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Understanding the Impact of ESG Practices in Corporate Finance

Author

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  • Sang Kim

    (Economics Department, Western University, London, ON N6A 3K7, Canada)

  • Zhichuan (Frank) Li

    (Ivey Business School, Western University, London, ON N6A 3K7, Canada)

Abstract

This study examines the relationship between environmental, social, and governance (ESG) factors and corporate financial performance. Specifically, we study various individual ESG categories, both ESG strengths and concerns, and aggregate ESG factor and their impact on corporate financial performance including profitability and financial risk. We find a positive effect of ESG factors on corporate profitability, and the effect is more pronounced for larger firms. Among different ESG categories, corporate governance has the most significant impact, particularly for firms with weak governance. We also find that ESG variables generally have a positive influence on credit rating. In particular, the social factor has the most significant impact on credit rating, while environmental score surprisingly has a negative effect. Overall, this research provides a rationale for ESG integration in the context of investment management and portfolio construction to maximize value and minimize risk.

Suggested Citation

  • Sang Kim & Zhichuan (Frank) Li, 2021. "Understanding the Impact of ESG Practices in Corporate Finance," Sustainability, MDPI, vol. 13(7), pages 1-15, March.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:7:p:3746-:d:525282
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    References listed on IDEAS

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    Cited by:

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    7. Guochao Wan & Ahmad Yahya Dawod, 2022. "ESG Rating and Northbound Capital Shareholding Preferences: Evidence from China," Sustainability, MDPI, vol. 14(15), pages 1-19, July.
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    10. Cojoianu, Theodor F. & Hoepner, Andreas G.F. & Lin, Yanan, 2022. "Private market impact investing firms: Ownership structure and investment style," International Review of Financial Analysis, Elsevier, vol. 84(C).
    11. Jiajia Liu & Zhenzhen Ge & Yahan Wang, 2024. "Role of environmental, social, and governance rating data in predicting financial risk and risk management," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(1), pages 260-273, January.
    12. Debora Kobayashi Mendes de Oliveira & Joshua Onome Imoniana & Valmor Slomski & Luciane Reginato & Vilma Geni Slomski, 2022. "How do Internal Control Environments Connect to Sustainable Development to Curb Fraud in Brazil?," Sustainability, MDPI, vol. 14(9), pages 1-21, May.
    13. Olesya P. Kazachenok & Galina V. Stankevich & Natalia N. Chubaeva & Yuliya G. Tyurina, 2023. "Economic and legal approaches to the humanization of FinTech in the economy of artificial intelligence through the integration of blockchain into ESG Finance," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-9, December.
    14. Radu-Alexandru Șerban & Diana Marieta Mihaiu & Mihai Țichindelean, 2022. "Environment, Social, and Governance Score and Value Added Impacts on Market Capitalization: A Sectoral-Based Approach," Sustainability, MDPI, vol. 14(4), pages 1-25, February.
    15. Mouncif Harabida & Bouchra Radi & Jean-Pierre Gueyie, 2022. "Socially Responsible Investment During the COVID-19 Pandemic: Evidence from Morocco, Egypt and Turkey," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(4), pages 1-65, April.
    16. Guangfan Sun & Changwei Guo & Junchen Ye & Chaoran Ji & Nuo Xu & Hanqi Li, 2022. "How ESG Contribute to the High-Quality Development of State-Owned Enterprise in China: A Multi-Stage fsQCA Method," Sustainability, MDPI, vol. 14(23), pages 1-18, November.
    17. Wen‐Min Lu & Qian Long Kweh & Irene Wei Kiong Ting & Chunya Ren, 2023. "How does stakeholder engagement through environmental, social, and governance affect eco‐efficiency and profitability efficiency? Zooming into Apple Inc.'s counterparts," Business Strategy and the Environment, Wiley Blackwell, vol. 32(1), pages 587-601, January.
    18. Chunya Ren & Irene Wei Kiong Ting & Wen‐Min Lu & Qian Long Kweh, 2022. "Nonlinear effects of ESG on energy‐adjusted firm efficiency: Evidence from the stakeholder engagement of apple incorporated," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1231-1246, September.
    19. Xingshuai Wang & Ehsan Elahi & Zainab Khalid, 2022. "Do Green Finance Policies Foster Environmental, Social, and Governance Performance of Corporate?," IJERPH, MDPI, vol. 19(22), pages 1-15, November.
    20. Michael J. Lenox & Michael W. Toffel, 2022. "Diffusing Environmental Management Practices within the Firm: The Role of Information Provision," Sustainability, MDPI, vol. 14(10), pages 1-18, May.
    21. Lipeng Sun & Nur Ashikin Mohd Saat, 2023. "How Does Intelligent Manufacturing Affect the ESG Performance of Manufacturing Firms? Evidence from China," Sustainability, MDPI, vol. 15(4), pages 1-20, February.

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