ESG Performance and Disclosure A Cross-Country Analysis
ESG Performance and Disclosure A Cross-Country Analysis
For helpful comments, we are grateful to conference and seminar participants at the
Conference on Corporate Law and Governance at Bocconi University (March 2019),
Conference on Stewardship Codes at the European University of Rome (jointly organized
with Bocconi University and Consob) (June 2019), ECGI and House of Finance at Goethe
University Frankfurt (September 2019), Conference on Alternative Investments in the Tech
Era at the National University of Singapore (September 2019), and 3CL Travers Smith
Seminar Series at Cambridge University (November 2019). We would also like to thank
Giulia Carnevale for her excellent research assistance.
Abstract:
We use a unique dataset to examine the link between ESG disclosure and quality through a
strong relationship between the extent of ESG disclosure and the quality of a firm’s
disclosure. Furthermore, we find that ESG is correlated with decreased risk. This result
suggests that firms with good ESG scores are simply disclosing more information. Finally,
we show that ESG scores have little or no impact on risk-adjusted financial performance.
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I. Introduction
Corporate sustainability represents a growing concern for both institutional investors and
regulators because of the significance of environmental, social and governance (ESG) factors
in investment decisions and future portfolio performance. This coincides with major changes
in the pattern of investments around the world. For example, the growth rate of sustainable
investments under management in the United States increased from USD 8.7 trillion to USD
12 trillion between 2016 and 2018.1 Similarly, the impact of the growth of US and European-
oriented ESG funds increased 44% between 2014 and 2018.2 Despite the recent slowdown of
investment flows in 2018, ESG-oriented funds are expected to continue growing their assets
under management and also to allocate their flows to different types of investment options.3
In response to the rapid increase in ESG investments, a policy debate has emerged about
recently, various national and industry bodies have considered approaches ranging from
investors and companies to disclose ESG-related data. On the one hand, various voluntary
1
US SIF, “Report on US Sustainable, Responsible and Impact Investing Trends 2018” (2018), available at
https://www.ussif.org/files/Trends/Trends%202018%20executive%20summary%20FINAL.pdf.
2
Morningstar, “The Evolving Approaches to Regulating ESG Investing” (2019)
https://www.morningstar.com/lp/esg-regulation.
3
FT, “ESG Money Market Funds Grow 15% in First Half of 2019” (14 July 2019), available at
https://www.ft.com/content/2c7b8438-a5a6-11e9-984c-fac8325aaa04.
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Europe. In France, the new reporting measures are applied to institutional investors to
measure the extent to which ESG issues are integrated in their investment and voting
decisions. The main aim of these voluntary measures is to enhance awareness of ESG issues
and elaborate best practices for institutional investors. On the other hand, recent studies have
limited or not directly comparable across jurisdictions.4 In this context, the UK’s Financial
Reporting Council has revised its Stewardship Code to integrate ESG issues—including
monitoring and voting activities, while ensuring that their investment decisions are aligned
with client needs.5 To achieve these goals, the ESG factors have become material for
investors.6 As such, this may reflect the new Code’s attempt to improve the impacts of
and social externalities, and second, by possibly mitigating systemic risks by giving
institutional investors better information regarding firm ESG factors and encouraging more
active corporate governance engagement with the environmental and social aspects of their
investments.7
4
OECD, “Investment Governance and the Integration of Environmental, Social and Governance Factors”
(2017), available at https://www.oecd.org/finance/Investment-Governance-Integration-ESG-Factors.pdf.
5
UK Financial Reporting Council (FRC), “UK Stewardship Code of 2020” (24 October 2019), available at
https://www.frc.org.uk/investors/uk-stewardship-code. The revised UK Stewardship Code allows the FCA to
investigate concerns that asset managers are ignoring trustee ECG policies and voting instructions. See, eg, FT,
“Pension Trustees Test UK’s Revamped Stewardship Code” (4 November 2019) available at
https://www.ft.com/content/93007a0f-62d1-4369-be76-4d9262be687c.
6
See, e.g., Mozaffar Khan, George Serafeim, Aaron Yoon, “Corporate Sustainability: First Evidence on
Materality” (2016) 91 The Accounting Review 1697.
7
IPE, “FRC Reworks Stewardship Definition in More Demanding Code” (24 October 2019), available at
https://www.ipe.com/countries/uk/frc-reworks-stewardship-definition-in-more-demanding-
code/www.ipe.com/countries/uk/frc-reworks-stewardship-definition-in-more-demanding-
code/10034074.fullarticle.
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But do these sustainability investments have value implications for future financial
performance? Two opposing views exist with respect to the relationship between ESG
investments and financial performance. One stream of literature has shown a weak or
negative correlation with the financial performance of ESG funds.8 This view holds that one
reason for holding inefficient investments could be the investors’ utility of holding high-
quality ESG investments. Interestingly, some recent studies have found evidence of a positive
effect of ESG filters on returns.9 However, other research shows that institutional investors
can use increasing ESG scores to manage portfolio risk, particularly in more volatile capital
To address these conflicting views, we analyze the link between ESG disclosure and the ESG
disclosure requirements and stewardship codes. Our analysis considers the potential
relationship between ESG and firms’ financial performance across these countries.
Our results show a strong relationship between the extent of ESG disclosure and the quality
of a firm’s disclosure. The results provide statistically significant evidence that ESG is
correlated with decreased risk. However, most of this relationship can be attributed to the fact
that firms are simply disclosing more information, while the actual quality of the firms’ ESG
8
See, Arno Riedl and Paul Smeets, “Why Do Investors Hold Socially Responsible Mutual Funds?” (2017) J Fin
2505. See, also, Luc Renneboog, Jenke ter Horst, Chendi Zhang, “The Price of Ethics and Stakeholder
Governance: The Performance of Socially Responsible Mutual Funds” (2008) J Corp Fin 302.
9
Benjamin R. Auer and Frank Scuhmacher, “Do Socially (Ir)responsible Investments Pay?: New Evidence from
International ESG Data” (2016) Q J Econ Fin 51. See, also, Tim Verheyden, Robert G. Eccles, Andreas Feiner,
“ESG for All? The Impact of ESG Screening on Risk, Return, and Diversification” (2016) 28 J App Corp Fin,
available at http://doi.org/10.1111/jacf.12174.
10
Christina E. Bannier, Yannik Bofinger, Bjorn Rock, “Doing Safe by Doing Good: ESG Investing and
Corporate Social Responsibility in the U.S. and Europe,” available at https://www.uni-
giessen.de/fbz/fb02/fb/professuren/bwl/bannier/team/190424ESGPaper.pdf. See, also, Dan Hanson, Tom Lyons,
Jennifer Bender, Bruno Bertocci, Bobby Lamy, “Analysts Roundtable on Integrating ESG into Investment
Decision-Making” (2017) J App Corp Fin, available at http://doi.org.10.1111/jacf.12232.
Page 5 of 45
factors are of less importance. Furthermore, there appears to be little to no impact on risk-
adjusted financial performance due to ESG factors. Overall, our results can be taken as an
indication that companies with higher ESG disclose more data; they also provide further
The remainder of the paper proceeds as follows. Section II reviews the relevant literature on
ESG disclosure requirements and investment performance. Section III discusses the
methodology and data. Section IV examines the relationship between ESG disclosure and a
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II. Background and Literature Review
With the increased interest of institutional investors in integrating ESG factors into their asset
allocations, asset managers must consider how mandatory ESG disclosure requirements for
companies or ESG-related stewardship codes for investors can improve overall ESG quality,
as well as what the corresponding impact on firms’ financial performance will be.
The previous literature found mixed evidence that, under certain conditions, environmental,
social, and governance criteria are individually correlated with firms’ positive financial
performance; however, the literature on ESG-focused mutual fund performance has shown
that ESG funds tend to underperform the market. Other studies have argued that ESG criteria
can be used as part of portfolio design for superior risk-adjusted returns under certain
circumstances.
This section begins with a brief overview of recent trends in ESG-related disclosure rules and
stewardship codes. This has motivated our research questions regarding the relationship
between a firm’s level of ESG data disclosure and the quality of ESG, as well as whether
ESG disclosure and quality have an impact on firms’ financial performance. We then discuss
the difficulty in measuring and comparing ESG data between firms. In the third part of this
section, we provide a review of the relevant theoretical and empirical literature on ESG
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II.A. ESG disclosure requirements and stewardship codes
stewardship codes in relation to ESG. We consider a range of such regimes from non-
mandatory disclosure with no effective stewardship code in the US, mandated disclosure
explain provision which was developed and continues to evolve through an iterative dialogue
between regulators and investors, and “transplanted” stewardship codes in Australia and
Japan.
The United Nations Principles for Responsible Investment (PRI) has spearheaded global
efforts for investors to incorporate ESG into investment decisions and actively consider the
and environmental impact, the PRI is also aimed at fostering long-term value creation and
reducing systemic market risk.11 In addition to this global, investor-led approach, various
national and advisory bodies have considered approaches ranging from incorporating ESG
into voluntary investor stewardship codes to requiring institutional investors and companies
In the United States, companies’ ESG statistics are generally deemed material and subject to
mandatory disclosure only if there is a clear financial consideration. For example, the SEC
Guidance on Climate Change Disclosure states that such data should be disclosed if they
11
See Principles for Responsible Investing (PRI), https://www.unpri.org/.
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financial condition and results of operations.”12 There have been some increased efforts to get
the SEC to adopt widespread mandatory and standardized disclosure requirements related to
ESG information.13 Many large institutional investors, academics, lawyers, and proxy
require widespread ESG disclosure by companies.15 Meanwhile, a new bill was recently
passed by the Financial Services Committee that, if passed by the House, would require
In the EU, the materiality threshold for ESG disclosures is not necessarily linked to financial
considerations, and a company should report any ESG data that are “necessary for an
expect a number of countries implemented different reporting criteria, which in some cases
have increased. For example, Italy not only implemented this EU directive (vis-á-vis D.Lgs.
254/2016) requiring ESG data disclosure as of 2017 for medium and large cap issuers (more
12
SEC “Commission Guidance Regarding Disclosure Related to Climate Change” (2010),
https://www.sec.gov/rules/interp/2010/33-9106.pdf.
13
See Jill E. Fisch, “Making Sustainability Disclosure Sustainable” (2019), Geo L J 107:923; Hans B.
Christensen, Luzi Hail, Christian Leuz, “Adoption of CSR and Sustainability Reporting Standards: Economic
Analysis and Review” (2019) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3427748.
14
SEC “Request for rulemaking on environmental, social, and governance (ESG) disclosure” (2018),
https://www.sec.gov/rules/petitions/2018/petn4-730.pdf.
15
See P Temple-West, “US Congress rejects European-style ESG reporting standards,” Financial Times (12
July 2019); and US House Committee on Financial Services, “Building a Sustainable and Competitive
Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures” (10
July 2019), https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=404000. Meanwhile, a bill,
H.R. 4329, the ESG Simplification Act of 2019, was passed by the House Financial Services Committee on 20
September 2019, but is unlikely to be passed by the U.S. House of Representatives,
https://www.lexblog.com/2019/10/13/esg-disclosure-simplification-act-passes-committee-but-will-fail/.
16
EU Directive 2014/95, of the European Parliament and of the Council of Oct. 22, 2014, Article 1, 2014 O.J.
(L 330/1) 1, 5 (EU).
Page 9 of 45
than EUR 20M in assets or EUR 40M in net sales), but also introduced criteria to distinguish
Stewardship codes are another approach designed to increase the consideration of ESG
criteria by institutional investors. There is some evidence that this can drive improved ESG
quality. Dyck et al. (2019) demonstrate that demand by institutional investors for high-quality
ESG investments is correlated with increased ESG performance of firms whose equities are
To cite one example, a 2016 French law requires institutional investors to report how they
consider the environmental and social governance issues related to their portfolio companies.
Article 173-VI of the French “Energy Transition for Green Growth” law, dated January 2016,
requires investors to provide a general description of their ESG policies; to describe how they
analyze ESG data; and to explain how such measures are incorporated into their investment
Short of the explicit legal requirement of the French law, the UK stewardship code has a
comply-or-explain provision that aims to pressure investors to voluntarily disclose how they
consider the ESG aspects of their investments.20 As opposed to a directly legislated approach,
17
D.Lgs. 254/2016.
18
Alexander Dyck, Karl V. Lins, Lukas Roth, Hannes F. Wagner, “Do Institutional Investors Drive Corporate
Social Responsibility? International Evidence” (2019) J Fin Econ 131:693.
19
See Principles for Responsible Investing (PRI), “French Energy Transition Law: Global investor briefing on
Article 173” (22 April 2016), https://www.unpri.org/policy-and-regulation/french-energy-transition-law-global-
investor-briefing-on-article-173/295.article; and Forum pour l’Investissement Responsable (FIR), “ Article 173-
VI: Understanding the French regulation on investor climate reporting,” (October 2016),
https://www.frenchsif.org/isr-esg/wp-content/uploads/Understanding_article173-French_SIF_Handbook.pdf.
20
UK FRC, “The UK Stewardship Code” (September 2012), https://www.frc.org.uk/getattachment/d67933f9-
ca38-4233-b603-3d24b2f62c5f/UK-Stewardship-Code-(September-2012).pdf.
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the UK Financial Reporting Council (FRC) in conjunction with the Financial Conduct
Authority (FCA) has developed its stewardship code through an iterative discussion and
comment process with investors, companies, and other stakeholders. The FRC has, in
October 2019, finalized a new, expanded stewardship code to include a wider definition of
ESG and to broaden the duty of institutional investors beyond their holdings in listed
companies to include their holdings in private equity, venture capital, and other alternative
investments.21
Australia has ostensibly developed its stewardship code through an iterative dialogue
between regulatory bodies and investors. While the process echoes the UK approach, the
final product is rather like a transplant of the UK stewardship code - voluntary in nature with
code almost identical to what the UK has recently done.23 Japan has followed a similar
approach of “transplanting” the UK’s iterative, voluntary stewardship code with a similar
companies and the large ownership stake of Japanese banks means that there is a significant
number of investors not covered by the UK-style stewardship code in Japan; this limits the
21
UK FRC, “UK Stewardship Code of 2020” (24 October 2019), available at
https://www.frc.org.uk/investors/uk-stewardship-code
22
Australian Council of Superannuation Investors, (17 May 2018), “Australian Asset Owner Stewardship code,”
https://www.acsi.org.au/publications-1/australian-asset-owner-stewarship-code.html
23
Australian Council of Superannuation Investors, (8 May 2019), “ESG integration and stronger stewardship
support long-term value creation,”
https://www.acsi.org.au/images/stories/ACSIDocuments/MediaReleases/ESG-integration-and-stronger-
stewardship-support-long-term-value-creation-May-2019-FOR-IMMEDIATE-RELEASE.pdf
24
See Japan Financial Services Agency, “Finalization of Japan’s Stewardship Code (Revised version),” (May
2017) at https://www.fsa.go.jp/en/refer/councils/stewardship/20170529.html, and related materials at
https://www.fsa.go.jp/en/refer/councils/stewardship/index.html
25
See Rohei Nakagawa, “Shareholding Characteristics and Imperfect Coverage of the Stewardship Code in
Japan” (2017), Japan Forum 29:339-353.
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Aside from stewardship codes and mandated ESG disclosure requirements, there is evidence
that a more market-based approach may bring about results that improve both ESG quality
and firms’ financial performance. Barko et al. examine how ESG-mandated activist funds
that focus on improving target company ESG criteria can also improve the target companies’
financial performance.26 They find minimal but statistically significant evidence of positive
reactions to stock prices after engagement. Yet it is not clear if this is due to the investor
engaging in ESG criteria, as the effects on accounting and fundamental financial measures
are statistically insignificant. In short, it may simply be that this fund is also good at finding
firms with undervalued equities in addition to driving ESG improvement at these companies.
So how, then, can investors effectively keep a effective yardstick measure of the ECG data
This section discusses standards for calculating and reporting ESG data, as well as efforts by
There are various competing standards for how companies should disclose raw ESG data.
The Global Reporting Initiative (GRI) is an UN-affiliated organization (UNEP) that has
created “Sustainability Reporting Standards”—guidelines for reporting ESG data.27 The US-
standards modeled after and aimed to align with the Financial Accounting Standards Board’s
26
Tamas Barko, Martijn Cremers, Luc Renneboog, “Shareholder Engagement on Environmental, Social, and
Governance Performance” (2018) available at
https://ecgi.global/sites/default/files/working_papers/documents/finalbarkocremersrenneboog.pdf.
27
GRI Standards, GRI, available at http://www.globalreporting.org/standards (2011).
Page 12 of 45
(FASB) standards.28 In addition, the International Integrated Reporting Council (IIRC)
propagates an ambitious effort to codify corporate reporting across financial and non-
Amel-Zadeh and Serafeim noted that a large proportion of investors view lack of data
widespread and meaningful use by institutional investors. In part, this may require more data
and analysis to determine which ESG criteria are most impactful to long-term firm
sustainability).
Various ESG-focused rating agencies have arisen to fill the need for objective and
standardized evaluations of a firm’s ESG, allowing investors to evaluate and compare firms
along this metric. However, in some ways, this has made the problem even more difficult, as
investors are now presented with competing ESG ratings by different data vendors.
Furthermore, the literature in this area illustrates some of the difficulties that investors face
How can we make sense of the different data providers in order to get a good handle on
evaluating the different indices and disclosure standards? It is helpful to turn to Eccles and
28
SASB, Standards Overview, available at http://www.sasb.org/standards-overview.
29
International Integrated Reporting Council (IIRC), “Towards Integrated Reporting: Communicating Value in
the 21st Century (2011).
30
Amir Amel-Zadeh and George Serafeim, “Why and How Investors Use ESG Information: Evidence from a
Global Survey” (2018) Fin Anal J 74:87.
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Stroehle who dichotomize ESG data providers as values-driven or values-oriented, with only
little consolidation and convergence over time.31 Much of the early research sought to show
that there is no correlation or agreement among CSR ratings.32 For instance, competing
environmental ratings are strongly correlated.33 Another example along the same lines is
Daines et al., who find little predictive power of corporate governance ratings for
performance, but slightly better for ratings based on financial disclosures rather than on
qualitative information on corporate governance.34 Similarly, other scholars, find that ESG
ratings are often influenced by market intermediaries and that firm performance often
precedes a ratings change, thus making the rating less useful to investors since it conveys
These results may be unsurprising. Indeed, a large part of the problem in comparing ESG
ratings is the lack of a consensus as to what is good and the highly subjective assessments by
the ESG rating agencies. Furthermore, the lack of a consistent definition of positive
sustainability makes it difficult to account for sustainability and empirically compare or test
companies on these metrics.36 However, despite the difficulties and inherent subjectivity in
constructing ESG ratings, previous empirical work has found high correlations among the
major ESG rating providers despite differing emphases by the data providers.37
31
Robert G. Eccles, Judith C. Stroehle, “Exploring Social Origins in the Construction of ESG Measures” (July
12, 2018) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3212685.
32
Aaron K. Chatterji, Michael W. Toffel, “How Firms Respond to Being Rated” (2010) Strat Manage J 31:917.
33
Magali A. Delmas, Dror Etzion, Nicholas Nairn-Birch, “Triangulating Environmental Performance: What Do
Corporate Social Responsibility Ratings Really Capture” (2013) Acad Manage Perspect 27:255.
34
Robert M. Daines, Ian D. Gow, David F. Larcker, “Rating the Ratings: How Good Are Commercial
Governance Ratings” (2010) J Fin Econ 98:439.
35
Jonathan P. Doh, Shawn D. Howton, Shelly W. Howton, Donald S. Siegel, “Does the Market Respond to an
Endorsement of Social Responsibility? The Role of Institutions, Information, and Legitimacy” (2009) J Manage
36:1461.
36
Rob Gray, “Is Accounting for Sustainability Actually for Sustainability …. And How Would We Know? An
Exploration of Organizations and the Planet” (2010) Account Org Soc 35:47.
37
Florencio Lopez-de-Silanes, Joseph A. Mc Cahery, and Paul C. Pudschedl, “Institutional Investors and ESG
Preferences,” (2019) Working paper.
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II.C. ESG and Investment Performance
In this section, we now consider a theoretical paradigm of firm investments in ESG quality
and the reactions of hypothetical investors. We examine the relevant prior empirical literature
Theory tells us that if firms are investing in ESG with no financial return, this will reduce
their profitability and, consequently, the returns available to investors. The theoretical
literature on ESG postulates that ESG investments are driven by a subset of investors that
have a non-financial component of utility, and these investors are willing to accept lower
As such, companies investing in ESG criteria will reduce their returns if these expenditures
are not also correlated with positive financial returns. This may be the case, for example, if a
firm invests in energy-saving technologies to reduce its carbon footprint, and this creates a
positive externality of lowering the firm’s energy costs. As is often the case, a firm may
invest in green technologies with the purely financial motive of reducing costs, but the
investment may coincidentally improve its environmental rating. Investors in these funds see
suggests that firms with better environmental performance have higher intangible-asset
valuations, which may indicate positive technological spillover from green investments. 40
McWilliams and Siegel argue that firm returns from ESG investments follow a concave
38
Ridel and Smeets, supra note 8 at 2505.
39
Glen Dowell, Stuart Hall, Bernard Yeung, “Do Corporate Global Environmental Standards Create or Destroy
Market Value?” (2000) Management Science 46:1059.
40
Shameek Konar and Mark A. Cohen, “Does the Market Value Environmental Performance?” Rev Econ Stat
83:281.
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function, and, thus, there is an optimal point at which the benefits (in terms of the decreased
cost of capital) from investments in ESG exceed the costs of such investments. 41
Another possible link between ESG and firms’ financial performance may be due to the
to slant their portfolios towards firms with strong ESG criteria and away from weaker-scoring
ESG firms. While these investors are motivated, in part, by non-financial motives, if a
sufficiently large number of investors act in a similar fashion, there will be fewer investors
willing to hold poor-quality ESG firms. Therefore, it will be harder to diversify the risk of
holding these firms, and the investors willing to hold these firms’ securities will demand a
higher risk premium because of the reduced diversification possibilities. The subset of
investors acting this way needs to be just large enough to raise the cost of capital for firms
that do not invest in ESG in order to provide such firms with a positive financial incentive to
invest in ESG.42 In other words, investments in ESG increase firms’ value by lowering the
cost of capital.43
Many empirical studies have examined the financial performance of such funds with ESG-
related mandates, as well as the impact that screening on ESG factors has on the funds’
financial performance; these studies provide a mixed picture. To begin, Hong and
Kacperczyk show that funds that shun “sin stocks” suffer lower returns, while Trinks and
41
Abagail McWilliams and Donald S. Siegel, “Corporate Social Responsibility: A Theory of the Firm
Perspective” (2001) Acad Man Rev 26:117.
42
Robert Heikel, Alan Kraus, Josef Zechner, “The Effect of Green Investment on Corporate Behavior” (2001) J
Fin Quant Anal 36:431.
43
Patrick R. Martin and Donald V. Moser, “Managers’ Green Investment Disclosures and Investors’ Reaction”
(2016) J Account Econ 61:239.
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Scholtens find that investments in “sin stocks” generate superior returns.44 In another strand
of the literature, Martin and Moser45 argue that the financial benefits to firms investing in
being “green” and environmentally sustainable do not exceed the monetary costs, and Baker
et al.46 and Karpf and Mandel 47 find that “green bonds” have lower risk-adjusted returns.
Similarly, investors in ESG focused mutual funds earn lower risk-adjusted returns.48
Meanwhile, Borgers et al. find that green bond funds have generated superior returns over
certain periods, and Barko et al. present convincing arguments that ESG-focused activist
investors can enhance firms’ value.49 Moreover, several studies claim that firms’ superior
financial performance is correlated with positive ESG factors.50 Finally, Friede et al suggest
that more studies in the existing literature find a positive link between ESG and financial
performance.51
Despite the mixed empirical evidence, Amel-Zadeh and Serafeim find that many institutional
investors, when considering ESG factors in their investment decisions, are motivated by
44
Compare Harrison Hong and Marcin Kacperczyk, “The Price of Sin: The Effects of Social Norms on
Markets” (2009) J Fin Econ 93:15 with Peter Jan Trinks and Bert Scholtens, “The Opportunity Cost of Negative
Screening in Socially Responsible Investing” (2017) J Bus Ethics 140:193.
45
Martin and Moser, supra note 43.
46
Malcolm P. Baker, Daniel Bergstresser, George Serafeim, Jeffrey Wurgler, “Financing the Response to
Climage Change: The Pricing and Ownership of U.S. Green Bonds” (2018) available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3275327.
47
Andreas Karpf and Antoine Mandel, “Does it Pay to Be Green?” (2017) available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2923484.
48
Renneboog, et al, supra note 8; Reidl and Smeets, supra note 8.
49
Arian Borgers, Jeroen Derwall, Kees Kodjik, Jeneke ter Horst, “Do Social Factors Influence Investment
Behavior and Performance? Evidence from Mutual Fund Holdings” (2015) J Bank Fin 60:112; Barko, et al,
supra note 26.
50
James T. Hamilton, “Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory
Data” (1995) J Envtl Econ Manage 28:98; R.D. Klassen and C.P. McLaughlin, “The Impact of Environmental
Management on Firm Performance” (1996) Manage Sci 42:1199; Susmita Dasgupta, Ashoka Mody, Subhendu
Roy, David Wheeler, “Environmental Regulation and Development: A Cross-Country Empirical Analysis”
(2001) Ox Dev Stud 2:173; Jeroen Derwall, Nadja Guenster, Rob Bauer, Kees Koedijk, “The Co-Efficiency
Puzzle” Fin Anal J 15:282; Philipp Krüger, “Corporate Goodness and Shareholder Wealth” (2015) J Fin Econ
115:304.
51
Gunnar Friede, Timo Busch, Alexander Bassen, “ESG and Financial Performance: Aggregated Evidence from
More than 2000 Empirical Publications” (2015) J Sustain Fin 5:210.
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financial performance.52 Some strands of the literature recognize the need to more closely
consider the financial performance impacts of ESG factors at the portfolio level—i.e.,
These studies find that positive returns from investment depend on how willing a fund
manager is to deviate from strict ESG screening criteria. For example, Barnett and Salomon
find that the link between performance and ESG depends on how the fund manager uses ESG
and that positive returns depend on the usage of ESG criteria to weight portfolios away from
poor ESG companies rather than completely excluding them.54 The resulting connection
between ESG and financial performance is also sensitive to the time period and the modeling
method used for returns. A common finding among all of these studies is that a positive
relationship with financial performance exists only when fund managers are able/willing to
deviate from strict ESG screening criteria. For example, Sherwood and Pollard and Hanson et
al argue that ESG can be used to diversify risks in portfolio construction.55 Consistent with
that view, Barnett and Salomon, Shafer and Szado, and Hanson et al. find that investors
generally view ESG as important in managing tail risks.56 In particular, Hoepner et al. and
Bialkowski and Starks, by examining volatility surfaces such as lower partial standard
deviations of returns, find some evidence that ESG factors are negatively related to extreme
downside risks.57
52
Amel-Zadeh and Serafeim supra note 30.
53
Meir Statman and Denys Glushkov, “The Wages of Social Responsibility” (2008) Fin Anal J 65:33;
Christopher C. Geczy, Robert F. Stambaugh, David Levin, “Investing in Socially Responsible Funds” (2005)
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=416380; Verheyden, et al, supra note 9.
54
Michael L Barnett and Robert M Salomon, ”Beyond Dichotomy: The Cruvilinear Relationship between
Social Responsibility and Financial Performance’ (2006) Strat Manage J 27:1101.
55
Matthew W. Sherwood and Julia Pollard, “The Risk-Adjusted Return Potential of Integrating ESG Strategies
into Emerging Market Equities” (2017) J Sustain Fin 8:26; Hanson et al, supra note 10.
56
Barnett and Salomon, supra note 53; Michael Shafer and Edward Szado, “Environmental, Social, and
Governance Practices and Perceived Tail Risk” (2018) available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3220617; Hanson, et al, supra note 10.
57
Andreas G.F. Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T. Starks, Xiaoyan, “ESG Shareholder
Engagement and Downside Risk” (2018) available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874252; Jedrzej Bialkowski and Laura J. Starks, “SRI
Page 18 of 45
This supports our hypothesis that ESG criteria convey some information that relates to
financial performance, but not enough to be able to rely on this information as a sole
criterion. This is why strict ESG-themed mutual funds tend to underperform the market,58
despite empirical evidence of positive relationships between ESG factors and financial
We also note that the focus of enforcement may differ by jurisdiction and may lead to a de
facto standard that diverges from the reading of the regulations. This would lead to variances
in investor and company behavior among jurisdictions. Eccles et al. find some evidence that
the demand for specific ESG data differs by country, and while this may be due to cultural
differences reflecting investor preferences for companies with different ESG characteristics 60,
more on regulating companies on environmental criteria, then this would affect financial
performance more than the other criteria, and investors would be correspondingly more
Funds: Investor Demand, Exogenous Shocks and ESG Profiles” (2016) Working Papers in Economics 16/11,
University of Canterbury, Department of Economics and Finance.
58
See, eg, Renneboog, et al, supra note 8.
59
See, eg, Krüger, supra note 50.
60
Robert G. Eccles, George Serafeim, Michael P. Krzus, “Market Interest in Nonfinancial Information” (2011) J
App Corp Fin 23:113.
61
Lopez-de-Silanes, et al, supra note 37.
Page 19 of 45
III. Data and Methodology
This section describes our data collection methodology and provides a general description
We use two different variables to measure firm-level ESG criteria: Bloomberg ESG
The Bloomberg ESG disclosure score is not a quality measure and measures only the extent
0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose
Bloomberg states that “each data point is weighted in terms of importance” and “the score is
also tailored to different industry sectors. In this way, each company is only evaluated in
The Sustainalytics ESG quality ranking is “assigned to the company based on its
environmental, social and governance (ESG) total score relative to its industry peers.”63 The
ranking ranges from 0 for the poorest ESG-quality companies to 100 for the best.
62
Bloomberg Professional Services, “The Terminal” available at
https://www.bloomberg.com/professional/solution/bloomberg-terminal/.
63
Sustainalytics Ratings and Research, “Understanding Your Company’s ESG Ratings” (May 2019) available at
https://www.sustainalytics.com/sustainable-finance/2019/04/26/webinar-understanding-esg-risk-ratings-2/.
Page 20 of 45
Sustainalytics ESG ranking is meant to encompass a company's level of preparedness,
The Bloomberg ESG disclosure score measures the amount of ESG data a company reports
publicly and does not measure the quality of a company's performance on any data point.
However, we believe that part of being a high-quality ESG company is the transparency and
disclosure of ESG quality. Furthermore, given the largely voluntary nature of ESG disclosure
requirements, as well as the lack of standardization, one of our hypotheses is that there will
be a strong correlation between ESG disclosure and ESG quality. Furthermore, the nature of
the Bloomberg ESG disclosure score is somewhat more objective, as it does not assign
subjective quality judgements to the individual ESG criteria aside from the relative
importance of the data point itself and not what constitutes a “good” or “bad” quality.
While the Sustainalytics ESG quality score is widely published and used by industry (as
evidenced by its prominence on the Bloomberg Financial Terminal), the ratings contain
believe that using each of these widely available rankings will provide a good proxy for the
overall ESG quality of firms. While there is some difference of thematic emphasis (E vs S vs
G) between the ESG rankings from various providers, there is a high degree of correlation
64
For a discussion of the various conceptual approaches to constructing ESG rankings and understanding
divergences among the rankings, see Eccles and Stroehle, supra note 31.
Page 21 of 45
among them.65 We are therefore confident in our choice of using only the Sustainalytics
We choose six countries from which to construct a sample set of firms: the United States as
the world’s largest financial market with a lack of a strong stewardship code or ESG
disclosure requirements; the United Kingdom with its iterative, flexible stewardship code
institutional investors to consider and explain ESG factors related to their investments;
Switzerland as a large European financial market outside of the scope of EU regulations and
a global-leader in providing ESG products despite low ESG attention from domestic
institutional investors66; and Japan and Australia for a comparison with two highly-developed
stewardship code. While Japan is also a highly-developed financial market with strong
American and Anglo-Saxon influences, its culture of corporate governance is very different
with a high degree of cross-shareholdings and bank ownership. This means that Japan’s use
of a UK-style stewardship code regime may not be as appropriate as in the UK and Australia.
For each of these countries, we screen the 2015-2018 time period. We choose this relatively
narrow time period for three reasons: 1) to be able to ensure the widest coverage of
65
Lopez-de-Silanes, et al, supra note 37.
66
Nina Röhrbein, “The Swiss ESG paradox,” IPE magazine, June 2012, available at
https://www.ipe.com/switzerland-the-swiss-esg-paradox/45760.article
Page 22 of 45
companies with respect to ESG data points; 2) to control for relatively recent changes in
requirements related to ESG disclosure and stewardship codes; and 3) to minimize the effects
We then screen for companies with market capitalizations over 700 million USD—or the
local currency equivalent—that have both Bloomberg ESG disclosure scores and
Sustainalytics ESG quality rankings available for at least one year during the 2015-2018
Appendix Table 1 shows the variables that we use in our regression analyses, as well as the
definitions and calculation methodologies. Table 2 shows the number of companies that
survived our screening criteria by country. Table 3 provides univariate summary statistics for
Page 23 of 45
IV. Results
We begin by considering the relationship between the extent to which a company discloses
ESG data and the actual quality of the company’s ESG metrics. In the absence of stringent
to be more likely to disclose good-quality ESG data. If a company incidentally has good ESG
data as a natural result of its operations, then there is a minimal marginal cost to disclose
those data, which can make the company more attractive to the subset of investors driven by
hypothesized in the literature that, given a sufficient number of ESG-driven investors, firms
with high-quality ESG characteristics will enjoy lower costs of capital due to a greater
number of investors willing to hold securities in such firms and the resulting ease of
diversification.68 In this context, firms with high-quality ESG data have a clear financial
incentive to disclose these data in order to reap the benefits of lower costs of capital.
In order to investigate the relationship between ESG disclosure and the quality of a firm’s
ESG criteria, we regress Bloomberg firms’ ESG disclosure scores onto Sustainalytics ESG
rankings. We know that both data providers, Bloomberg and Sustainalytics, adjust their
scoring by industry and over time; therefore, we control for these effects in our regressions.
67
Martin and Moser, supra note 42 and Eugene F. Fama and Kenneth R. French, “Disagreement, tastes, and
asset prices,” (2007) Journal of Financial Economics 83, pp. 667-689.
68
See Robert Heinkel, Alan Kraus and Josef Zechner, “The Effect of Green Investment on Corporate Behavior,”
(2001) The Journal of Financial and Quantitative Analysis Vol. 36, No. 4, pp. 431-449.
Page 24 of 45
We perform this regression for the entire dataset controlling for country effects, and then
separately for each of the six countries in our dataset. Table 4 shows the results of these
regressions.
Across all regressions, we see a strong positive correlation between the quantity of ESG data
quality of a firm’s ESG criteria—as measured Sustainalytics ESG rankings. The magnitude
investors. Hence, we see that in the United States the correlation is greater than one.
One possible explanation is that, in the United States, for example, which has minimal ESG
disclosure requirements, companies will be more likely to disclose ESG data when it is of
high quality. Alternatively, or additionally, it may be that there is little demand among
institutional investors in the US for ESG data. Again, this results in the situation in which
companies with good ESG data are more likely to disclose these data in order to appeal to the
small subset of investors who demand ESG data; at the same time, however, firms with poor
or no ESG data are likely to be shunned by those investors who are motivated by ESG
considerations.
If strong stewardship codes require most, if not all, institutional investors to consider ESG
criteria, this creates widespread demand for ESG data from institutional investors, and we are
likely to see smaller correlation coefficients between disclosure and the quality of ESG.
Therefore, we contrast countries such as the US—with the coefficient of 1.3 due to a lack of a
Page 25 of 45
countries in which stewardship codes are much stronger, such as the United Kingdom and
France, where the correlation coefficients are 1.1 and 0.8, respectively. Sufficient demand for
could create a situation in which companies are forced to disclose ESG information,
regardless of its quality, and, consequently, average ESG quality improves over time as
We now consider the relationship between ESG factors and investment performance. Basic
finance theory tells us that a firm’s expenditures on activities that do not yield positive
financial returns will necessarily decrease the firm’s value. Thus, we distinguish between two
possibilities: companies invest solely to improve ESG criteria; or ESG quality is simply
correlated with other company investments and industry characteristics that yield positive
returns. If investments in ESG do not produce positive financial returns, then we would
Certain firm characteristics may be inadvertently correlated with ESG quality, or it may be
the case that unrelated firm investments generate positive ESG-enhancing externalities. For
firm’s environmental quality and its level of intangible assets. 70 This relationship between
intangible assets and environmental quality is due, in part, to firms in certain industries (e.g.,
69
See the cost of capital argument advanced by Heinkel et al, ibid and the empirical evidence on ESG and
institutional holdings from Dyck et al, supra note 18.
70
Dowell et al, supra note 39 and Konar and Cohen, supra note 40.
Page 26 of 45
internet companies) incidentally having a lower carbon footprint because of the nature of
their operations. Furthermore, firms that invest in more-efficient technologies often develop
technologies that are not only more cost-effective, but that also have smaller carbon
Government regulations that impose financial penalties on firms can create financial
incentives for firms to invest in ESG criteria. Investors would consider current and expected
future environmental regulations and resulting fines for firms with poor environmental
criteria when valuing a firm’s securities, and, therefore, poor environmental quality would be
correlated with negative financial returns71. Therefore, even when firms invest in improving
their environmental quality aside from positive profit-generating externalities, investors may
In the same vein as the relationship between a firm’s environmental quality and performance,
a firm may be able to generate positive financial returns, or at least hedge against potential
risks, by investing in improving “social” criteria. Doing so would help the firm avoid or limit
the risk of controversy and poor publicity (i.e., reputational risk), as well as litigation related
to negative “social” behavior, such as discriminatory employment practices, health and safety
violations, and labor law violations. Similarly, a firm’s investments in better corporate
governance structures and mechanisms may enhance its financial performance by reducing
the risks of agency problems and rent-seeking behavior by management, as well as the
71
See empirical evidence by Hamilton, supra note 50, Klassen and McLaughlin, supra note 50, and Derwall,
supra note 50.
Page 27 of 45
possibility of corporate fraud and other scandals, through improved firm governance and
negative relationship between the quality of a firm’s ESG characteristics and the riskiness of
We now examine the effect of ESG criteria on the riskiness associated with investments in
the firm, as measured by the volatility of equity prices. If ESG is does, indeed, relate to risk,
Table 5a shows the results of regressions of Bloomberg’s ESG disclosure score on annual
volatility. We control for firm size using the log of assets, the level of intangible assets using
Tobin’s Q, and the degree of leverage using debt-to-asset ratios. We additionally control for
industry, year, and firm-level effects for the regressions on all datasets. The regression on the
combined dataset also controls for country-level effects. We then repeat these regressions
using Sustainalytics ESG rankings in place of Bloomberg’s ESG disclosure scores; the results
and Bloomberg ESG disclosure scores for the full dataset and for the United States dataset
(coefficients of -0.0461 with a standard error of .0.0179 for the full set and -0.0581 with a
standard error of 0.0246 for the United States set, both statistically significant at the five-
percent level). Coefficients for the datasets of the United Kingdom, Switzerland, Australia,
Page 28 of 45
The coefficient for the regression on the Japanese dataset shows a statistically significant
positive relationship between ESG disclosure scores and volatility (0.0749, with a standard
error of 0.0276, with significance at the five-percent level). However, the exceptionally low
volatility of the Japanese firms in our sample set (see univariate statistics in Table 3) may
explain the opposite relationship between volatility and ESG in Japan.72 Furthermore, we
note that in the regressions, the relationship between Tobin's Q appears different for Japanese
firms as for all other firms. While several studies support a link between environmental
quality, firm performance, and Tobin's Q73, ESG rankings in Japan may be dominated by
governance criteria, resulting in a different relationship between overall ESG and Tobin's Q
than prevails in most other countries. This would, in turn, explain the anomalous relationship
In Table 5b, we see similar results when we use the Sustainalytics ESG quality rankings in
place of the Bloomberg ESG disclosure scores. While the negative relationship and statistical
significance persists, we find that the magnitude (i.e., absolute value) of the correlation
coefficient is lower (-0.0167 for the full dataset with a standard error of 0.0078, and -0.0321
for the United States data with a standard error of 0.0111, with statistical significance at the
five-percent level). Coefficients for the United Kingdom’s, Switzerland’s, and France’s
datasets are also negative but lack statistical significance. The coefficient for Australia is
positive but has high standard error and lacks statistical significance. While the coefficient for
Japan is slightly positive (0.0196) and statistically significant at the ten-percent level, the
coefficient is close to zero with a high standard error (0.0104). Additionally, with regard to
72
Cf. Hanson et al, supra note 10, Hoepner et al, supra note 56, and Bialkowski and Starks, supra note 56 have
found evidence that ESG is related to extreme downside risk, and, therefore, higher levels of volatility would
show a stronger relationship with ESG criteria.
73
Dowell et al, supra note 39 and Konar and Cohen, supra note 40.
Page 29 of 45
Japan, we again note (as discussed above) the low range of volatility for the firms in the
Japanese dataset, as well as the same inverted relationship between Tobin's Q and the
Sustainalytics ESG ranking that we saw with the Bloomberg ESG disclosure score.
We note that, while the direction and statistical significance is the same, there is a greater
magnitude (i.e., a higher absolute value of the coefficient) of the relationship between the
Bloomberg ESG disclosure scores and volatility than there is between Sustainalytics ESG
quality rankings and volatility. This is noteworthy because, even though the two scores are
generally correlated, the Bloomberg ESG disclosure score simply measures the amount of
ESG data that firms disclose, while the Sustainalytics score is a quality ranking of firms with
regard to their ESG characteristics. It is possible that companies that disclose more ESG data
experience lower volatilities and that this effect is largely independent of changes in actual
ESG quality.
Disclosure itself, ESG or otherwise, may signal that firms are very open and transparent;
thus, investors are more certain of these companies’ fundamental value, and, thus, there is
less volatility in these firms’ equity prices. This would mean that the actual effect of ESG on
volatility is lower than that measured by the Bloomberg ESG disclosure scores and more in
line with what is seen with the Sustainalytics ESG rankings. Alternatively, it may be that
there is a time lag between when a firm releases ESG data and when Sustainalytics updates
its ESG rankings. The market would then react to changes in ESG quality conveyed by the
raw ESG data that the firm discloses before the ESG rankings are updated.
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Our results related to ESG and volatility are broadly consistent with other empirical studies
that have found links between firm risk and ESG74 and with the literature that has found that
investors tend to view ESG criteria as important for managing portfolio risk.75
The results of our analyses of ESG and firm volatility suggest that ESG may have a small but
statistically significant impact on reducing volatility. However, the question remains: does
this effect translate into improved financial performance in terms of overall risk-adjusted
returns?
As noted, the theoretical literature argues that, if we allow for a subset of investors who are
will see that such investors are willing to pay a premium for securities in firms with high
ESG quality. This bidding-up of these securities’ prices will result in poorer performance of
such securities, while arbitrageurs can capitalize on the relative underpricing of securities in
firms with poor ESG quality.77 However, sufficient widespread shunning of poor ESG-
quality investments may result in an increased cost of capital for such firms, as investors
willing to hold such securities find it more costly to diversify away the firm-specific risks in
their portfolios, resulting in those investors demanding a premium for holding such
securities.78 On the other hand, empirical studies focused on ESG-related mutual funds have
supported the underperformance hypothesis whereby ESG- focused investors are willing to
74
Cf. Barko et al, supra note 26, Bialkowski and Starks, supra note 57, and Shafer and Szado, supra note 52.
75
Cf. Amel-Zedeh and Serafeim, supra note 27 and Hanson et al, supra note 10.
76
Fama and French, supra note 67.
77
Hong and Kacperczyk, supra note 40.
78
Heinkel et al, supra note 68.
Page 31 of 45
accept poorer risk-adjusted returns in exchange for the non-financial utility of holding high-
Given the conflicting theoretical predictions and the mixed results of the previous empirical
In order to investigate the potential relationship between ESG and risk-adjusted returns, we
regress ESG rankings on annual security returns (assuming reinvested dividends) while
controlling for risk by using annual volatility as a control variable. By using industry
dummies, we control for the fact that certain industries have, by their very nature, activities
that generate positive ESG externalities. In order to control for leverage, we use a firm’s
debt-to- assets ratio. We also control for a firm’s level of intangible assets by using firms’
Tobin’s Q ratios.
performance adjusted for risk, as measured by volatility. We perform the regression using our
entire sample set controlling for country effects and then separately for each country. All
regressions control for industry, year, and firm-level effects. Table 6b repeats these
regressions using Sustainalytics ESG rankings instead of Bloomberg ESG disclosure scores.
Comparing the regressions in Tables 6a and 6b, we see that the only statistically significant
relationship found between ESG and performance is for the regression with the United States
dataset in Table 6a, where we find a coefficient on Bloomberg’s ESG disclosure score of -
79
Cf. Riedl and Smeets, supra note 8, Renneboog et al, supra note 8.
Page 32 of 45
0.0799 with a standard error of 0.0460 and statistical significance at the ten-percent level.
Although the relationship is negative and, therefore, lends some support to the theoretical
literature that predicts negative returns as ESG-focused investors pay a premium for
companies with high-quality ESG, the effect is small, with such a standard error that the
effect is often even closer to zero. Furthermore, we find no statistical significance with the
regressions on any other dataset in Table 6a or for the regressions in Table 6b using the
Bloomberg’s ESG disclosure scores and risk-adjusted returns, but none when the
Sustainalytics ESG quality rankings are used in place of the Bloomberg scores. This may be
due to the fact that ESG information takes some time to be absorbed by the market. Thus, by
the time that Sustainalytics ESG rankings are updated, any new ESG data is already reflected
in security prices. Since there is a strong positive correlation between ESG disclosure and
quality, there is support for this hypothesis. However, the alternative hypothesis is that the
effect may not be related to ESG, but simply to the fact that companies with higher ESG
disclosure scores disclose more extensive data generally (both non-ESG and ESG-related
data), and this serves to signal high-quality firms with superior financial performance. This
alternative hypothesis is supported by the fact that we have found no statistically significant
relationship between Sustainalytics ESG rankings and financial performance. This would also
explain the lack of a statistically significant relationship in countries other than the United
States, where ESG disclosure is more widespread due to disclosure requirements and
stewardship codes. The more “mandatory” nature of ESG disclosure means that it is not only
high-quality firms that are disclosing ESG data, and, therefore, the relationship between
transparent, lower-risk firms and ESG disclosure scores in the United States is lost in
Page 33 of 45
jurisdictions where every firm is required (explicitly or implicitly) to disclose ESG
information.
Nonetheless, the absence of a strong relationship between ESG and risk-adjusted returns may
be due to the fact that the effect becomes more pronounced only during times of high market
stress. This conclusion is also supported by prior empirical literature evidencing that ESG is
related to extreme downside risk.80 Otherwise, the limited reduction in volatility is not
consistently strong enough to affect risk-adjusted returns across our sample size and time
period.
Even though our regressions show only some weak evidence of a connection between ESG
between ESG and volatility, which may mean that there are portfolio diversification benefits
from high-quality ESG investments in certain situations. This leaves open the possibility for
the creation of portfolios that, over some time, may generate superior financial performance
by incorporating specific ESG screening and weighting rules into portfolio construction.81
Furthermore, this would not be inconsistent with the results of prior empirical studies that
mutual funds82 because such funds may not be using optimal ESG screenings and, instead,
simply appeal to investors who are willing to accept lower returns in exchange for high ESG
quality.
80
Cf. Hanson et al, supra note 10, Hoepner et al, supra note 57, and Bialkowski and Starks, supra note 57.
81
Verheyden et al., supra note 9; Barnett and Salomon, supra note 54; Sherwood and Pollard, supra note 55;
Statman and Glushkov, supra note 53.
82
Riedl and Smeets, supra note 8, Renneboog et al, supra note 8.
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V. Conclusion
This article contributes to the current debate about the desirability of introducing mandatory
corporate reporting on ESG issues. Using a unique dataset constructed from two
commercially available databases, we conduct three sets of tests to examine the link between
the extent of the disclosure of ESG quality through a cross-country comparison of varying
ESG disclosure requirements and stewardship codes. Our data yield a number of interesting
findings. First, we find a strong relationship between the quantity of ESG data disclosed by
companies and the quality of this data. Second, the differences across countries seems to be
driven by more-stringent ESG disclosure requirements and stewardship codes imposing ESG
disclosure. Third, we find evidence that ESG is correlated with decreased risk, though this
effect may be due to firms disclosing more information than just the quality of the firms’
ESG factors. Finally, we find a negative relationship between ESG and performance in the
US, which is consistent with the fact that ESG-oriented investors are willing to pay a
Page 35 of 45
Appendix
Table 1
Variable Definition
Proprietary Bloomberg score based on the extent of a company's publicly disclosed ESG data. Scores range
from 0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose every
Bloomberg ESG disclosure data point collected by Bloomberg. Bloomberg tailors the scoring to different industries. Bloomberg field:
score "ESG_DISCLOSURE_SCORE"
Sustainaytics assigns a rank to the company based on its total ESG quality relative to its industry peers.
Sustainalytics ESG ranking Scores range from 0 to 100. Bloomberg field: "SUSTAINAYLTICS_RANK"
We use the natural logarithm of a company's book asset value in order to control for relative size in our
log assets regression analyses. This corresponds to the natural logarithm of the Bloomberg field "BS_TOT_ASSET"
In order to control for leverage, we calculate the ratio of firm debt to the book value of assets. This
debt to assets corresponds to the quotient of the Bloomberg fields "SHORT_AND_LONG_TERM_DEBT" / "BS_TOT_ASSET".
To measure the risk of holding a company's security, we use historical volatility calculated by Bloomberg as
the annualized standard deviation of the relative price changes for the daily closing prices over the previous
volatility calendar year. Bloomberg field: "VOLATILITY_360D"
Annual total return of the company's primary security over the previous calendar year assuming reinvested
annual total returns dividends. Bloomberg field: "CUST_TRR_RETURN_ANNUALIZED"
We use Tobin's Q to control for the level of a firm's intangible assets. It is the ratio of the market value of a
firm to the replacement cost of the firm's assets. The ratio is computed by Bloomberg as: (Market Cap + Total
Liabilities + Preferred Equity + Minority Interest) / Total Assets
Tobin's Q Bloomberg field: "TOBIN_Q_RATIO"
In our regressions, we use industry dummies based on the Global Industry Classification Standard (GICS)
developed by MSCI in collaboration with Standard & Poors (S&P). The GICS classification assigns a sector
industry name to each company according to its principal business activity. Bloomberg field: "GICS_SECTOR_NAME"
market capitalization We screen for companies using market capitalization. Bloomberg field: "HISTORICAL_MARKET_CAP"
Page 36 of 45
Table 2
Coverage of Bloomberg ESG disclosure scores and Sustainalytics ESG rankings data by country
over the 2015-2018 time period among publicly traded companies with a market capitalization of
Page 37 of 45
Table 3
Univariate statistics for the variables broken down by each national dataset and the full combined
set. The number of observed values in each dataset in parentheses. The values for market
Bloomberg ESG disclosure score 35.77 2.89 75.62 14.48 14.88 58.68
Bloomberg ESG disclosure score 31.39 7.85 75.62 14.30 14.82 57.03
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United Kingdom (n=390)
Bloomberg ESG disclosure score 43.20 23.55 69.42 9.99 29.34 59.50
Japan (n=893)
Bloomberg ESG disclosure score 36.96 2.89 62.81 13.28 12.81 54.98
Switzerland (n=119)
Bloomberg ESG disclosure score 43.36 8.68 65.70 16.14 12.81 64.05
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Australia (n=271)
Bloomberg ESG disclosure score 37.80 14.88 63.07 12.60 17.77 58.12
France (n=275)
Bloomberg ESG disclosure score 50.13 21.07 67.36 8.93 30.58 61.98
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Table 4
Regressions of firms’ Bloomberg ESG disclosure scores onto firm Sustainalytics ESG rankings.
Dummy variables control for year and industry effects in all sample sets. The full set also uses
country dummy variables. Coefficients are shown with asterisks denoting statistical significance,
Page 41 of 45
Table 5a
Regressions of firms’ Bloomberg ESG disclosure scores onto annual volatility of security
returns. Control variables control for size (log of assets), leverage (debt-to-asset ratio), and
intangible asset level (Tobin’s Q). Dummy variables control for year and industry effects in all
sample sets. The full set also uses country dummy variables. Coefficients are shown with
asterisks denoting statistical significance, and standard errors appear in brackets below
coefficients.
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Table 5b
Regressions of firms’ Sustainalytics ESG rankings onto annual volatility of security returns.
Control variables control for size (log of assets), leverage (debt to asset ratio), and intangible
asset level (Tobin’s Q). Dummy variables control for year and industry effects in all sample sets.
The full set also uses country dummy variables. Coefficients are shown with asterisks denoting
full set United States United Kingdom Japan Switzerland Australia France
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Table 6a
Regressions of firms’ Bloomberg ESG disclosure scores onto annual security returns. Control
variables control for size (log of assets), leverage (debt to asset ratio), intangible asset level
(Tobin’s Q), and riskiness (annual volatility). Dummy variables o control for year and industry
effects in all sample sets. The full set also uses country dummy variables. Coefficients are shown
with asterisks denoting statistical significance, and standard errors appear in brackets below
coefficients.
Page 44 of 45
Table 6b
Regressions of firms’ Sustainalytics ESG disclosure scores onto annual security returns. Control
variables control for size (log of assets), leverage (debt to asset ratio), intangible asset level
(Tobin’s Q), and riskiness (annual volatility). Dummy variables control for year and industry
effects in all sample sets. The full set also uses country dummy variables. Coefficients are shown
with asterisks denoting statistical significance, and standard errors appear in brackets below
coefficients.
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