International Journal of Business and Management Sciences, Vol 3, No 3, 2022 E ISSN 2708-4337

Available online at http://www.ijbms.org

International Journal of Business and Management Sciences

Volume 03(03) 2022
Received 2 September, 2022, Accepted 13 September, 2022, Published 30 September, 2022

ESG Factors and their Influence on the Investment Behavior of Individual

Investor: A Case from Pakistan
Mehwish1, Mustafa Afeef 2, Shahid Jan Kakakhel3
Keywords: ABSTRACT
ESG factors, Individual Companies are extensively mobilized about their sustainability
Investor, Structural equation due to the inequalities and problems in the presence of resource
modeling, Socially scarcity at a global level. Sustainable responsible investment
Responsible Investment. (SRI) holds the belief to merge Environmental, Social, and
Governance (ESG) factors in strategies, policies, and investment
allocations to act socially impactful. This article postulates a
deductive study framework based on a theory of planned behavior
(TPB) to further enlighten the stakeholders on this subject. The
research study has analyzed the ESG factors' influence on
investors' investment where primary data has been collected from
individual investors based on GPower analysis (sample 300)
through snowball non-probability sampling technique in the
Pakistan Stock Exchange (PSX). The results obtained through
Structural Equation Modeling (SEM), demonstrate that investors
are sensitive to ESG factors. The combined effects of the three
factors are statistically significant and favorable for investing. The
respondents' investment decisions are significantly and
dominantly influenced by the governance factors, followed by
social factors, and then environmental factors have additional
effects. The results revealed the impact of perceptions about
(ESG) aspects on outcomes (Investment). The research suggested
the assessment of ESG factors as an integral part of a suitable
investment process for investors. There are few studies available
to measure the perception of individual investors in the market
about non-financial criteria that brings variation in investors'
investment decision. The subjective studies are also lacking in
finance. Theoretically, it has been found that each person's
attitude is shaped by their beliefs that further lead to certain
behavior. For businesses, it has been suggested that management
should improve their ESG performance to draw large amounts of
investment from the market. The results also showed that
investors should invest in companies that can safeguard their
capital and increase their cash inflows by undertaking ESG
factors.

1
PhD Scholar, Islamia College Peshawar. [email protected]
2
Assistant Professor, Department of Management Sciences, Islamia College Peshawar. [email protected]
3
Associate Professor, Chairman, Department of Management Sciences, Islamia College Peshawar.
[email protected]

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INTRODUCTION
Environmental, social, and governance (ESG) factor evolution has created more value for
sustainable investment in financial markets (Glavina, 2022). Sustainable investment, socially
responsible investment, moral investment, or impact investment are terms used to refer to the
incorporation of ESG factors into investment decisions. The ESG factors appraisal
phenomena are crucial for both parties i.e., company and investor. The company assessment
process of ESG factors is termed as ESG due diligence (DD). ESG-DD is an uninterrupted
process of objectively compiling and evaluating ESG material factors/issues relevant
information disclosed to stakeholders in various reports (Villmann, 2021). The previous
studies describe the DD procedure/method of investigation to identify crucial business
transactions and operational tasks. However, this process has been executed in mergers and
acquisitions to assess the value, inherent risks, and price of the target firm (Spedding, 2008).
The ESG's first pillar, environmental factors emphasize the issues related to the phenomena
of climate and environmental variation. These incorporate water and air pollution,
greenhouse gases emission, and waste management policies ensuring the best use of
resources, social factors have an impact on basic human rights, delivery of high-quality goods
and services, consumer’s health and safety, and maximum employment benefits and
governance factors focus more on the board of directors' impartiality and responsibility, the
shareholder's equal rights and benefits, financial disclosure and transparency, and legislation
and initiatives to combat corruption (PRI, 2015). The environmental information implies a
cure of credibility and trust that possibly influence investor behavior and attitude toward an
investment opportunity (Amel-Zadeh & Serafeim, 2018). To comply with the social norms in
which they are operating as an entity, the corporation must undergo a thorough examination
known as "social factors." Whether it is required by law or regulation, the corporation must
do it as a member of society (Busch et al., 2016). Corporate governance places a strong
emphasis on driving management to increase company profits and safeguard shareholders'
interests (return on investment) (the agency theory). Investors often utilize their judgment,
advanced analytics, and fundamental analysis as tools for investment appraisal based on
various factors relevant to non-financial information (Jagongo & Mutswenje, 2014).
Corporate investors take governance practices into account while investing (Crifo et al.,
2015). The goal of investments is to increase prospective cash inflows. As a result, when
making a decision, the investor must consider numerous factors, both monetary and non-
monetary (Whelan, Atz, Van Holt, & Clark, 2021).

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Therefore, the perceptions about each material ESG factor reshape their decisions towards
sustainable investments. Larry Fink, founder, and CEO of the Global Investment
Management Corporation stated that sustainability must be the main element in an investment
decision (Herz et al., 2016). Previous empirical studies also suggested the ESG factors
assessment for better selection of investment opportunities (Berry & Junkus, 2013; Crifo,
Forget, & Teyssier, 2015). This study has used the impact of investors’ perception of ESG
factors on their investment allocation.
The developing market of Pakistan has no hard rules for disclosure of non-financial
information rather it’s a board of directors’ fiduciary duty as per the amended code of
corporate governance 2017 issued by the Security Exchange Commission of Pakistan (SECP)
(Naveed, Sohail, Abdin, Awais, & Batool, 2020). The board act as a bridge between the two
parties i.e., shareholders and management. They are responsible to protect the rights of
stockholders and monitoring management's decision-making practices (Shah, Ahmad, &
Mahmood, 2018). Therefore, ESG organized data is not available as prescribed by the
international standard index. Pakistan's weak laws contrary to global frameworks trigger for
more focus to have empirical studies on the subject matter. Empirical study has shown the
connection between voluntary disclosure, governance structure, and organizational features.
The study further adds that an increase in disclosure practices related to the environment,
society, and governance is directly proportional to achieving sustainable results. The study
made recommendations for further integration of these data into decision-making processes
in diverse scenarios (Khalid, Razzaq, Ming & Razi, 2022).
The emerging markets listed companies issue fewer reports on corporate social responsibility
(CSR). Even sustainability performance is rarely a subject of study as contrary to financial
information analysis (Cohen, Holder-Webb, & Zamora, 2015; Khan, 2019). Although many
studies have been conducted on ESG implementation and its macro-level impact on the
companies' financial performance (Lokuwaduge & Heenetigala, 2017; Dobbs & Staden,
2016; Eccles, Ioannou & Serafeim, 2012), few have examined the importance that investors
place on ESG when making investment decisions (Rooh et al., 2021; Naveed et al., 2020;
Sultana, Zulkifl, 2018). The studies found disparities in investor attitudes toward ESG
considerations in their investments despite the presence of evidence about those who don't
care about ESG preferences and those who favor ESG practices having a beneficial impact on
financial performance (Chen, & Xie, 2022). The study recommended that businesses exhibit
excellent ESG performance outperform their industry peers financially and command greater
market valuations. Moreover, further analysis is crucial to identify investors who value ESG

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information in the presence of tested ESG-enhanced market performance (Ademi &
Klungseth, 2022). The research has concluded the concerns about the quality of information
disclosed for ESG factors analysis used by institutional investors. The results added that there
is a need to mitigate the barriers related to the lack of quality information. Supplementary
research is required to add knowledge about investor perception to direct companies for more
quality information (Jonsdottir, Sigurjonsson, Johannsdottir, & Wendt, 2022). In
industrialized nations, various events and decisions have been shaped by the process of
integrating non-financial factors (Berry & Junkus, 2013; Crifo, Forget, & Teyssier, 2015).
The uncertain situation of novel corona crises raises further calls on ESG investments
(Naveed et al., 2020). Utilizing the global crisis brought on by the COVID-19 pandemic, the
study demonstrates that a positive relationship between ESG performance and a company's
market valuation holds even during times of unanticipated crises (Ademi & Klungseth, 2022).
The research objectives of the study have demonstrated how investors perceived value of
ESG factors shape their investment decisions in the Pakistan Stock Exchange. The
contribution of knowledge and its novelty is the main theme of research articles. By
providing a contemporary understanding of the variables impacting investors' judgments, the
findings add to the body of literature (Glavina, 2022). It improves and adds awareness about
investor value and beliefs in emerging markets in terms of investment avenues. Along with
predicting the overall impact of ESG on investors' investment choices, it also examines and
compares the specific effects of a variable. The ESG performance-based studies assist
companies in the way investors organize their outlays in various projects. The results also
added further about the precision of their decisions that rely on various published non-
financial information from companies. Subjective assessments necessitate survey-based
investigations in finance. The study's conclusions imply that in addition to financial
measurements, organizations should pay more attention to ESG factors. The requirements of
the study are satisfied by testing the hypothesis that has been put forward based on literature
evaluation, research design, outcomes, and discussion.
LITERATURE REVIEW
Comprehensive Empirical Studies on ESG Factors
ESG factors are crucial for business investment and decision-making, especially in managing
long-term operations and mitigating risk (Dhaliwal, Li, Tsang & Yang, 2011; Spedding,
2008). The sustainable development framework of ESG constructs action plans efficiently
handle the financial crises and other significant issues in domestic and international stock
markets (Lokuwaduge, 2017; Ademi & Klungseth, 2022). The investment facets of

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sustainable return, risk management, and responsibility are encountered by ESG (Sultana et
al., 2018). Similarly, corporate sustainability is crucial to ensure environmental pollution
preservation and addressing issues of planet natural resources protection. Particularly when
climate change is a diverse challenge for the global village (Dobbs & Staden, 2016). On the
other hand, social considerations come up in discussions about modern slavery (Adam &
Shauki, 2014). The dedication and responsibility to governance issues, such as the rights and
obligations of the company's stakeholders, are also vital (Filatotchev, Poulsen, & Bell, 2019).
Investors are rational about the role that ESG plays in generating consistent returns on their
investments (Kocmanová & Doekalová, 2012). ESG reporting increases the demand for
shares and resultantly enhances share prices in the market (Cheng, Ioannou, & Serafeim,
2014). The sustainability information variables fluctuate company performance. These are
pertinent and indicative of financial performance as it creates hype for shares in the market
that shift the prices demands (Grewal, Hauptmann, & Serafeim 2017). However, there are
studies on objective measures of ESG factors, but a gap exists to evaluate the subjective
measure to find the investors' judgments and perceptions about ESG integration (Hongming,
Ahmed, Hussain, Rehman, Ullah & Khan, 2020; Whelan et al., 2021; Buallay, 2019; Adedeji,
Ong, Rahman, Odukoya, & Alam, 2019; khan, 2019; Adam & Shauki, 2014). Extensive
research on each aspect strengthens the link between ESG reporting and investment choices.
Environmental Factors and Investors’ Investment
To achieve the sustainable development aim outlined in the millennium goals, environmental
information includes the company's performance on environmental practices. Analysis of the
detrimental impacts of air pollution on commercial activity has led to unfavorable
conclusions (Dobbs & Staden, 2016). More than ever, investors are concerned about the
environment, which eventually influences their choice of investments (Rooh et al., 2021).
The environmental elements are influenced by the nature of the business, the sort of
employment, and the region's natural environment and climate. These often involve
greenhouse gas emissions, climate change, waste management, and water and air pollution
(PRI, 2015). Environmental concerns are often considered when making investment
decisions. Italian investors' perceptions of organizations are favorably impacted by ESG
voluntary disclosure, which depends on an audit accountability structure (Fazzini & Dal
Manso, 2016). These findings are consistent with the study by Crifo et al. (2015), which
demonstrates a 30.8% decline in private equity investments in French companies when they
pay less attention to environmental issues. The same is true in Japan, where investors and
other stakeholders are more concerned with the company's environmental policies. The

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results of the Australian study are also similar regarding ESG variables (Zwaan, Brimble, &
Stewart, 2015). Investors expect that businesses uphold environmentally sustainable practices
all over the world. Environmental protection is priorities for investors and the companies
grasp high profits with strict policy implementation. Therefore, the company's environmental
initiatives send a message to the market and affect investors' attitudes and behaviors
regarding investments (Amel-Zadeh & Serafeim, 2018). According to the study by Rooh et
al., (2021), investors are aware of how to take care of their surroundings. Therefore, it is
worthwhile and advised to assess the impact of environmental factors. The first hypothesis is
proposed here.
H1: Environmental factors have a positive effect on investors’ investment.
Social Factors and Investors’ Investment
Social issues are crucial in influencing investors' decisions. The social sustainability of the
company is an artificial person including taking better attention to its stakeholders and
community at large (Cohen et al., 2015). It covers the welfare and interests of the
communities, as well as individual and reciprocal rights. Human rights, health facilities, a
positive work environment, child labor, contentious weaponry, consumer protection, linkages
to local communities, and other health-related activities are some of these obligations. Human
rights also encompass freedom of association and expression ( UN PRI, 2015). Social
interactions have been one of the key elements influencing investors' choices (Crifo et al.,
2015). According to Zwaan et al., (2015) social aspects are one of the main pillars that
investors in Australia consider when making ESG decisions. Publications on this subject are
most frequently found in the fields of human rights, labor health and protection, product
safety, and public relations (Berry & Junkus, 2013; Rakotomavo, 2011). Thus, in comparison
to governance and environmental considerations, the social aspect was overwhelmingly
dominating and favored (Sultana et al, 2018). In the regime of integrated markets in
industrialized countries, stock market investors give social issues a higher priority (Zwaan et
al., 2015). Studies must learn more about this situation because there is a void in the setting
of developing countries. A different theory was put up in this study to determine the social
aspects influencing investors' choices in PSX.
H2: Social factors have a positive effect on investors’ investment.
Governance factors and Investors’ Investment
Investors view corporate governance principles as a critical management system and a key
indicator of a company's financial viability in investment allocation (Crifo et al., 2015).
Frequently the investors perceive their financial success based on first dominant factors

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governance structure and later dedication to environmental and social factors in the financial
markets (Walsh, Mitchell, Jackson & Beatty, 2009). Corporate governance is a framework for
safeguarding stakeholders’ rights, with a particular emphasis on shareholders and guiding
management decisions in the company's best interests. Additionally, it runs into agency
issues that arise when distinct ownership and control authorities are used (Aguilera, Judge, &
Terjesen, 2018). The governance mechanism also makes sure that the firm has a robust
internal control system to accomplish both financial and non-financial goals. The results
found that 64% of respondents are concerned about corporate governance when choosing
their investments (Zwaan et al., 2015). The better-performing businesses can also invest in
social and environmental issues to further support their reputation (Busch, Bauer, & Orlitzky,
2016). The survey-based analysis, which evaluated the three ESG pillars, found that
investors, industries, brokers, and financial experts all have governance as a top concern.
Corporate governance guarantees the firms' openness and disclosure, assisting investors in
making investment decisions (Filatotchev, Poulsen, & Bell, 2019). While the other two
variables tend more toward sustainability (Herz & Rogers, 2016). However, the three
components' importance has been resurrected by the present global movement of socially
responsible investment. According to researchers, social issues now outweigh environmental
aspects in importance, but perception varies from investor to investor (Bradford, Earp,
Showalter & Williams, 2016). If environmental and social concerns result in profitable
investments in the region then investors value this factor more as compared to others
(Rakotomavo, 2011). Corporate governance is recommended in all other cases. Global
scandals like Enron and Tyco raise awareness of corporate governance's process and
necessity in the business sector. As a result, it is crucial to investigate how investors behave
about corporate governance while making investment decisions in Pakistan. As a result, the
third theory is put forward here.
H3: Governance factors have a positive effect on investors’ investment.
The study chooses a deductive research methodology where studies are based on theories for
more firm analysis and results. The theory of planned behavior (TPB) is utilized here. The
theory postulate that intentions are determined by attitude. Intentions are a combination of
one's attitude toward behavior, perception of behavior control, and subjective norms that
leads to real behavior. As a result, actions should result from intentions, and vice versa
(Ajzen & Fishbein, 2000). Here the study adopted the component of “attitude” and
“intention” from a theory of planned behavior. To further operationalize the investors'
perception towards ESG factors are considered as attitude and their intention is the output in

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the form of investment decision. The theory has been tested in various studies. It has been
found while testing TPB that individual interest has a significant influence on investment
behavior (Paramita, Isbanah, Kusumaningrum, Musdholifah, & Hartono, 2018). Another
study found the impact of ESG on investment decisions in Bangladesh using TPB (Sultana et
al., 2018). The desire for future rewards drives investors' attitude to engage in stock
investments (Grewal et al., 2017). According to Villmann (2021), the goal of investment is to
generate additional inflow from the invested outlay. Investors review the intended investment
opportunity using their fundamental, technical, and judgmental analysis as a tool (Jagongo &
Mutswenje, 2014). Sairally (2015) concluded in his study that consideration of numerous
important criteria, including non-financial ones, results in a better investment. The proposed
study has looked at the relationship between investors' perception of ESG factors and their
plans to pursue their investment in projects where solid environmental, social, and
governance standards are being executed.
Conceptual Framework
The following conceptual framework is suggested for the study based on the preceding
analysis of the current literature.

Figure 1. Conceptual Model

RESEARCH METHODOLOGY
The research is based on a philosophical stance. The current study employs epistemological
positivistic philosophy (Wilson & McLean, 1994). The quantitative study collected data
through a survey questionnaire from an individual investor in the Pakistan stock exchange
(PSX). The central Depository Company declared fifty-nine thousand, seven hundred &
nineteen (59719) as the total no of individual investors trading at PSX. The GPower 3.1
power analysis calculates two hundred and twenty-two (222) as the required minimum
sample size setting the effect size to 0.30 by default, the alpha level to 0.01, and the power to
0.99, as recommended (Faul, Erdfelder, Buchner, & Lang, 2009). The sample size includes
300 active trading investors for the safe side in case the values are missing, or outliers exist.
A non-probability snowball sampling strategy has been used in the investigation. It has been

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tested for item validity and reliability. Fornell and Larcker's (1981) criteria are used to test
reliability via Cronbach's alpha (CA) and composite reliability (CR). Validity assumption has
been met by ensuring the convergent and discriminant validity tests (Hair et al., 2017). After
all, hypothesis testing allowed us to attain our goals. Partial least squares structural equation
modeling has been used for this purpose (Hair et al., 2017).
The demographic details are mentioned in Table 1 to summarize the attributes of participants
(Investors).
Table 1 Demographic Attributes of the Respondents

Demographic variable Characteristics Percentage

Gender Male 94.3
Female 5.7
Age Upto 25 years 3.0
26-35 years 4.0
36-45 years 78.3
46-55 years 12.7
above 55 years 1.7
Highest Qualification Intermediate 0.1
Bachelors 21
Masters 68.3
Doctorate 3.3
Other 6.3
Yearly Income Less/equal 500000 Rs. 8.7
500001 - 1000000 Rs. 12.7
1000001 - 1500000 Rs. 24.7
1500001 - 2000000 Rs. 18.3
Above 2000000 Rs. 35.3
Trading Experience Less than 1 year 5.0
2–5 years 8.3
6-9 years 73
10 or more years 13.7

Research Instrument
The dependent variable is assessed using six items on a Mayfield-adapted five-point Likert
scale (2008). The study's independent variables are Environment factors (Items-7), Social
factors (8-Items), and Governance factors (9-Items) factors (ESG) to determine the investor's
preference for which elements received more value while investing in the company using a 5-

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point Likert scale. The survey for ESG is adapted from the research by Sultana et al., (2018).
The questionnaire used is organized and modified under the ESG elements index from the
respected Thomson Reuters Corporate Responsibility Index (TRCRI, 2013) and the United
Nations Global Compact (UNGC, 2004). Bangladesh, where the study was conducted, is a
developing nation like Pakistan. However, neither nation has an index for measuring a
company's ESG performance. According to the UNGC, Bangladesh has 43 participants
whereas Pakistan has 73. Therefore, it is appropriate to conduct a study of Pakistan Stock
Exchange investors using the adopted questionnaire. The instrument's face and content
validity has been measured for accuracy to analyze the subject matter (Zikmund, Carr &
Griffin, 2013). The questionnaire was attested from four brokerage houses in Peshawar to
review and attempt the research instrument. The face validity was ensured with a few minor
corrections/comprehensions highlighted through brokerage house managers in items. The rest
of the items were simple and in familiar wordings (Saunders et al., 2016). The content
validity measures the instrument's acceptable coverage of the research questions. The
evidence was already provided through literature but still, the questionnaire was reviewed by
three subject experts with more than 10 years of experience in the same domain. As the same
instrument has been tested in other developing markets of Bangladesh (Sultana et al.,2018).
Thus, the questionnaire was adopted and was brief in their respective construct, and the panel
of experts approved each item as important and relevant. A further pilot study was also
conducted with 165 initial responses from investors where The reliability of the survey
instrument was confirmed by Cronbach's alpha values, which varied from 0.81 to 0.93 for all
the constructs and were higher than the usually acceptable norm of 0.7 (Hair et al., 2017;
Nunnally & Bernstein, 1994).
ANALYSIS
A second-generation technique that has been extensively used in investigations for the past
20 years is structural equation modeling (SEM). The second-generation approach has fixed
the first-generation's flaws. The approach takes into consideration measurement error and
uses latent variables that are not visible but are nevertheless quantified by items or indicators.
The Partial Least Square Structural Equation (PLS-SEM) is used to analyze complex theories
where the model focus exists on explanatory and/or predictive relevance as recommended
(Ringle, Sarstedt, Mitchell, & Gudergan, 2020; Sarstedt, Ringle, Henseler, & Hair, 2014).
PLS-SEM path modeling is used to test the hypothesis of the study and the same has been
found in previous studies too (Rooh et al., 2021; Naveed et al., 2020; Sultana et al., 2018).

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Table 2 Descriptive Statistics

Constructs N Min Max Mean Std. Dev Variance Range

Env_F 300 1.86 5.00 3.82 .843 .712 3.14

Soc_F 300 1.43 4.86 3.88 .708 .502 3.43
Gov_F 300 1.00 5.00 4.11 .760 .578 4.00
IInv 300 1.83 4.83 3.42 .711 .506 3.00
Note: Env_F= Environmental factors, Soc_F= Social factors, Gov_F= Governance factors, IInv= Investors’
Investment.

The results present descriptive and correlation results. The descriptive statistics in Table 2
show numerous details regarding each variable. Environmental factors have a mean value of
3.82 and a range of 1.86 to 5.00 for independent variables. The mean for social diligence is
3.88 with a minimum value of 1.43 and a maximum value of 4.86. The mean value of
governance factors was recorded as 4.11, with a minimum and maximum value of 1.00 to
5.00. Investors' Investment Scores, a dependent variable minimum and maximum range from
1.83 to 4.83 with a mean value of 3.42.
Common Method Bias (CMB)
When data is collected across a single time period, the issue of common method bias (CMB)
arises and may compromise the validity of the results. Harman's (1967) single factor test and
the correlation matrix process are statistical methods that were executed for evaluating CMB
(Bagozzi et al., 1991). By including all the items in exploratory factor analysis (EFA)
utilizing principal component analysis (PCA), Harman's (1967) single factor test was used.
The findings show that there are six factors with eigenvalues greater than one and that the
first component explains 40.297 percent of the variation in total. This demonstrates that the
validity of the notion is not at risk because of CMB (Podsakoff, MacKenzie, Lee, &
Podsakoff, 2003). According to Bagozzi et al. (1991), the existence of CMB is demonstrated
by a significantly high correlation (r > 0.9) among the studied constructs when using the
correlation matrix approach. As a result, Table 3 analysis of the variables' correlations
revealed that they were significantly below 0.9. CMB was therefore not a major worry in this
research investigation.

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Table 3 Correlation Matrix
Constructs Env_F Soc_F Gov_F
Soc_F .529**
Gov_F .756** .526**
IInv .744** .643** .778**
**. Correlation is significant at the 0.01 level (2-tailed).
The correlation matrix result shown in Table 3 reveals that investors' investment is positively
and statistically highly significantly correlated with independent variables environmental
factors (r=0.744), social factors (r=0.643), and governance factors (r=0.778) at the first level
(0.00).
Structural Equation Model (PLS-SEM)
A multi-construct or multi-item model applies to both small and large sample sets using PLS-
SEM. There are two steps in the process. Quality criteria were initially evaluated using a
measurement model. Once the first step is met here for the first criterion, then the structure
model has been evaluated (Hair et al., 2017).
Measurement Model
The reflective model in PLS-SEM is assessed by each indicator loading, internal consistency
reliability, and constructs validity (Ringle & coll., 2020; Hair et al., 2017).
Factor Outer Loading
The Factor outer loading demonstrates the input of every indicator to the formulation of its
construct. The first view of reliability can be analyzed through factor outer loading produced
by PLS Algorithm (see Fig. 1).

Figure. 1. Factor outer-loading of the model

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The item must be retained in case the construct explained 0.70. (Hair et al., 2017; Ringle et
al., 2020). However, the latent construct can comprise extra indicator items and is considered
appropriate in the case of at least 0.50 loading items (Henseler, Ringle & Sarstedt, 2015). The
exogenous variable Environmental factors are denoted by (Env_F), Social factors by (Soc_F),
and Governance factors by (Gov_F). Environmental and social factors include Seven
indicator items, numbered E1 through E7 and S1 to S7 respectively. Governance factors
include eight items numbered G1 to G8. The endogenous variable investors' investment
includes six items from IInv1 to IInv6. All the factors are well above 0.70, therefore items are
retained here in all constructs (Env_F, Soc_F, Gov_F & IInv).
Table 4 Outer Loading for Environmental Factors
Construct Items Loadings p-values
Environmental Factors E1 .817 .00
E2 .84 .00
E3 .843 .00
E4 .856 .00
E5 .851 .00
E6 .878 .00
E7 .873 .00
Social Factors S1 .85 .00
S2 .86 .00
S3 .807 .00
S4 .78 .00
S5 .776 .00
S6 .773 .00
S7 .704 .00
Governance Factors G1 .903 .00
G2 .876 .00
G3 .794 .00
G4 .801 .00
G5 .798 .00
G6 .771 .00
G7 .695 .00
G8 .747 .00
Investors’ Investment IInv1 .855 .00
IInv2 .747 .00
IInv3 .857 .00
IInv4 .833 .00
IInv5 .83 .00
IInv6 .806 .00

Internal Consistency Reliability (CR) and Convergent Validity (CV)

For further examination, it is essential to consider each item's internal consistency and
reliability. In this type of investigation, composite reliability is seen as being more important
than Cronbach's alpha (Hair et al., 2017). Cronbach's alpha or composite reliability should be
greater than 0.70, but not greater than 0.95, for satisfactory dependability. Redundancy is
indicated by the data above a reliability rating of 0.95 (Avkiran, 2017). Similarly, the

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Average variance extracted (AVE), PLS algorithm is another operation to analyze the validity
of the constructs in the model. The convergent validity of a measure is the degree to which it
positively correlates with other measures of the same construct. For improved variance
explanation by the indicators of the construct, the AVE scores should be greater than 0.507.
(Hair et al., 2017).
Table 5 Internal Consistency Reliability
Cronbach's Alpha Composite Reliability Average Variance Extracted
(CA) (CR) (AVE)
Construct AR-Values p-Values CR-Values p-Value
Env_F .93 .00 .94 .00 .725
Soc_F .90 .00 .92 .00 .631
Gov_F .91 .00 .93 .00 .641
IInv .90 .00 .92 .00 .676

All the study's variables are statistically reliable for further examination. The reliability for
Cronbach's alpha ranges from 0.90-0.93 (p-value 0.00) and composite reliability range from
0.92-0.94 (p-value 0.00). The AVE results here vary from 0.63 to 0.72 and are significantly
higher than the cutoff point of 0.507, demonstrating CV.
Discriminant Validity (DV)
Discriminant validity (DV) can be examined through different measures. The mostly utilized
measures are the Fornell-Larcker criterion (1981) and the HTMT ratio (Henseler et al., 2015).
Discriminant validity is “the degree to which a construct is truly distinct from other
constructs by empirical standards” (Hair et al., 2017 p.115).
Fornell-Larcker criterion
According to this method, each construct's variance ought to be higher than its association
with any other variable. The reports proved the higher association with its own rather than
any other construct. Consider as the value of Soc_F square root value 0.796 is greater than its
score with other variables. Consequently, the Fornell-Larker Criterion is used here to prove
the discriminant validity of each latent variable. Table 6 below lists the results of the
calculations.

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Table 6 Fornell-Larcker criterion
Construct Env_F Gov_F IInv Soc_F
Env_F .851
Gov_F .768 .800
IInv .748 .792 .827
Soc_F .533 .524 .639 .796
Note: Env_F= Environmental factors, Soc_F= Social factors, Gov_F= Governance factors, IInv=
Investors’ Investment.
Heterotrait-Monotrait Ratio (HTMT)
For the analysis of DV, Henseler et al. (2015) developed a method that is extensively used.
The Proposed Heterotrait-Monotrait Ratio (HTMT) ratio has established the standards for
determining whether it is acceptable. In SEM-PLS, the HTMT value should be less than
HTML 0.90 for rigorous validity (Henseler et al., 2015; Kline, 2011). The outcome in Table 7
demonstrates how all values between 0.577 and 0.852 reflect the constructs' validity at that
value.
Table 7 Heterotrait-Monotrait Ratio
Construct Env_F Gov_F IInv
Env_F
Gov_F .827
IInv .809 .852
Soc_F .577 .570 .713
Note: Env_F= Environmental factors, Soc_F= Social factors, Gov_F= Governance factors, IInv=
Investors’ Investment.
Structural Equation Model
The article's central hypothesis is examined by the structural equation model, which is more
significant.
Direct Path Model
The model comprises a total of four variables. Environmental, Social, and Governance
factors (Env_F, Soc_F, & Gov_F) are exogenous variables while investors’ investment (IInv) is
an endogenous variable of the study. The model is shown in Figure.2.

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Figure. 2. Bootstrapping results of Structural Equation Model

Assessment of Coefficient of Determination (R2)

An endogenous dependent variable's expected variation because of external independent
variables included is measured by the coefficient of determination (R2). Three categories
make up the evaluation standards for R2. First, show minor predictability at 0.25, moderate
value suggested as 0.50 then last cut off point is 0.75 is considered to be significant (Henseler
et al., 2015).
Table 08 reports R-square values here. The R-square value (R2=0.716, p value= 0.00) and
adjusted R-square value (R2=0.713, p value= 0.00) are almost same with a minimal difference
here. It shows that 71% of the variation is caused by the included variables (Env_F, Soc_F, &
Gov_F) in the model to predict the dependent variable.
Table 8 Coefficient of Determination (R2)

R-Square Adjusted R Square

Construc R2 SD t-Stats p- R2 Adj. SD t-Stats p-

t values values
IInv .716 .02 31.25 .00 .71 .023 30.81 .00

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Predictive Relevance of the Model (Q2)

The Stone-(Q2) Geisser's model's predictive relevance also serves to determine the model's
prediction accuracy. The predictive relevance of the path model is demonstrated by a
reflecting model when Q2 has a value greater than zero (Hair et al., 2017). The blindfolding
process in PLS-SEM is used to determine the value of the Q square. All values far above zero
in Table 9, Q-square statistics indicate better prediction relevance of regressors for the
dependent variable in the path model.
Table 9 Model Predictive relevance values

Constructs SSO SSE Q²

Env_F 2100 778.611 .629

Soc_F 2100 1038.534 .505

Gov_F 2400 1116.899 .535

IInv 1800 819.021 .545

The Effect Size (f2)

Effect size (f2) demonstrates the relevance of each variable in the outcome for more practical
and significant results. Cohen (1988) defined a minor effect of independent latent variable's
affect size value up to 0.02, a medium effect size value of 0.15, and a strong influence
remaining at 0.35. The big effect size denotes more relevancy while the small shows limited
particle implications. Here, social factors have a medium effect (0.186), environmental
factors have a slightly lower effect (0.10) than medium, and governance factors have a high
effect (0.253). At p=0.00, all effect size remains significant.
Table 10 The effect size of constructs
Paths F2 ST.DEV P Values
Env_F -> IInv .100 .038 .00
Soc_F -> IInv .186 .053 .00
Gov_F -> IInv .253 .061 .00

Hypotheses Testing: Direct Path Model

The structural model is examined after ensuring the quality dimensions through the
measurement model. The values in Table 11 were obtained using SEM-PLS (Bootstrapping
with 5000 subsamples) and the BCa method, which is advised for complicated models
including four or more components. The technique produces Path coefficients, t-statistics,
and p-values.In parallel, scores are generated for the confidence interval bias adjusted

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method, which examines the stability of beta coefficients. The route coefficients are thought
to be steadier and more important if the confidence interval lower and upper limits do not
have zero values.
Table 11 Path Coefficients output ( Inner Structural Model)

Construct Path SD t- p-Value Confidence interval

coefficients Statistics (Bias corrected)

5.0% 95.0%
Env_F -> IInv .271 .049 .547 .00 .191 .353

Soc_F -> IInv .278 .040 .017 .00 .212 .341

Gov_F -> IInv .428 .047 .172 .00 .349 .500

Note. Env_F= Environmental factors, Soc_F= Social factors, Gov_F= Governance factors, IInv= Investors’
Investment.
The model results proved the significant effect of ESG factors on investors' investment in the
Pakistan stock exchange. The first variable environmental factors estimated the beta
coefficient value is 0.271(p=0.00), social factors estimated beta value of 0.278 (p=0.00), and
governance factors beta coefficient value is 0.428(p=0.00) turns out highly statistically
significant. The stability of the coefficient finding is demonstrated by the confidence interval
borders not having a zero value. All the confidence intervals lower and upper value proved
their significance too. This concludes that all three factors have a strong effect on investors'
investment.
The interpretation is crucial here. The results show that a 1% change in environmental
conditions will bring a 27% increase in investor investment. The result of social factors is
consistent with it. Investors' investment decisions will improve by 27.8% because of a 1%
improvement in social factors. The governance factors turn out the most dominant. A 1%
change will result in a 42.8% positive change in investors' investment decisions, indicating
that the governance coefficient value has a greater overall impact on investments. These
outputs support all three hypotheses in the study.
DISCUSSION
The study unit of analysis "Individual Investors" are investigated here about their perception
(Shah, 2018). The primary data provide stakeholders with more up-to-date information
regarding the aspects they are concerned about while making investment allocations (Amel-
Zadeh & Serafeim, 2018). The current study uses a survey-based methodology to look at
investor preferences for ESG and how it affects their choice of investments. In line with the
findings of Dobbs and Staden, the survey concludes that in environmental factors investors

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want to put their money where the entity focuses on "the demand from civil society to
enhance performance, transparency, and responsibility on environmental practices" (2016).
According to the study, "Producing quality goods and services while considering the
customers' health and safety and providing accurate product information and labeling" is one
of the social factors that receives widespread support. The investor rates "The independence
and accountability of the board of directors" and "Financial reporting standards" get same
score and importance when it comes to governance factors (Spedding, 2008). The statement
in dependent variable investors investment "Our investment has a lower risk compared to the
market in general" gains the highest value.
Impact of ESG factors on Investors’ Investment
Stone-predictive Geisser's relevance and structural equation modeling partial least square are
utilized to examine the effect of ESG factors on investors' investment utilizing the effect size
(f2), Coefficient of determination (R2), and relevance (Q2). The results indicate that 71% of
the variability in investors' investment decisions can be described by the explanatory
variables. The same is demonstrated by Q2 predictive relevance, which included exogenous
variables that demonstrated strong predictability for the model's distribution of investors'
investments. The effect size (f2) demonstrates that governance factors have a moderate
impact compared to social and environmental factors. The study's findings suggest that ESG
has a positive, significant impact on investors' investments. Similar to the research of
investors' perceptions of ESG investing through superannuation by Zwaans (2015). The study
is consistent in reporting the results that governance is an elevated factor that can draw more
financing from the market. The same results are reported in various empirical studies
(Naveed et al., 2020; Sultana et al., 2018; Lokuwaduge & Heenetigala 2017; Busch et al
2016; Cohen et al., 2015; Adam & Shauki., 2014). However, two other pillars, environmental
factors, and social factors both have their unique value to improve the investment decision of
investors (Rusu, 2020; Dobbs & Staden, 2016; Fazzini & Dal Maso, 2016). Recent studies
suggest parallel results that the investors' group anticipates stronger future capital inflows for
companies with higher ESG scores since they are more sustainable in long term (Glavina,
2022). Studies have shown that non-financial factors influence economic performance
((Hongming et al., 2020; Whelan et al., 2021; Buallay, 2019; Adedeji et al., 2019;
Kocmanová & Doekalová, 2012). Other findings suggest that investors pay more prices for
shares with high ESG reporting and consider the company more strengthen to protect their
investments principal amount plus future gains (Sultana et al., 2018; Khan, 2019). According
to the study, investors are clamoring for firm annual reports to disclose non-financial

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transparency information about ESG policies so they may base their decisions on solid
evidence (Naveed et al., 2020). Individual investors valued this type of information more
highly than institutional investors (Rakotomavo, 2011). According to Lokuwaduge and
Heenetigala's (2017) study, the enhancement of business financial performance is the
additional rationale for a preference for non-financial metrics.
There are some controversies about ESG performance. The study shows that in the US and
Europe the stock that undergoes controversies always performs below even the benchmark.
The fact is that market reacts to those inconsistencies that bring negative returns but in Asia,
the situation is different where it always outperforms (Franco, 2020). Another study considers
the companies with profit-driven social impact identified in "Fortune magazine's annual
Change the World list. Many of them are not able to place their position in SRI funds and
ESG rankings (Porter, Serafeim, & Kramer, 2019). The corporate investor and their
anticipated impacts on long-term profitability and value have underperformed even with ESG
advancements. This appears to be especially clear during the quarterly earnings call. The data
indicates that the cause is ESG disclosure content. The researcher makes the case for
disseminating ESG data that is useful to both market sellers and purchasers (Eckerle, Whelan,
& Tomlinson, 2020). The evidence that socially conscious companies have lower discount
rates and as a result, lower expected returns for investors, is stronger than the evidence that
these businesses experience better earnings or growth. Some companies simply gain from
being socially responsible, yet there are cases where doing so incurs expenses with no
corresponding advantages. (Cornell & Damodaran, 2020).
CONCLUSION
The central conclusion of the study is that investors value ESG information disclosure and
pay attention to the issues associated with these factors. The comparative dominance of
governance factors is high as compared to the rest of the two factors, but all create a
combined effect for the entity. The emerging markets including Pakistan Stock Exchange
have no proper index or proper law to find and compare the company’s commitment to the
ESG factors. Therefore, in this situation, the current study findings would encourage the
firms to blend the ESG aspects as part of their strategic management to give positive signals
to the market. The company’s investment in ESG issues will make its position better in the
market and enhance its goodwill. The study also demonstrates how organizations can grow
and continue over time by acquiring sizable investor markets. The money would be given to
long-term initiatives concurrently to increase cash flow. Businesses run more efficiently

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when they increase their ESG compliance and transparency as responsible citizens of the
community, which eventually attracts talent through enhanced social standing (Cheng, 2014).
The study's key findings have the potential to improve two areas. First, businesses may
contribute by upholding the internationally acknowledged norms for ESG factors. Firms can
increase their productivity by effective use of scarce resources. The company gives a positive
signal through better performance and reputation. That ultimately reduce their expenses to
encourage investors' investment and attract them without extraordinary efforts. The ESG
performance eventually supports the signaling theory here. The second obvious competitive
edge is to present care and consideration for stakeholders’ interest in the market by ESG
factors analysis. There is no standardized index to collect information on investor perceptions
of ESG in the context of Pakistani companies or measure how well companies perform in
terms of ESG. As a result, this study has developed a wonderful technique for including
investors' viewpoints in the creation of business strategies and policies. The more determined
the aim, the more likely the individual is to carry out a specific action or activity that
corresponds to a habit. The study has demonstrated the awareness of individual investors
about ESG factors as a Subjective Norm. It refers to the perception that most people either
approve of or disapprove of conduct about certain phenomena. A person's behavior is judged
favorably or unfavorably. This necessitates taking the behavior's result into account. The
expected return on the investment is the outcome of such behavior if it relates to stock market
investments. Investors may experience positive or negative circumstances depending on
whether they can accomplish the expected return on their investment (profit) or not. If they
can obtain the expected rate of return, they are in a good circumstance (profit).
LIMITATIONS & FUTURE DIRECTIONS
Although there are some disadvantages, survey-based research is typically preferred for
subjective topics. To assess the effects of the firm and investors on both sides, secondary data
may be used in addition to primary data for more objectivity. The study used a nonrandom
sampling technique. The sample size can be increased for further generalizability. The
relationship has no moderating and mediating variable that can enhance their relationship.
The study can further extend to a comparative analysis of Pakistan with other developing
countries. Additional investigation into the unobserved heterogeneity connected to ESG may
be done to comprehend the issues better. The effects of investment effectiveness, firm
reputation, stock prices, behavioral biases, risk aggressiveness, financial literacy, stakeholder
participation, etc. may be utilized as additional mediating and moderating variables. The
analysis methods can also be updated.

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RECOMMENDATIONS
Eventually, CEOs and directors must include ESG as a part of the entire business plan.
According to the survey, each board should establish clear communication with executives
regarding how they will tackle sustainability performance for all stakeholders. By allocating
funds to possibilities that are more attractive and sustainable, ESG proposals can improve
investment results. By having a competitive advantage, the company can increase its market
share. The only way to do this is to be proactive in governance, social issues, and the
environment. By evaluating these factors, organizations can lower risk and gain an advantage
over their customers. It is the need of an hour to start implementing ESG initiatives. Existing
frameworks are numerous. The management should start tracking and publishing the
important market indicators. This is an unending process. The frameworks and solutions are
still being developed.
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