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ESG and Financial Performance: Impact of Environmental, Social, and Governance Issues on Corporate Performance

ESG and Financial Performance: Impact of Environmental, Social, and Governance Issues on Corporate Performance
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Author(s): Aslı Aybars (Marmara University, Turkey), Levent Ataünal (Freelance Academic, Turkey)and Ali Osman Gürbüz (Istanbul Commerce University, Turkey)
Copyright: 2019
Pages: 17
Source title: Handbook of Research on Managerial Thinking in Global Business Economics
Source Author(s)/Editor(s): Hasan Dinçer (Istanbul Medipol University, Turkey)and Serhat Yüksel (Istanbul Medipol University, Turkey)
DOI: 10.4018/978-1-5225-7180-3.ch029

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Abstract

Non-financial information such as environmental, social, governance (ESG) issues is becoming as much important as financial data. This study investigated the empirical relationship between Thomson Reuters Environmental Social Governance (ESG) Combined Score and performance of S&P 500 firms with eleven years of data from between 2006 and 2016. The study confirmed unidirectional positive and significant relation between ESG Combined Score and ROA, suggesting that improvements in ESG score have positive impact on operating performance of the firm. Although simultaneous equation estimations by means of instrumental variables (IV) employing two-stage least squares (2SLS) and three-stage least squares (3SLS) confirmed the significant positive relation between ESG Combined Score and operational profitability (ROA); contrarily, Tobin's Q seemed to affect ESG score rather than the ESG score inducing Tobin's Q. Higher Tobin's Q seems to lead to a lower ESG score. In other words, firms with higher growth potential as denoted by a higher Tobin's Q, are found to be less sensitive to ESG issues.

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