IDEAS home Printed from https://ideas.repec.org/a/eee/juipol/v82y2023ics095717872300067x.html
   My bibliography  Save this article

Materiality investor perspectives on utilities’ ESG performance. An empirical analysis of ESG factors and cost of equity

Author

Listed:
  • Mio, Chiara
  • Fasan, Marco
  • Scarpa, Francesco

Abstract

The last years have seen significant growth in the demands and use of Environmental, Social, and Governance (ESG) data and ratings, which have relevant market implications and affect the value of firms based on prior evidence. However, little is known about the materiality of ESG factors to investors’ risk perceptions. This paper contributes to this debate by analyzing the relationship between the ESG performance of utility companies and the cost of equity capital. Using fixed-effect panel regressions on a sample of 273 firm-year observations between 2017 and 2021, this paper provides novel insights with significant theoretical and practical implications.

Suggested Citation

  • Mio, Chiara & Fasan, Marco & Scarpa, Francesco, 2023. "Materiality investor perspectives on utilities’ ESG performance. An empirical analysis of ESG factors and cost of equity," Utilities Policy, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:juipol:v:82:y:2023:i:c:s095717872300067x
    DOI: 10.1016/j.jup.2023.101555
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S095717872300067X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jup.2023.101555?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Monica Billio & Michele Costola & Iva Hristova & Carmelo Latino & Loriana Pelizzon, 2021. "Inside the ESG ratings: (Dis)agreement and performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(5), pages 1426-1445, September.
    2. Hüseyin Temiz, 2022. "Environmental performance and cost of finance: evidence from emerging markets," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 13(5), pages 1229-1250, June.
    3. Roland Bénabou & Jean Tirole, 2010. "Individual and Corporate Social Responsibility," Economica, London School of Economics and Political Science, vol. 77(305), pages 1-19, January.
    4. Özge Sahin & Karoline Bax & Claudia Czado & Sandra Paterlini, 2022. "Environmental, Social, Governance scores and the Missing pillar—Why does missing information matter?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1782-1798, September.
    5. Venturelli, Andrea & Ligorio, Lorenzo & de Nuccio, Elbano, 2023. "Biodiversity accountability in water utilities: A case study," Utilities Policy, Elsevier, vol. 81(C).
    6. Imperiale, Francesca & Pizzi, Simone & Lippolis, Stella, 2023. "Sustainability reporting and ESG performance in the utilities sector," Utilities Policy, Elsevier, vol. 80(C).
    7. Rui Albuquerque & Yrjö Koskinen & Chendi Zhang, 2019. "Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence," Management Science, INFORMS, vol. 65(10), pages 4451-4469, October.
    8. Pornsit Jiraporn & Napatsorn Jiraporn & Adisak Boeprasert & Kiyoung Chang, 2014. "Does Corporate Social Responsibility (CSR) Improve Credit Ratings? Evidence from Geographic Identification," Financial Management, Financial Management Association International, vol. 43(3), pages 505-531, September.
    9. Dan Daugaard, 2020. "Emerging new themes in environmental, social and governance investing: a systematic literature review," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1501-1530, June.
    10. Ana Gabriela Ramirez & Julián Monsalve & Juan David González-Ruiz & Paula Almonacid & Alejandro Peña, 2022. "Relationship between the Cost of Capital and Environmental, Social, and Governance Scores: Evidence from Latin America," Sustainability, MDPI, vol. 14(9), pages 1-15, April.
    11. El Ghoul, Sadok & Guedhami, Omrane & Kwok, Chuck C.Y. & Mishra, Dev R., 2011. "Does corporate social responsibility affect the cost of capital?," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2388-2406, September.
    12. Ait Sidhoum, Amer & Serra, Teresa, 2017. "Corporate social responsibility and dimensions of performance: An application to U.S. electric utilities," Utilities Policy, Elsevier, vol. 48(C), pages 1-11.
    13. Thomas A. Tsalis & Ioannis E. Nikolaou & Konstantinos P. Tsagarakis, 2020. "A benchmarking–scoring methodology for assessing the water risk disclosures of water utilities," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 22(7), pages 6473-6493, October.
    14. Aaron K. Chatterji & David I. Levine & Michael W. Toffel, 2009. "How Well Do Social Ratings Actually Measure Corporate Social Responsibility?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(1), pages 125-169, March.
    15. Gillan, Stuart L. & Koch, Andrew & Starks, Laura T., 2021. "Firms and social responsibility: A review of ESG and CSR research in corporate finance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    16. Breuer, Wolfgang & Müller, Torbjörn & Rosenbach, David & Salzmann, Astrid, 2018. "Corporate social responsibility, investor protection, and cost of equity: A cross-country comparison," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 34-55.
    17. Simona Fiandrino & Alberto Tonelli & Alain Devalle, 2022. "Sustainability materiality research: a systematic literature review of methods, theories and academic themes," Qualitative Research in Accounting & Management, Emerald Group Publishing Limited, vol. 19(5), pages 665-695, September.
    18. Elizabeth Demers & Jurian Hendrikse & Philip Joos & Baruch Lev, 2021. "ESG did not immunize stocks during the COVID‐19 crisis, but investments in intangible assets did," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 433-462, March.
    19. Hüseyin Temiz, 2022. "Environmental performance and cost of finance: evidence from emerging markets," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 13(5), pages 1229-1250, June.
    20. Mark P. Sharfman & Chitru S. Fernando, 2008. "Environmental risk management and the cost of capital," Strategic Management Journal, Wiley Blackwell, vol. 29(6), pages 569-592, June.
    21. Silvia Cantele & Thomas A. Tsalis & Ioannis E. Nikolaou, 2018. "A New Framework for Assessing the Sustainability Reporting Disclosure of Water Utilities," Sustainability, MDPI, vol. 10(2), pages 1-12, February.
    22. Luluk Widyawati, 2020. "A systematic literature review of socially responsible investment and environmental social governance metrics," Business Strategy and the Environment, Wiley Blackwell, vol. 29(2), pages 619-637, February.
    23. Ioannis Oikonomou & Chris Brooks & Stephen Pavelin, 2012. "The Impact of Corporate Social Performance on Financial Risk and Utility: A Longitudinal Analysis," Financial Management, Financial Management Association International, vol. 41(2), pages 483-515, June.
    24. Annesi, Nora & Battaglia, Massimo & Frey, Marco, 2021. "Stakeholder engagement by an Italian water utility company: Insight from participant observation of dialogism," Utilities Policy, Elsevier, vol. 72(C).
    25. Davide Giacomini & Diego Paredi & Alessandro Sancino, 2022. "Stakeholder interactions as sources for organisational learning: insights from the water sector," Meditari Accountancy Research, Emerald Group Publishing Limited, vol. 30(7), pages 1-25, February.
    26. Stefan Schaltegger & Florian Lüdeke-Freund & Erik G. Hansen, 2012. "Business cases for sustainability: the role of business model innovation for corporate sustainability," International Journal of Innovation and Sustainable Development, Inderscience Enterprises Ltd, vol. 6(2), pages 95-119.
    27. Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
    28. repec:eme:marpps:10222529200800012 is not listed on IDEAS
    29. Ping-Sheng Koh & Cuili Qian & Heli Wang, 2014. "Firm litigation risk and the insurance value of corporate social performance," Strategic Management Journal, Wiley Blackwell, vol. 35(10), pages 1464-1482, October.
    30. Lu, Hao & Oh, Won-Yong & Kleffner, Anne & Chang, Young Kyun, 2021. "How do investors value corporate social responsibility? Market valuation and the firm specific contexts," Journal of Business Research, Elsevier, vol. 125(C), pages 14-25.
    31. Chiara Mio, 2010. "Corporate social reporting in Italian multi‐utility companies: an empirical analysis," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 17(5), pages 247-271, September.
    32. Ilze Zumente & Nataļja Lāce, 2021. "ESG Rating—Necessity for the Investor or the Company?," Sustainability, MDPI, vol. 13(16), pages 1-14, August.
    33. Ligorio, Lorenzo & Caputo, Fabio & Venturelli, Andrea, 2022. "Sustainability disclosure and reporting by municipally owned water utilities," Utilities Policy, Elsevier, vol. 77(C).
    34. Dan Daugaard & Ashley Ding, 2022. "Global Drivers for ESG Performance: The Body of Knowledge," Sustainability, MDPI, vol. 14(4), pages 1-21, February.
    35. Elena Escrig-Olmedo & María Ángeles Fernández-Izquierdo & Idoya Ferrero-Ferrero & Juana María Rivera-Lirio & María Jesús Muñoz-Torres, 2019. "Rating the Raters: Evaluating how ESG Rating Agencies Integrate Sustainability Principles," Sustainability, MDPI, vol. 11(3), pages 1-16, February.
    36. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    37. Ng, Anthony C. & Rezaee, Zabihollah, 2015. "Business sustainability performance and cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 128-149.
    38. Denis Cormier & Irene M. Gordon, 2001. "An examination of social and environmental reporting strategies," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 14(5), pages 587-617, December.
    39. Stefan Schaltegger & Roger Burritt, 2018. "Business Cases and Corporate Engagement with Sustainability: Differentiating Ethical Motivations," Journal of Business Ethics, Springer, vol. 147(2), pages 241-259, January.
    40. Alfonso Del Giudice & Silvia Rigamonti, 2020. "Does Audit Improve the Quality of ESG Scores? Evidence from Corporate Misconduct," Sustainability, MDPI, vol. 12(14), pages 1-16, July.
    41. Valenza, Giuseppe & Damiano, Rodolfo, 2023. "Sustainability reporting and public value: Evidence from port authorities," Utilities Policy, Elsevier, vol. 81(C).
    42. Paul C. Godfrey & Craig B. Merrill & Jared M. Hansen, 2009. "The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis," Strategic Management Journal, Wiley Blackwell, vol. 30(4), pages 425-445, April.
    43. repec:eme:aaaj00:eum0000000006264 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gabriella D’Amore & Maria Testa & Luigi Lepore, 2023. "How Is the Utilities Sector Contributing to Building a Sustainable Future? A Systematic Literature Review of Sustainability Practices," Sustainability, MDPI, vol. 16(1), pages 1-19, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gillan, Stuart L. & Koch, Andrew & Starks, Laura T., 2021. "Firms and social responsibility: A review of ESG and CSR research in corporate finance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    2. Danilo Drago & Concetta Carnevale, 2020. "Do CSR Ratings Affect Loan Spreads? Evidence from European Syndicated Loan Market," Sustainability, MDPI, vol. 12(18), pages 1-30, September.
    3. Breuer, Wolfgang & Müller, Torbjörn & Rosenbach, David & Salzmann, Astrid, 2018. "Corporate social responsibility, investor protection, and cost of equity: A cross-country comparison," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 34-55.
    4. Bai, Min & Ho, Ly, 2022. "Corporate social performance and firm debt levels: Impacts of the covid-19 pandemic and institutional environments," Finance Research Letters, Elsevier, vol. 47(PB).
    5. Hoje Jo & Haejung Na, 2012. "Does CSR Reduce Firm Risk? Evidence from Controversial Industry Sectors," Journal of Business Ethics, Springer, vol. 110(4), pages 441-456, November.
    6. Huang, Chenchen & Luo, Di & Mukherjee, Soumyatanu & Mishra, Tapas, 2022. "To Acquire or to Ally? Managing Partners’ Environmental Risk in International Expansion," MPRA Paper 117591, University Library of Munich, Germany, revised 07 Jan 2023.
    7. Champagne, Claudia & Coggins, Frank & Sodjahin, Amos, 2022. "Can extra-financial ratings serve as an indicator of ESG risk?," Global Finance Journal, Elsevier, vol. 54(C).
    8. Fafaliou, Irene & Giaka, Maria & Konstantios, Dimitrios & Polemis, Michael, 2022. "Firms’ ESG reputational risk and market longevity: A firm-level analysis for the United States," Journal of Business Research, Elsevier, vol. 149(C), pages 161-177.
    9. Shih, Yi-Cheng & Wang, Yao & Zhong, Rui & Ma, Yi-Ming, 2021. "Corporate environmental responsibility and default risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    10. Frank J. Fabozzi & Peck Wah Ng & Diana E. Tunaru, 2021. "The impact of corporate social responsibility on corporate financial performance and credit ratings in Japan," Journal of Asset Management, Palgrave Macmillan, vol. 22(2), pages 79-95, March.
    11. Ramírez-Orellana, Alicia & Martínez-Victoria, MCarmen & García-Amate, Antonio & Rojo-Ramírez, Alfonso A., 2023. "Is the corporate financial strategy in the oil and gas sector affected by ESG dimensions?," Resources Policy, Elsevier, vol. 81(C).
    12. Becchetti, Leonardo & Cucinelli, Doriana & Ielasi, Federica & Rossolini, Monica, 2023. "Corporate social irresponsibility: The relationship between ESG misconduct and the cost of equity," International Review of Financial Analysis, Elsevier, vol. 89(C).
    13. Tsang, Albert & Frost, Tracie & Cao, Huijuan, 2023. "Environmental, Social, and Governance (ESG) disclosure: A literature review," The British Accounting Review, Elsevier, vol. 55(1).
    14. Giovanni Catello Landi & Francesca Iandolo & Antonio Renzi & Andrea Rey, 2022. "Embedding sustainability in risk management: The impact of environmental, social, and governance ratings on corporate financial risk," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(4), pages 1096-1107, July.
    15. Caiazza, Stefano & Galloppo, Giuseppe & La Rosa, Giovanni, 2023. "The mitigation role of corporate sustainability: Evidence from the CDS spread," Finance Research Letters, Elsevier, vol. 52(C).
    16. Huang, Wei & Luo, Yan & Wang, Xiaohuan & Xiao, Lifu, 2022. "Controlling shareholder pledging and corporate ESG behavior," Research in International Business and Finance, Elsevier, vol. 61(C).
    17. Hassan, M. Kabir & Chiaramonte, Laura & Dreassi, Alberto & Paltrinieri, Andrea & Piserà, Stefano, 2023. "Equity costs and risks in emerging markets: Are ESG and Sharia principles complementary?," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    18. Xiangjun Hong & Xian Lin & Laitan Fang & Yuchen Gao & Ruipeng Li, 2022. "Application of Machine Learning Models for Predictions on Cross-Border Merger and Acquisition Decisions with ESG Characteristics from an Ecosystem and Sustainable Development Perspective," Sustainability, MDPI, vol. 14(5), pages 1-27, February.
    19. Sadok El Ghoul & Omrane Guedhami & Hakkon Kim & Kwangwoo Park, 2018. "Corporate Environmental Responsibility and the Cost of Capital: International Evidence," Journal of Business Ethics, Springer, vol. 149(2), pages 335-361, May.
    20. Jongwon Park & Sunyoung Kim & Albert Tsang, 2023. "CEO Personal Hedging and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 182(1), pages 199-221, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:juipol:v:82:y:2023:i:c:s095717872300067x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.sciencedirect.com/journal/utilities-policy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.