IDEAS home Printed from https://ideas.repec.org/a/eee/tefoso/v195y2023ics004016252300464x.html
   My bibliography  Save this article

Understanding ESG scores and firm performance: Are high-performing firms E, S, and G-balanced?

Author

Listed:
  • Lee, Michael T.
  • Raschke, Robyn L.
  • Krishen, Anjala S.

Abstract

What is the relationship among independent third-party rating agency weighted ESG scores, balanced weighted ESG scores, and firm performance? Research studies show that the relationship between rating agency ESG scores and firm performance is mixed and likely inconclusive. This is because rating agencies have the discretion to choose from among many comparable E, S, and G measures that are not the same in scope and measurement, leading to variations in component weights that can cause material differences in reported weighted average ESG scores. To overcome this variation, we propose an extension to organisational ambidexterity theory that incorporates ESG activities and use balanced E, S, and G weights to calculate ESG scores. Using a combination of quantitative and qualitative methodologies on a sample 562 U.S. firms in the Forbes 2000 ranking, we find balanced weighted ESG scores are associated with firm performance, and the greater the positive percent difference between rating agency ESG scores and balanced ESG scores the lower the firm performance. Rating agency weighting methodologies may unknowingly be encouraging firm greenwashing.

Suggested Citation

  • Lee, Michael T. & Raschke, Robyn L. & Krishen, Anjala S., 2023. "Understanding ESG scores and firm performance: Are high-performing firms E, S, and G-balanced?," Technological Forecasting and Social Change, Elsevier, vol. 195(C).
    • Handle: RePEc:eee:tefoso:v:195:y:2023:i:c:s004016252300464x
    DOI: 10.1016/j.techfore.2023.122779
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S004016252300464X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.techfore.2023.122779?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. Lee, Michael T. & Raschke, Robyn L. & Krishen, Anjala S., 2022. "Signaling green! firm ESG signals in an interconnected environment that promote brand valuation," Journal of Business Research, Elsevier, vol. 138(C), pages 1-11.
    2. Justin J. P. Jansen & Frans A. J. Van Den Bosch & Henk W. Volberda, 2006. "Exploratory Innovation, Exploitative Innovation, and Performance: Effects of Organizational Antecedents and Environmental Moderators," Management Science, INFORMS, vol. 52(11), pages 1661-1674, November.
    3. Samuel Drempetic & Christian Klein & Bernhard Zwergel, 2020. "The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review," Journal of Business Ethics, Springer, vol. 167(2), pages 333-360, November.
    4. Rodrigo, L & Pérez-Arechaederra, D & Palacios, M & Romero, J, 2022. "Organisational commitment in the digital social innovation context: does qualitative comparative analysis add information to linear regression?," Technological Forecasting and Social Change, Elsevier, vol. 179(C).
    5. Ho, Joanne & Plewa, Carolin & Lu, Vinh Nhat, 2016. "Examining strategic orientation complementarity using multiple regression analysis and fuzzy set QCA," Journal of Business Research, Elsevier, vol. 69(6), pages 2199-2205.
    6. Bryan W Husted & David B Allen, 2006. "Corporate social responsibility in the multinational enterprise: strategic and institutional approaches," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 37(6), pages 838-849, November.
    7. Qing Cao & Eric Gedajlovic & Hongping Zhang, 2009. "Unpacking Organizational Ambidexterity: Dimensions, Contingencies, and Synergistic Effects," Organization Science, INFORMS, vol. 20(4), pages 781-796, August.
    8. Skarmeas, Dionysis & Leonidou, Constantinos N. & Saridakis, Charalampos, 2014. "Examining the role of CSR skepticism using fuzzy-set qualitative comparative analysis," Journal of Business Research, Elsevier, vol. 67(9), pages 1796-1805.
    9. Juha Uotila & Markku Maula & Thomas Keil & Shaker A. Zahra, 2009. "Exploration, exploitation, and financial performance: analysis of S&P 500 corporations," Strategic Management Journal, Wiley Blackwell, vol. 30(2), pages 221-231, February.
    10. Lee, Michael T. & Raschke, Robyn L., 2020. "Innovative sustainability and stakeholders’ shared understanding: The secret sauce to “performance with a purpose”," Journal of Business Research, Elsevier, vol. 108(C), pages 20-28.
    11. Kumar, Satish & Sahoo, Saumyaranjan & Lim, Weng Marc & Kraus, Sascha & Bamel, Umesh, 2022. "Fuzzy-set qualitative comparative analysis (fsQCA) in business and management research: A contemporary overview," Technological Forecasting and Social Change, Elsevier, vol. 178(C).
    12. James G. March, 1991. "Exploration and Exploitation in Organizational Learning," Organization Science, INFORMS, vol. 2(1), pages 71-87, February.
    13. Lee, Michael T. & Theokary, Carol, 2021. "The superstar social media influencer: Exploiting linguistic style and emotional contagion over content?," Journal of Business Research, Elsevier, vol. 132(C), pages 860-871.
    14. Gunnar Friede & Timo Busch & Alexander Bassen, 2015. "ESG and financial performance: aggregated evidence from more than 2000 empirical studies," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 5(4), pages 210-233, October.
    15. Zi-Lin He & Poh-Kam Wong, 2004. "Exploration vs. Exploitation: An Empirical Test of the Ambidexterity Hypothesis," Organization Science, INFORMS, vol. 15(4), pages 481-494, August.
    16. Paul S. Adler & Barbara Goldoftas & David I. Levine, 1999. "Flexibility Versus Efficiency? A Case Study of Model Changeovers in the Toyota Production System," Organization Science, INFORMS, vol. 10(1), pages 43-68, February.
    17. O'Reilly, Charles A., III & Tushman, Michael L., 2013. "Organizational Ambidexterity: Past, Present and Future," Research Papers 2130, Stanford University, Graduate School of Business.
    18. Stefan Schaltegger & Jacob Hörisch, 2017. "In Search of the Dominant Rationale in Sustainability Management: Legitimacy- or Profit-Seeking?," Journal of Business Ethics, Springer, vol. 145(2), pages 259-276, October.
    19. Tao, Hu & Zhuang, Shan & Xue, Rui & Cao, Wei & Tian, Jinfang & Shan, Yuli, 2022. "Environmental Finance: An Interdisciplinary Review," Technological Forecasting and Social Change, Elsevier, vol. 179(C).
    20. Uriel Stettner & Dovev Lavie, 2014. "Ambidexterity under scrutiny: Exploration and exploitation via internal organization, alliances, and acquisitions," Strategic Management Journal, Wiley Blackwell, vol. 35(13), pages 1903-1929, December.
    21. 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.
    Full references (including those not matched with items on IDEAS)

    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. Martin Owusu Ansah & Nicholas Addai-Boamah & Abeeku Bylon Bamfo & Lucy Afeafa Ry-Kottoh, 2022. "Organizational ambidexterity and financial performance in the banking industry: evidence from a developing economy," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 27(3), pages 250-263, September.
    2. Úbeda-García, Mercedes & Claver-Cortés, Enrique & Marco-Lajara, Bartolomé & Zaragoza-Sáez, Patrocinio, 2020. "Toward a dynamic construction of organizational ambidexterity: Exploring the synergies between structural differentiation, organizational context, and interorganizational relations," Journal of Business Research, Elsevier, vol. 112(C), pages 363-372.
    3. Mavroudi, Eva & Kesidou, Effie & Pandza, Krsto, 2023. "Effects of ambidextrous and specialized R&D strategies on firm performance: The contingent role of industry orientation," Journal of Business Research, Elsevier, vol. 154(C).
    4. Marina Estrada-Cruz & Noelia Rodriguez-Hernández & Antonio J. Verdú-Jover & Jose Maria Gómez-Gras, 2022. "The effect of competitive intensity on the relationship between strategic entrepreneurship and organizational results," International Entrepreneurship and Management Journal, Springer, vol. 18(1), pages 1-24, March.
    5. Marina Estrada-Cruz & Noelia Rodriguez-Hernández & Antonio J. Verdú-Jover & Jose Maria Gómez-Gras, 0. "The effect of competitive intensity on the relationship between strategic entrepreneurship and organizational results," International Entrepreneurship and Management Journal, Springer, vol. 0, pages 1-24.
    6. Lee, Michael T. & Raschke, Robyn L., 2020. "Innovative sustainability and stakeholders’ shared understanding: The secret sauce to “performance with a purpose”," Journal of Business Research, Elsevier, vol. 108(C), pages 20-28.
    7. Olga Kassotaki, 2022. "Review of Organizational Ambidexterity Research," SAGE Open, , vol. 12(1), pages 21582440221, March.
    8. Partanen, Jukka & Kohtamäki, Marko & Patel, Pankaj C. & Parida, Vinit, 2020. "Supply chain ambidexterity and manufacturing SME performance: The moderating roles of network capability and strategic information flow," International Journal of Production Economics, Elsevier, vol. 221(C).
    9. Vinit Parida & Tom Lahti & Joakim Wincent, 2016. "Exploration and exploitation and firm performance variability: a study of ambidexterity in entrepreneurial firms," International Entrepreneurship and Management Journal, Springer, vol. 12(4), pages 1147-1164, December.
    10. Andreea N. Kiss & Dirk Libaers & Pamela S. Barr & Tang Wang & Miles A. Zachary, 2020. "CEO cognitive flexibility, information search, and organizational ambidexterity," Strategic Management Journal, Wiley Blackwell, vol. 41(12), pages 2200-2233, December.
    11. Zhang, Zhu & Lyles, Marjorie A. & Wu, Changqi, 2020. "The stock market performance of exploration-oriented and exploitation-oriented cross-border mergers and acquisitions: Evidence from emerging market enterprises," International Business Review, Elsevier, vol. 29(4).
    12. Christine Chou & Steven O. Kimbrough, 2016. "An agent-based model of organizational ambidexterity decisions and strategies in new product development," Computational and Mathematical Organization Theory, Springer, vol. 22(1), pages 4-46, March.
    13. Yasser Alizadeh & Antonie J. Jetter, 2019. "Pathways for Balancing Exploration and Exploitation in Innovations: A Review and Expansion of Ambidexterity Theory," International Journal of Innovation and Technology Management (IJITM), World Scientific Publishing Co. Pte. Ltd., vol. 16(05), pages 1-33, August.
    14. Lee, Michael T. & Raschke, Robyn L., 2023. "Stakeholder legitimacy in firm greening and financial performance: What about greenwashing temptations?☆," Journal of Business Research, Elsevier, vol. 155(PB).
    15. Shuwaikh, Fatima & Brintte, Souad & Khemiri, Sabrina, 2022. "The impact of dynamic ambidexterity on the performance of organizations: Evidence from corporate venture capital investing in North America," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 991-1009.
    16. Youngtak M. Kim & John R. Busenbark & Seung-Hwan Jeong & Son K. Lam, 2022. "The performance impact of marketing dualities: a response surface approach to resolving empirical challenges," Journal of the Academy of Marketing Science, Springer, vol. 50(5), pages 915-940, September.
    17. YoungKi Park & Paul A. Pavlou & Nilesh Saraf, 2020. "Configurations for Achieving Organizational Ambidexterity with Digitization," Information Systems Research, INFORMS, vol. 31(4), pages 1376-1397, December.
    18. Matthews, Lane & Heyden, Mariano L.M. & Zhou, Dan, 2022. "Paradoxical transparency? Capital market responses to exploration and exploitation disclosure," Research Policy, Elsevier, vol. 51(1).
    19. Young Rok Choi & Seongwook Ha & Youngbae Kim, 2022. "Innovation ambidexterity, resource configuration and firm growth: is smallness a liability or an asset?," Small Business Economics, Springer, vol. 58(4), pages 2183-2209, April.
    20. Wang, Pengfei & Van De Vrande, Vareska & Jansen, Justin J.P., 2017. "Balancing exploration and exploitation in inventions: Quality of inventions and team composition," Research Policy, Elsevier, vol. 46(10), pages 1836-1850.

    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:tefoso:v:195:y:2023:i:c:s004016252300464x. 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: http://www.sciencedirect.com/science/journal/00401625 .

    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.