ESG impact on performance of US S&P 500-listed firms

• DOI: https://doi.org/10.1108/CG-06-2020-0258
• Pages: 1409-1428
• Published date: 26 October 2020
• Date: 26 October 2020
• Author: Bahaaeddin Ahmed Alareeni,Allam Hamdan
• Subject Matter: Strategy,Corporate governance

ESG impact on performance of US S&P

500-listed firms

Bahaaeddin Ahmed Alareeni and Allam Hamdan

Abstract

Purpose –This paper aims to investigatewhether there are relationshipsamong corporate disclosure of

environmental, social and governance (ESG) and firms’ operational (ROA), financial (ROE) and market

performance(Tobin’s Q), and if these relationshipsare positives or negatives or even neutral.

Design/methodology/approach –The study sample covers USS&P 500-listed companies during the

period 2009 to 2018. Panel regressionanalysis was used to examine the study hypotheses and achieve

the studyaims.

Findings –The results showed that ESG disclosure positively affects a firms’ performancemeasures.

However, measuringESG sub-components separately showed that environmental(EVN) and corporate

social responsibility (CSR) disclosure is negatively associated with ROA and ROE. EVN and CSR

disclosure is positivelyrelated to Tobin’s Q. Further, corporate governance (CG)disclosure is positively

related to ROA and Tobin’s Q, and negativelyrelated to ROE. More importantly, ESG, CSR, EVN and CG

tend to be higher with firms that have high assets and high financial leverage. Furthermore, the higher

level of ESG,EVN, CSR and CG disclosure, the higher the ROA andROE.

Originality/value –The study limns a vision of the roleof ESG on firm performance. This study tries to

determine whether there are relationships among all ESG disclosure and FP, and if they are positive,

negativeor even neutral.

Keywords Governance, Social, Performance, Environmental, ESG disclosure, US S&P 500

Paper type Research paper

1. Introduction

Early in the 21st century, well-known cases of financial failures in the USA had a severe

negative impact on the US and global economy, raising the emergence of the 2008 global

financial crisis. The global financial crisis shook markets international causing an economic

problems requiring a high level of intervention by authorities and causing a wide range of

social concerns (Nicholsonet al.,2011). The financial crisis raised concernregarding farms’

ethical behaviour, accountability risk oversight and capability to strategically attract a wide

range of investors (Galbreath, 2013). In addition, it cast doubt on corporate reporting and

disclosure as a credible source of information on firms’ going-concern (Alqallaf and

Alareeni, 2018).

Issues of disclosure have long been an inherent part of the life of firms. Disclosure is a

crucial link in our economies, and the availability of information about companies is

essential for investors and other stakeholders to make proper capital allocation choices and

avoid any imminent danger. A higher level of disclosure can help attract capital and

maintain confidence in stockmarkets. In contrast, a lower level of disclosure and an unclear

picture of firms can lead to manipulation, unethical behaviour and damage of market

integrity at a high cost to firms, stakeholdersand the economy (OECD, 2004).

Given frequent financial scandals, as part of firms’ strategy and in response to pressure

from authorities, NGOs and stakeholders, more firms now strictly comply with

Bahaaeddin Ahmed

Alareeni is based at

Business Administration

Program, Middle East

Technical University,

Northern Cyprus Campus,

Kalkanli, Mersin, Turkey.

Allam Hamdan is based at

the College of Business

and Finance, Ahlia

University, Manama,

Bahrain.

Received 20 June 2020

Revised 13 September 2020

2 October 2020

2 October 2020

Accepted 6 October 2020

DOI 10.1108/CG-06-2020-0258 VOL. 20 NO. 7 2020,pp. 1409-1428, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1409

environmental, social andother local regulations. Firms want to provide all stakeholders with

a clear picture of their corporate responsibility practices and efforts. Consequently,

corporate disclosure of environmental, social and governance (ESG) aspects has

developed in a variety of dimensions over more than two decades. In addition, a growing

number of firms are now engaged in a broad set of ESG disclosure activities, and this

important issue has become a topic of muchattention.

Meanwhile, the crucial question firms and shareholders must answer is whether ESG

disclosure practices can be turned into positive firm performance (FP). Prior research has

tried to test the effect of ESG disclosure practices on FP. Most of these studies focus on a

single dimension of ESG such as environmental or social disclosure (Smith et al., 2007;

Ponnu, 2008;Barnett and Salomon,2012a, 2012b;Han et al.,2016a, 2016b). However,

ESG disclosure issues are interconnected; therefore, considering only one dimension could

be problematic. A limited number of ESG studies focus on all three dimensions of ESG and

their impact on FP in a single setting (Gillan et al., 2011;Yeom, 2012;Balatbat et al., 2012;

Galbreath, 2013;Pasquini-Descomps and Sahut,2014a, 2014b;Sahut and Pasquini-

Descomps, 2015;Sharma and Thukral, 2015;Tarmuji et al., 2016a,2016b;Nollet et al.,

2016b). More important, the findings of these studies include conflicting perspectives and

inconclusive findings on whether ESG and its dimensions have a positive, negative or

neutral impact on FP. Therefore, it is essential to focus on all dimensions of ESG when

testing their impact on FP. Further, researchbeyond ESG’s direct link to FP is desired.

The study contributes to ESG prior literature in six different dimensions. First, we selected data

from a large time span, the period from 2009 to 2018. To the best of our knowledge, this is the

first study to examine the impact of all ESG Bloomberg scores on FP for S&P 500 firms from 2008

until 2017. Second, a small number of studies systemically tested changes over time within and

among all Bloomberg ESG scores of S&P 500 firms. Thus, this study is interested in exploring

improvements and developments in ESG disclosure practices by S&P 500 companies. This is a

crucial point of investigation, as de Lange et al. (2012) reported that tangible improvements could

be observed in corporate ESG performance over time. Third, we tested the impact of the ESG

score and its three sub-components (EVN, CSR and CG scores) on FP to identify the main driver

affecting S&P 500 firms’ performance. Many research studies consider only a single

subcomponent of ESG, not all. Fourth, the study evaluated firms’ performance based on three

dimensions: the firm’s financial, operational and market performance indicators [return on equity

(ROE), return on assets (ROA) and Tobin’s Q] and robustness purposes. Also, the study

incorporated firm size, financial leverage, assets turnover and assets growth as essential control

variables. Fifth, the results are expected to be generalized to other developed countries, such as

in the EU. Lastly, the outcomes will help scholars, firms’ shareholders, decision makers,

regulators, policymakers improve their consciousness of ESG disclosure scores and the

significance of incorporating ESG disclosure scores in all aspects.

With the first section being an introduction, the remainder of the paper is divided into six

sections. Section 2 argues the literature review and overview of ESG scores. Section 3

shows the data description and methodology. Section 4 shows the study results. Section 5

presents the study’s conclusion,limitations and the scope for further research.

2. Literature review and overview of environmental, social and governance scores

Prior studies have examined the association between ESG practices and FP. Most studies focus

on a single dimension/subcomponent of ESG (Smith et al., 2007;Ponnu, 2008; Barnett and

Salomon, 2012; Kim et al., 2013;Han et al., 2016a,2016b). As discussed above, ESG issues

are interconnected; therefore, concentrating on a single dimension could be problematical

(Galbreath, 2013). Some studies have argued that focusing on the association between ESG

dimensions and FP could weaken the moral aspects necessary for society and future

investments needed to maintain social and environmental practices (Richardson, 2009;Hahn

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