ESG ratings and financial performance: a case of JSE listed firms.

Chininga, Emmerson

ESG ratings and financial performance: a case of JSE listed firms.

Thesis / Dissertation

2022

Abstract

High net-worth individuals and institutions are assumed to have developed much interest in the Environmental, Social and Governance (ESG) activities of a business in pursuit of risk-adjusted returns. There is rapid growing of ESG assets under management globally from US$22.8 trillion in 2016 to US$35 trillion in 2020, a clear evidence of increasing appetite for long term returns. By factoring ESG ratings in their investment decisions, investors are taking calculated risks in their choice of investments. In July 2017, Africa had over US$428 billion of ESG assets under management and South Africa had the biggest proportion with its most advanced financial system. ESG investors are concerned about costs that comes with unsustainable practices like use of fossil fuels and governance malpractices including corruption. The study examines the impact of ESG ratings on the financial performance of JSE/FTSE Russel's Responsibility Investment listed firms. The study utilises annual firm data on 40 firms listed on the JSE/FTSE Responsible Investment Index between 2015-2019. The panel data regression models were estimated using both random effects and fixed effects models. Results revealed that overall ESG rating has a significantly negative impact on Tobin's Q. No significant effect was noted on other financial performance measures; return on assets (ROA) and abnormal gains and losses (ABGL). Of the ESG pillars, environmental and social have negative significant impact on ABGL and Tobin's Q respectively. Governance does not show any significant relationships. These results could mean the South African investors do not value the firms' involvement in activities that are sustainable and do not consider the firms steps to increase governance practices which reduces their riskiness. The study is essential to ESG stakeholders including investors, in climate change, in geopolitical relations and to financial markets stability. To the policy makers, they need to put in place incentives for ESG investors such as tax concessions, tax breaks to attract long term ESG investments.

Keywords

development finance

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