welfare. The study also adds to the relevance and importance of social factor consideration when constructing investor portfolios.

Keywords

Finance and Tax

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