Environmental, Social, and Governance (ESG) Profiles, Stock Returns, and Financial Policy: Australian Evidence

• Author: Manapon Limkriangkrai,Robert B. Durand,SzeKee Koh
• Published date: 01 September 2017
• Date: 01 September 2017
• DOI: http://doi.org/10.1111/irfi.12101

Environmental, Social, and

Governance (ESG) Profiles, Stock

Returns, and Financial Policy:

Australian Evidence*

MANAPON LIMKRIANGKRAI

†

,SZEKEE KOH

‡

AND ROBERT B. DURAND

§

†

Department of Banking and Finance, Monash Business School, Monash University,

Melbourne, VIC, Australia,

‡

Singapore Institute of Technology, Singapore and

§

Department of Finance and Banking, Curtin University, Perth, WA, Australia

ABSTRACT

This study investigates the independent effects of environmental (E), social

(S), corporate governance (G), and the composite ESG ratings on stock returns

and corporate financing decisions of the largest stocks in the Australian equity

market. Firms with high composite ESG ratings tend to increase their leverage.

For the individual ratings, we find different inferences: firms with low E and

high G ratings tend to raise less debt. Firms with high G ratings hold less cash,

while those with low G ratings have lower dividend payouts. S ratings have no

impact on corporate financing decisions. There appears to be no significant

difference in risk-adjusted returns for portfolios based on ESG ratings, effec-

tively indicating that there is no cost of ESG investment.

JEL Codes: G34; D71

I. INTRODUCTION

There is an increasing research interest in the rationale behind environmental,

social, and governance (ESG) activities undertaken by firms. Environmental (E)

activities involve a firm's efforts to make a positive impact on the environment,

through compliance with existing regulations and recognition of future impacts.

Social (S) activities refer to equitable treatment ofclose stakeholders and protection

of the social eco system in which the firm operates. Governance (G) incorporates

firm ethics andintegrity,including principles suchas transparency and fair dealing,

and effectivefunctioning of the board of directors.A firm's ESG activities areimpor-

tant because both institutional and individual investors now recognize that ESG

represents opportunities and risks facing the firm. Investors use nonfinancial data

such as ESG factors to decide whether to invest in a firm (Coleman et al. 2010). In

* The asset-pricing factors were kindly made available by Philip Gray. We also thank the anonymous

referee and Philip Gray for their valuable comments.

© 2016 International Review of Finance Ltd. 2016

International Review of Finance, 17:3, 2017: pp. 461–471

DOI: 10.1111/irfi.12101