ESG selected good books | A Business Survival Guide under Climate Change | In-depth analysis of "Climate Change Adaptation" (Part 2)

LINK-ESG Book Recommendation Official continues to introduce "Climate Change Adaptation, Governance and New Issues of Value: Measuring the Impact of ESG Scores on CoE and Firm Performance" to everyone. ESG Investment: An Empirical Analysis Report from Global Markets To examine the relationship between ESG and corporate financial performance, this chapter uses econometric methods to empirically analyze a sample of listed companies across industries and markets. The research design is as follows: 1. Research Design (1) Sample Selection and Data Sources: This study selects companies listed on major global stock markets between 2010-2020 as research subjects. After removing samples with severe data gaps, the study finally obtains a sample of 3000 listed companies covering 50 countries and regions and 20 industries. ESG data is sourced from third-party rating agencies such as MSCI, Bloomberg, and Refinitiv. Considering rating system differences, this study uses scores from multiple agencies to test the robustness of results. Financial data comes from the S&P Capital IQ database. (2) Variable Setting - Dependent Variables: Corporate financial performance is measured using indicators such as Return on Assets (ROA), Return on Equity (ROE), and Tobin's Q. ROA and ROE focus on profitability, while Tobin's Q focuses on market value. - Independent Variables: ESG overall score is used to measure overall sustainability performance, with sub-dimension scores for ENV, SOC, and GOV to examine the differential impacts of each dimension. - Control Variables: Variables such as company size, debt levels, cash holdings, R&D expenditure, industry, and year are included based on existing literature to eliminate the influence of other factors. (3) Model Construction To test the relationship between ESG and corporate performance, the following regression model is constructed: Firm_Perf it = + 1 ESG_Score it Control it it where Firm_Perf represents financial performance variables (ROA, ROE, or Tobin's Q), ESG_Score represents ESG score, Control includes a series of control variables, and subscripts i and t represent the company and year, is the random disturbance term. In addition to the baseline regression, this study also examines: - Whether there are differences in the effects of each sub-dimension (E, S, G) - Whether there is a nonlinear relationship between ESG and financial performance - The moderating effects of macroeconomic environment, industry characteristics, and other contextual factors The empirical section focuses on the core question of whether ESG affects and how it affects corporate financial performance, aiming to provide convincing research evidence for ESG investment practice using large sample data and robust econometric methods. 2. Empirical Results After rigorous data processing and model setting, we obtained a series of insightful empirical results. These findings not only confirm the positive relationship between ESG and corporate financial performance but also provide strong support for the effectiveness of ESG investment strategies. (1) Impact of ESG on Corporate Financial Performance - Overall, ESG score is significantly positively correlated with ROA and ROE. This means that the better the ESG performance, the stronger the company's profitability. A one standard deviation increase in ESG overall score leads to a 0.8-1.2 percentage point increase in ROA. - In terms of sub-dimensions, the performance of ENV and SOC dimensions is positively correlated with profitability, but the role of the GOV dimension is not significant. This indicates that environmental and social responsibility practices are more critical for improving profitability during the sample period. - When looking at different industries, the positive effects of ESG are more pronounced in light asset industries such as consumer goods and technology, media, and telecommunications (TMT). For cyclical and heavy asset industries, the returns on ESG investments show a certain lag effect. (2) Impact of ESG on Corporate Risk - After controlling for other factors, ESG score is significantly negatively correlated with the systematic risk beta of companies. This suggests that companies with outstanding ESG performance have stronger resilience to external shocks. - Looking at sub-dimensions, the role of the GOV dimension in reducing risk is most significant. Good corporate governance helps mitigate ethical risks such as insider trading and enhances corporate resilience. - Regionally, the negative relationship between ESG score and corporate risk is particularly prominent in mature markets such as North America and Europe. Emerging markets still have considerable room for improvement in ESG risk management. (3) Impact of ESG on Corporate Market Value - After controlling for profitability, growth, and other financial indicators, ESG score still has a significant positive impact on Tobin's Q. This indicates that capital markets already consider ESG as an important factor influencing corporate value. - Looking at sub-dimensions, the marginal effect of the ENV dimension on increasing corporate value is the greatest. Against the backdrop of the increasing popularity of the concept that "green waters and green mountains are golden mountains and silver mountains," environmental responsibility has become an important component of corporate core competitiveness. - Longitudinally, the positive effect of ESG score on corporate value continues to strengthen. As ESG investment becomes mainstream, its impact on stock pricing is expected to deepen further. The above empirical results preliminarily confirm the research hypothesis that "ESG is beneficial for improving financial performance and market value." How is this positive impact realized? Does the intensity of the impact vary by company? Let us explore these questions together based on the insights from empirical research. 3. Research Insights The reason why ESG can promote financial performance and increase corporate value lies in both its intrinsic economic logic and the positive response of capital markets and stakeholders. Summarizing the empirical research results, we can derive mechanisms of ESG value creation and investment.Important insights into the effectiveness of strategies.The Mechanism of ESG Value Creation ESG promotes long-term value creation for companies, mainly benefiting from the following aspects: - Efficiency improvement. Practicing ESG principles helps companies improve energy and resource utilization efficiency, resulting in direct cost savings. - Risk management. Companies with strong ESG awareness pay more attention to environmental, social, and governance risk prevention, leading to higher financial stability. - Reputation enhancement. In the context of stakeholders placing increasing importance on sustainable development, ESG performance has become an important influencing factor on corporate reputation. A good reputation helps companies earn consumer trust and attract excellent talent. - Innovation drive. ESG principles require companies to develop green products, explore inclusive business models, leading to continuous innovation. - Financing convenience. As ESG investment becomes mainstream, companies with outstanding ESG performance have advantages in equity and debt financing, resulting in lower funding costs. It can be seen that ESG value creation is multidimensional and multi-channel. The efficiency improvement, risk management, reputation enhancement, etc., triggered by ESG, collectively drive the enhancement of financial performance and market value. This transmission effect varies among companies in different industries and development stages, but the overall trend is becoming more apparent. Effectiveness of ESG Investment Strategies Empirical results show that ESG factors are significantly positively correlated with corporate financial performance and market value, which also confirms the effectiveness of ESG investment strategies: - ESG screening method. ESG ratings have been proven to be effective investment benchmarks. By comparing and screening based on ESG ratings, investors can effectively identify companies with excellent ESG performance, outperforming the market. - ESG integration method. Systematically integrating ESG factors into the investment process, not just as a screening tool, will make investment decisions more comprehensive and cautious. Investors should actively embrace ESG principles to enrich their investment perspectives. - Active shareholding method. Pushing companies to strengthen ESG management through shareholder voting and proposals has been proven to significantly improve corporate performance. Investors should actively exercise shareholder rights and play the role of "supervisors." - Long-term perspective. ESG investment requires a longer-term strategic vision. The effects of corporate ESG transformation require a process. Investors should break free from short-term constraints and befriend time. Whether through passive screening or active integration, incorporating ESG into investment perspectives has become a consensus. This is not only a necessary choice in response to the sustainable development trend but also can bring "alpha" returns to investors. Investors in emerging markets should especially learn from the experience of mature markets, emphasizing ESG principles while seizing development opportunities to achieve a win-win situation for "impact" and "return." Information disclosure is an important infrastructure for the ESG ecosystem. Only by building on a foundation of authentic, reliable, and comparable information can ESG investment decisions be targeted. Due to the wide-ranging factors and diverse standards involved in ESG, how to standardize ESG disclosure by companies and ensure information quality is a focal point of concern across various sectors. 1. Mandatory disclosure rules. With ESG becoming increasingly mainstream, more and more countries and regions are beginning to enforce mandatory requirements for ESG information disclosure through legislative means. For example: - The EU's Non-Financial Reporting Directive requires large listed companies to regularly publish non-financial reports containing ESG information. - The US SEC requires listed companies to disclose ESG risk factors related to financial performance in their 10-K annual reports. - Exchanges in Hong Kong, Singapore, and other places have issued ESG disclosure guidelines, requiring listed companies to enhance ESG transparency. The introduction of mandatory disclosure rules has increased corporate disclosure enthusiasm, but there is still room for improvement in terms of disclosure depth and consistency. In the next step, regulatory authorities worldwide need to further refine disclosure terms, strengthen post-event accountability, to truly enhance information effectiveness. 2. Voluntary disclosure standards. Alongside mandatory disclosure, voluntary disclosure standards formed by market entities have become an important supplement to ESG information disclosure. For example: - The GRI (Global Reporting Initiative) standard is the most widely used ESG disclosure framework currently. - The SASB (Sustainability Accounting Standards Board) standard, designed industry-specific quantitative disclosure indicators from a financially material perspective. - The TCFD (Task Force on Climate-related Financial Disclosures) recommendations focus on transition and physical risks brought about by climate change. Voluntary standards are more in line with market demand and help enhance comparability of ESG data across different companies and industries. Relevant organizations should actively incorporate feedback from all parties to drive the formation of globally unified disclosure standards. 3. ESG ratings and indices. Transforming vast amounts of raw ESG data into intuitive ratings and index products is crucial for leveraging the market function of ESG information. Currently, major international index companies and financial institutions have introduced ESG rating systems, for example: - MSCI's ESG ratings, based on 37 key themes, forming a database covering 160 countries and 13,000 companies. - Dow Jones Sustainability Indices, selecting leading global companies that excel in economic, environmental, and social aspects. - FTSE4Good Index Series, encompassing UK companies with excellent ESG practices. Investors can conduct benchmark analysis based on ESG ratings, achieve passive management through ESG thematic indices, and effectively reduce trading costs and asymmetric information risks. Currently, ESG rating quality varies, and the purity of index products needs improvement. In the future, as rating systems and methodologies mature, ESG ratings are expected to become the "guiding star" for investment decisions. 4. Green bond disclosure. Introducing ESG principles into fixed-income markets through green bonds requires comprehensive and transparent information disclosure. Green bond issuers need to disclose relevant information regarding the use of funds, project impact, and verification mechanisms to attract green investors. Overall, the evolution of the ESG investment landscape is driving companies, investors, and regulatory bodies to adopt more sustainable practices, with a focus on transparency, accountability, and long-term value creation.Innovative products in the fixed income field, green bonds have raised higher requirements for information disclosure. According to ICMA's "Green Bond Principles", green bond issuers are required to disclose the following information:Purpose of fund raising. It is necessary to clearly define the category of green projects to be invested in and explain their environmental sustainability goals. Project evaluation process. It is necessary to explain the screening criteria for green projects and the external standards or certifications on which they are based. Funding management mechanism. The raised funds must be tracked and managed to ensure that they are used exclusively for designated purposes and that returns are reinvested in green projects. Continuous reporting. Regular disclosure of the actual use of funds raised, the quantitative environmental benefits involved, and the relevant calculation methods. By strengthening the disclosure of "raised and invested" information, green bonds have effectively achieved "to compel the real by means of disclosure". This provides a good example for the establishment of standardized disclosure regulations for other ESG financial products. Currently, ESG disclosure is still in a state of many voices. Regulatory rules, industry standards, and rating systems need further integration and improvement. Looking ahead, with the popularization of mandatory disclosure, the standardization of key indicators, and the integration of financial and non-financial information, ESG disclosure will continue to mature, laying a solid information foundation for the construction of a sustainable financial system. How to standardize ESG disclosure? Key steps on the road to the future Building the ESG ecosystem Further development of ESG requires the establishment of a sound ecosystem involving the participation of multiple stakeholders. This ecosystem should include the following key elements: Policy and regulatory level: Governments and regulatory bodies should establish clear ESG policy guidelines, improve mandatory and voluntary disclosure rules, strengthen supervision and punishment for violations. They should also promote the development and implementation of ESG-related laws and regulations. Rating and disclosure level: Establish unified, comparable, and trustworthy ESG rating standards and methodologies, enhance the professionalism and independence of third-party ratings. Encourage companies to improve the timeliness, accuracy, and completeness of ESG disclosure. Investment and financing level: Promote the comprehensive integration of ESG factors into investment decision-making processes, and develop ESG-themed investment products. Encourage financial institutions to develop innovative financing tools such as green loans and sustainable development bonds, directing social capital towards companies with outstanding ESG performance. Corporate practice level: Enhance the ESG awareness of corporate managers and employees, integrate ESG principles into company strategies, operations, and culture. Strengthen communication with stakeholders to improve ESG practices. Actively respond to requests from investors, rating agencies, regulatory authorities, and other parties. Public awareness level: Strengthen advocacy and promotion of ESG principles, enhance public awareness of sustainable development and responsible investment concepts. The media should objectively report on ESG issues and create a positive public opinion atmosphere. Only through coordinated efforts from multiple parties, can the development ecosystem of "government guidance, market drive, corporate practice, and social participation" for ESG fully utilize the role of ESG in resource allocation and promote sustainable economic development. Secondly, the standardization of ESG disclosure is a key step in the development of the next stage. Currently, there is still a lack of consensus across sectors on the formulation and unification of ESG disclosure standards, frameworks, and indicators, which affects the comparability and usefulness of ESG data. In the future, the standardization of ESG disclosure should be promoted in the following aspects: Formulating uniform mandatory disclosure standards. At the regulatory level, accelerate the formulation of unified, clear, and operational mandatory ESG disclosure standards to enhance the standardization, consistency, and comparability of disclosure. Encouraging voluntary disclosure. Building on mandatory disclosure, encourage conditional companies to disclose more decision-useful quantitative and qualitative information in accordance with frameworks such as TCFD, SASB, and GRI. Enhancing the reliability of disclosure. Strengthen supervision of disclosure information auditing to enhance the authenticity of disclosure. Explore the establishment of an independent third-party verification market to enhance the credibility of ESG information. Improving the disclosure indicator system. Tailor environmental, social, and governance-related key performance indicators to optimize their relevance and measurability based on industry characteristics. Strengthening digital disclosure. Utilize new technologies such as big data and artificial intelligence to enhance the automation and timeliness of ESG data collection, processing, and transmission. In the future, as ESG practices deepen, these measures are expected to gradually advance the standardization of disclosure. The standardization and uniformity of disclosure will greatly enhance the market efficiency of ESG data and its resource allocation function. The relationship between ESG and long-term value creation by companies still needs further research and verification. There are still some controversies in the academic community, with some voices questioning the lack of inevitable connection between ESG investment and financial performance of companies, suggesting that ESG investments may sacrifice shareholder interests. Therefore, in the future, the following aspects of theoretical and empirical analysis should be strengthened: Improve the theoretical framework and transmission mechanism of ESG value creation. Deeply analyze the role of ESG factors in affecting different types of capital accumulation and risk management in companies, and construct a systematic analytical framework for ESG-driven value creation. Strengthen empirical research on ESG and financial performance. Expand the coverage of industries and regions in research samples, use diverse econometric methods to examine the relationship between ESG performance and company earnings, risk, and valuation, providing more empirical support for the commercial value of ESG. Emphasize the contextuality and dynamics of ESG value creation. Investigate the differences in the role of ESG in different institutional, cultural, and industry backgrounds, and dynamically assess the impact of ESG practices on value creation in the short and long term. Extract best practices of ESG value creation. Systematically review successful experiences of leading ESG companies, analyze and extract replicable and scalable ESG best practices, providing guidance for creating long-term shared value for more companies. ESG and corporate transformation The rise of ESG principles provides a new perspective and driving force for traditional companies to transform and upgrade. Faced with increasingly severe challenges in the environmental, social, and governance aspects, companies must actively incorporate ESG into the transformation of their development strategies and business models. Green transformation: Companies must align with the trends of a low-carbon economy and sustainable development, accelerating the transition to green manufacturing, clean energy, and the circular economy. Through technological innovation, process redesign, and sustainable supply chain management, companies can achieve sustainable development goals while driving profitability and growth. Overall, the development and standardization of ESG practices are essential for creating a more sustainable and responsible financial system, and for maximizing the positive impact of ESG principles on companies, investors, and society.Implement measures to improve energy efficiency, reduce pollution emissions, and promote environmentally friendly operations.Digital Transformation: Enterprises need to actively use new generation information technologies such as the Internet of Things, big data, artificial intelligence, etc. to promote digitalization and intelligent transformation. Through digital means, monitoring, analyzing, and decision-making levels of ESG performance can be enhanced, and new business growth points can be created. Business Model Transformation: Enterprises need to adapt to the upgrading of consumers' demands for health, safety, environmental protection, etc., and accelerate the transformation towards service-oriented manufacturing, sharing economy, platform economy, and other new business models. Through innovative models, a better balance between economic and social benefits can be achieved. Inclusive Transformation: Enterprises need to practice the concept of "leaving no one behind" in inclusive development, safeguarding the rights and interests of all stakeholders during the transformation process. Measures such as employee training and re-employment should be taken to reduce the pains of transformation, allowing stakeholders to share the results of the transformation. ESG has become an important guide for examining and leading corporate transformation. Only by embedding ESG throughout the entire process and at all levels of transformation can enterprises achieve sustainable development and maintain long-term competitiveness in uncertain environments. ESG practices should start from specific risks and opportunities within the industry and take targeted measures. Different industries are expected to show the following trends in advancing ESG: - Financial industry: ESG will further integrate into mainstream investment and insurance businesses. Measures such as developing green financial products and improving ESG risk management mechanisms will guide funds toward sustainable projects. Related information disclosure, due diligence, scenario analysis, etc., will also become important aspects of business operations. - Extractive industry: As an industry with significant environmental pressures, the extractive industry will pay more attention to ESG measures in pollution control, land reclamation, tailings management, and strengthen communication and cooperation with communities, fulfilling environmental and social responsibilities. Actively exploring innovative models for clean production and comprehensive resource utilization. - Manufacturing industry: With increasing environmental standards, the manufacturing industry will comprehensively improve ESG performance through measures such as energy conservation, waste disposal, and safety production. At the same time, in response to consumer demands, research and development of energy-efficient and environmentally friendly products will be accelerated. The ESG concept will be transmitted upstream and downstream through supply chain management. - Consumer goods industry: The industry will focus on product quality and safety, consumer rights protection, supply chain ESG management, etc. Emphasizing control from the source to ensure that raw material procurement and production processes meet ESG requirements. Guiding green and healthy consumption concepts based on consumer preferences. - Internet industry: Data security, privacy protection, content review, etc., will become the focus of ESG management for internet companies. Strengthening self-regulation, improving internal governance, and building a harmonious, healthy, and trustworthy online space. Meanwhile, leveraging the technological and channel advantages of the internet to empower other industries. The above are just some general trends. For individual companies, it is necessary to conduct in-depth analysis of their ESG risk profiles, identify key issues, and take targeted actions. Only by starting from the characteristics of the industry and fully integrating ESG into the entire process of operations and business expansion can companies truly implement the ESG concept, thus obtaining sustainable competitive advantages at a deeper and more comprehensive level. ESG Advancement Strategies in Emerging Markets Compared to developed markets, emerging markets face many challenges in advancing ESG, such as the need to improve relevant regulatory standards, insufficient ESG awareness and capabilities among enterprises, and an immature ESG investment ecosystem. To address this, emerging markets should adopt the following strategies to steadily promote ESG development: - Improve top-level design. Accelerate the formulation of national strategies and action plans in the ESG field, clearly defining development goals, paths, and measures. Timely introduce relevant laws and regulations, embedding ESG requirements into various economic policies and industrial policies. Encourage eligible stock exchanges and industry associations to establish rules and guidelines related to ESG. - Promote corporate practices. Increase the promotion and training efforts of ESG concepts to enhance the awareness of ESG among corporate management and employees. Encourage industry-leading companies to play a demonstrative role and create typical cases. Explore ESG practice paths that are in line with the country's national conditions to avoid blindly copying practices from developed markets. Guide small and medium-sized enterprises to gradually improve their ESG performance starting from the basics. - Cultivate the ESG ecosystem. Introduce policy support measures to encourage institutional investors to incorporate ESG into their decision-making processes. Develop local ESG rating agencies, indices, and other intermediary service markets. Strengthen international exchanges and cooperation, learning from experiences of mature markets. Support universities and think tanks to enhance theoretical and applied research on ESG. Create a market environment and social atmosphere conducive to the development of ESG. - Address special risks. Emerging markets generally face significant risks of social development imbalances, making poverty alleviation and livelihood protection a top priority in ESG efforts. In the face of external shocks and uncertainties, enhance risk prevention and crisis response capabilities to ensure the stability of the economy, society, and capital markets. Balance development with ESG demands, simultaneously accelerating economic growth and considering long-term sustainability. - Gradual progress. The advancement of ESG in emerging markets cannot be achieved overnight, requiring overall consideration and pace control. Adhere to a problem-oriented approach, focusing on the most urgent ESG issues in the country and setting stage-specific goals. Follow a pilot-first approach, breaking through in key areas such as securities markets and state-owned enterprises, leading the way for widespread impact. Adapt strategies to local conditions, building steadily based on local advantages and foundations.