Impact of Environmental, Social, and Governance (ESG) Factors on Stock Prices and Investment Performance

Abhinandan Kulal(Department of Commerce, University Evening College, Mangalore, 575001, India)
Abhishek N(Institute of Management and Commerce, Srinivas University, Mangalore, 574146, India)
Sahana Dinesh(Department of Commerce, Field Marshal K M Cariappa College, Madikeri, 571201, India)
Divyashree M.S.(Department of Commerce, GFGC, Uppinangady, Mangalore, 574241, India)

Abstract

This study examines the relationship between Environmental, Social, and Governance (ESG) factors and stock prices as well as investment performance. ESG factors have become increasingly relevant in investment decisions as investors prioritize companies with sustainable practices. Using a sample of publicly-traded companies, this research analyzes the impact of ESG factors on stock prices and investment returns. The findings suggest that companies with strong ESG performance tend to have higher stock prices and better investment performance than those with weak ESG performance. The study also highlights the significance of the individual components of ESG, such as environmental policies and corporate governance practices, on stock prices and investment returns. Overall, this research provides valuable insights for investors seeking to incorporate ESG factors into their investment decision-making processes.

Keywords

ESG factors; Stock price; Investment performance

References

Bhattacharya, S., Sharma, D., 2019. Do environment, social and governance performance impact credit ratings: A study from India. International Journal of Ethics and Systems. 35(3), 466-484.

Calero López, I., Rodríguez-López, B., 2020. The relevance of transversal competences in vocational education and training: A bibliometric analysis. Empirical Research in Vocational Education and Training. 12(1), 1-19.

Semenova, N., Hassel, L.G., 2019. Private engagement by Nordic institutional investors on environmental, social, and governance risks in global companies. Corporate Governance: An International Review. 27(2), 144-161.

Tsang, A., Frost, T., Cao, H., 2022. Environmental, social, and governance (ESG) disclosure: A literature review. The British Accounting Review. 101149.

Di Vaio, A., Varriale, L., Lekakou, M., et al., 2023. SDGs disclosure: Evidence from cruise corporations’ sustainability reporting. Corporate Governance. 23(4), 845-866. DOI: https://doi.org/10.1108/CG-04-2022-0174

Atif, M., Liu, B., Nadarajah, S., 2022. The effect of corporate environmental, social and governance disclosure on cash holdings: Life‐cycle perspective. Business Strategy and the Environment. 31(5), 2193-2212.

Xie, J., Nozawa, W., Yagi, M., et al., 2019. Do environmental, social, and governance activities improve corporate financial performance? Business Strategy and the Environment. 28(2), 286-300.

Saini, M., Singh, M., Kaur, M., et al., 2021. Analysing the tweets to examine the behavioural response of Indian citizens over the approval of national education policy 2020. International Journal of Educational Development. 82, 102356. DOI: https://doi.org/10.1016/j.ijedudev.2021.102356

Hoepner, A.G.F., 2010. Portfolio diversification and environmental, social or governance criteria: Must responsible investments really be poorly diversified. SSRN Electronic Journal. 10, 1-16.

Niţescu, D.C., Cristea, M.A., 2020. Environmental, social and governance risks—new challenges for the banking business sustainability. Amfiteatru Economic. 22(55), 692-706.

Bruno, C., Henisz, W.J., 2022. Environmental, Social, and Governance (ESG) Factors and Municipal Bond Yields [Internet]. SSRN. Avaliable From: https://ssrn.com/abstract=4035995

Sandberg, H., Alnoor, A., Tiberius, V., 2022. Environmental, Social, and Governance Ratings and Financial Performance: Evidence from the European Food Industry [Internet]. Business Strategy and the Environment. Avaliable from: https://doi.org/10.1002/bse.3259

Dogru, T., Akyildirim, E., Cepni, O., et al., 2022. The effect of environmental, social and governance risks. Annals of Tourism Research. 95, 103432.

Brogi, M., Lagasio, V., 2019. Environmental, social, and governance and company profitability: Are financial intermediaries different? Corporate Social Responsibility and Environmental Management. 26(3), 576-587.

Shakil, M.H., Tasnia, M., Mostafiz, M.I., 2021. Board gender diversity and environmental, social and governance performance of US banks: Moderating role of environmental, social and corporate governance controversies. International Journal of Bank Marketing. 39(4), 661-677.

Ruan, L., Liu, H., 2021. Environmental, social, governance activities and firm performance: Evidence from China. Sustainability. 13(2), 767.

Maji, S.G., Lohia, P., 2023. Environmental, social and governance (ESG) performance and firm performance in India. Society and Business Review. 18(1), 175-194.

Khalid, F., Sun, J., Huang, G., et al., 2021. Environmental, social and governance performance of Chinese multinationals: A comparison of state-and non-state-owned enterprises. Sustainability. 13(7), 4020.

Vinodkumar, N., Alarifi, G., 2022. Environmental social governance: A core value to responsible stakeholders and stock market sustainability in the Kingdom of Saudi Arabia. Journal of Sustainable Finance & Investment. 12(4), 1085-1101.

Bassen, A., Kovács, A.M., 2020. Environmental, social and governance key performance indicators from a capital market perspective. Springer: Berlin.

Ferrero-Ferrero, I., Fernández-Izquierdo, M.Á., Muñoz-Torres, M.J., 2016. The effect of environmental, social and governance consistency on economic results. Sustainability. 8(10), 1005.

Khalil, M.A., Khalil, R., Khalil, M.K., 2022. Environmental, Social and Governance (ESG)-Augmented Investments in Innovation and Firms Value: A Fixed-Effects Panel Regression of Asian Economies [Internet]. China Finance Review International. Avaliable from: http://www.globalauthorid.com/WebPortal/ArticleView?wd=20438966E55890747A07194E0AB03B53C3789440FA14D5368F3CD9467EE0E4D1

Peng, L.S., Isa, M., 2020. Environmental, social and governance (ESG) practices and performance in Shariah firms: Agency or stakeholder theory? Asian Academy of Management Journal of Accounting & Finance. 16(1).

Rooh, S., Hussain, A., 2022. The behavioral factors and individual investor’s trading performance in Khyber Pakhtunkhwa: The mediating role of environmental, social, and governance (ESG) performance: Herding, loss aversion, mental accounting, overconfidence, and ESG performance. City University Research Journal. 12(2).

Cek, K., Eyupoglu, S., 2020. Does environmental, social and governance performance influence economic performance?. Journal of Business Economics and Management. 21(4), 1165-1184.

Ferrell, O.C., 2021. Addressing socio-ecological issues in marketing: Environmental, social and governance (esg). AMS Review. 11(1-2), 140-144.

Brooks, C., Oikonomou, I., 2018. The effects of environmental, social and governance disclosures and performance on firm value: A review of the literature in accounting and finance. The British Accounting Review. 50(1), 1-15.

López‐Cabarcos, M.Á., Santos‐Rodrigues, H., Quiñoá‐Piñeiro, L., et al., 2023. How to Explain Stock Returns of Utility Companies from an Environmental, Social and Corporate Governance Perspective [Internet]. Corporate Social Responsibility and Environmental Management. Available from: https://doi.org/10.1002/csr.2483

Wang, S.Q., Li, Y.C., Zhang, Z.M., et al., 2014. Prevention measures and socio-economic development result in a decrease in malaria in Hainan, China. Malaria Journal. 13(1), 1-6.

Pacelli, V., Pampurini, F., Quaranta, A.G., 2023. Environmental, social and governance investing: Does rating matter?. Business Strategy and the Environment. 32(1), 30-41.

Setyahuni, S.W., Handayani, R.S., 2020. On the value relevance of information on environmental, social, and governance (ESG): An evidence from Indonesia. Journal of Critical Reviews. 7(12), 50-58.

Weber, A.S., 2011. The role of education in knowledge economies in developing countries. Procedia-Social and Behavioral Sciences. 15, 2589-2594. DOI: https://doi.org/10.1016/j.sbspro.2011.04.151

Cagli, E.C.C., Mandaci, P.E., Taşkın, D., 2022. Environmental, social, and governance (ESG) investing and commodities: Dynamic connectedness and risk management strategies. Sustainability Accounting, Management and Policy Journal. Ahead-of-print.

Linnenluecke, M.K., 2022. Environmental, social and governance (ESG) performance in the context of multinational business research. Multinational Business Review. 30(1), 1-16.

Bahadori, N., Kaymak, T., Seraj, M., 2021. Environmental, social, and governance factors in emerging markets: The impact on firm performance. Business Strategy & Development. 4(4), 411-422.

Duque-Grisales, E., Aguilera-Caracuel, J., 2021. Environmental, social and governance (ESG) scores and financial performance of multilatinas: Moderating effects of geographic international diversification and financial slack. Journal of Business Ethics. 168(2), 315-334.

Sarajoti, P., Chatjuthamard, P., Papangkorn, S., et al., 2022. The environmental, social, and governance (ESG) investment and its implications. Corporate social responsibility in the 21st century. IntechOpen: London.

Singh, G.K.G., Singh, S.K.G., 2008. Malaysian graduates’ employability skills. UNITAR e-Journal. 4(1), 15-45.

Alda, M., 2021. The environmental, social, and governance (ESG) dimension of firms in which social responsible investment (SRI) and conventional pension funds invest: The mainstream SRI and the ESG inclusion. Journal of Cleaner Production. 298, 126812.

Capelli, P., Ielasi, F., Russo, A., 2021. Forecasting volatility by integrating financial risk with environmental, social, and governance risk. Corporate Social Responsibility and Environmental Management. 28(5), 1483-1495.

Harvey, L., Bowers-Brown, T., 2004. Employability cross-country comparisons. Graduate Market Trends. 5, 3-5.

Taliento, M., Favino, C., Netti, A., 2019. Impact of environmental, social, and governance information on economic performance: Evidence of a corporate 'sustainability advantage' from Europe. Sustainability. 11(6), 1738.

Shaikh, I., 2022. Environmental, social, and governance (ESG) practice and firm performance: An international evidence. Journal of Business Economics and Management. 23(1), 218-237.

Dreyer, J.K., Moreira, M., Smith, W.T., et al., 2023. Do environmental, social and governance practices affect portfolio returns? Evidence from the US stock market from 2002 to 2020. Review of Accounting and Finance. Ahead-of-print.

Teti, E., Dell’Acqua, A., Bonsi, P., 2022. Detangling the role of environmental, social, and governance factors on M&A performance. Corporate Social Responsibility and Environmental Management. 29(5), 1768-1781.

Shakil, M.H., 2021. Environmental, social and governance performance and financial risk: Moderating role of ESG controversies and board gender diversity. Resources Policy. 72, 102144.

Winegarden, W., 2019. Environmental, Social, and Governance (ESG) Investing: An Evaluation of the Evidence [Internet]. Pacific Research Institute. Available from: https://www.pacificresearch.org/wp-content/uploads/2019/05/ESG_Funds_F_web.pdf

Crifo, P., Forget, V.D., Teyssier, S., 2015. The price of environmental, social and governance practice disclosure: An experiment with professional private equity investors. Journal of Corporate Finance. 30, 168-194.

Mulchandani, K., Mulchandani, K., Iyer, G., et al., 2022. Do equity investors care about environment, social and governance (ESG) disclosure performance? Evidence from India. Global Business Review. 23(6), 1336-1352.

Feng, G.F., Long, H., Wang, H.J., et al., 2022. Environmental, social and governance, corporate social responsibility, and stock returns: What are the short- and long-run relationships? Corporate Social Responsibility and Environmental Management. 29(5), 1884-1895.

La Torre, M., Mango, F., Cafaro, A., et al., 2020. Does the esg index affect stock return? evidence from the eurostoxx50. Sustainability. 12(16), 6387.

Suttipun, M., Yordudom, T., 2021. Impact of environmental, social and governance disclosures on market reaction: An evidence of Top50 companies listed from Thailand. Journal of Financial Reporting and Accounting. 20(3/4), 753-767.

Andini, V.P., Nursabela, M., Widarwati, E., et al., 2021. Environmental Transparency and Corporate Sustainability Performance: Preliminary Finding in Indonesian Industry During COVID-19 [Internet]. Available from: https://www.institute-csp.org/wp-content/uploads/2022/05/4.-Revised-Paper-Andini-et-al..pdf

Friede, G., Busch, T., Bassen, A., 2015. ESG and financial performance: Aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment. 5(4), 210-233. DOI: https://doi.org/10.1080/20430795.2015.1118917

Hoepner, A., Oikonomou, I., Scholtens, B., et al., 2016. The effects of corporate and country sustainability characteristics on the cost of debt: An international investigation. Journal of Business Finance & Accounting. 43(1-2), 158-190. DOI: https://doi.org/10.1111/jbfa.12183

Clark, G.L., Feiner, A., Viehs, M., 2015. From the stockholder to the stakeholder: How sustainability can drive financial outperformance. Social Science Research Network. DOI: https://doi.org/10.2139/ssrn.2508281

DOI: http://dx.doi.org/10.26549/mmpp.v5i2.15869