There Differences in the Operational Efficiency of Emerging Market Companies with and Without ESG Rating?

Abstract

The issue of socially responsible behavior of companies is becoming more and more relevant at the present stage. At the same time, the actions undertaken by firms in the framework of socially responsible behavior most often go beyond the procedures set by the current legislation and require additional costs and funding. Positive effects are not obvious, including in the long term, which makes the company's management, especially in developing countries, refuse to implement social and environmental measures. The ambiguity of potential economic effects made it possible to formulate a research question related to assessing the similarity/difference in operational efficiency and financial dependence of companies with and without social responsibility embedded in the business model. The social and environmental responsibility of companies in this study is assessed using the ESG rating. For further research, samples were formed by countries and industries grouped by companies with and without an ESG rating. The empirical analysis was based on statistical tests of difference. The put forward hypotheses were tested using the t-test. The study is based on company data for 2018, 2019, and 2020 in countries of Brazil, Russia, India, China, South Africa, Turkey, Indonesia and Mexico, related to emerging capital markets. For the sectoral cross-section, were used aggregated groups (economic sectors) according to the Thomson Reuters Eikon classification. The study revealed, in most cases, a significant excess of the value of financial leverage in companies with an ESG rating over companies without it. The average return on assets of enterprises with a non-zero ESG rating in all sectors is significantly higher than the return on assets without it. Thus, it is proved that implementing socially responsible behavior into a company's financial policy is economically viable, despite the increase in financial leverage. The results are stable over the entire considered interval; the pandemic did not affect the change in the results.