Purpose: This chapter identifies performance factors that have the strongest impact on companies' sustainable outcomes and compares the obtained results across different sectors. Methodology: About 3,384 observations were gathered from 2015 to 2022 from companies in communication services, energy, financials, real estate, and utilities sectors that comprise the 'STOXX Global ESG Leaders Select 50' index. The multiple regression model is constructed with companies' ESG scores as dependent variables and independent variables representing operational, financial, and market performance. Findings: Companies that tend to have higher operational and financial performance in the financial sector are more likely to have higher ESG performance. The financial performance results of companies showed the strongest statistically significant relationship with environmental and the weakest with governance scores. Implications: Results benefit private and institutional investors aiming to create more sustainable portfolios. The obtained results indicate that these investors should focus on companies operating in the financial and energy sectors with higher performance results. Better ROE, ROA, and Tobin's Q may have a negative impact on sustainable outcomes for companies operating in the real estate and utility sectors. Limitations: Firstly, not all ESG index providers disclose information about their index constituents. Secondly, within the chosen 'STOXX Global ESG Leaders Select 50' index, not all constituents had complete ESG data available on the Bloomberg platform. When selecting the analysis period, it was observed that the accessible ESG data on Bloomberg covers a relatively short time span, only from 2015 onwards. Future research: A larger number of companies by choosing a more comprehensive available ESG index.
Purpose: This study focuses on the business case of Environmental, Social and Governance (ESG), namely its economic benefits and long-term value creation by attracting environmental-friendly and socially responsible investors. Methodology: The central result of the von Neumann-Morgenstern (VNM) expected utility theory is that the optimal strategy under uncertainty is given by maximising the expected utility. The study introduces a second utility function to represent externalities. Total utility can be derived by a sum of the two functions where h is a scalar value which indicates to what degree the actor is interested in maximising the utility of externalities. The payouts could be set by ESG scores for the given companies, then the whole equation can be solved for simple cases such as the normal case. Findings: By extending the traditional risk/return MPT framework to account for the additional utility of contributing towards externalities (in this case specifically ESG goals) the utility maximisation algorithm can be applied to the ESG dimension in a holistic manner and not as a separate filter on the investment universe nor a synthetic boost to expected returns. Implications: Portfolio and asset managers can more efficiently optimise for consumer risk, return and sustainability preferences, allowing access to the widest possible investment universe while at the same time delivering an optimal bespoke solution for the specific sustainability preferences of the investors. Future research: How to measure investment's sustainability impact and what is the best way to estimate that. How to determine monetary impact of damages and externalities. Estimation of Hamilton's coefficient.
Purpose/Objectives: The lack of universal standards for environmental, social, and governance (ESG) measurement and reporting can lead to discrepancies and confusion in interpreting ESG performance. This paper analyses the main challenges in measuring and reporting ESG performance. Methodology: A comparative study of the evaluation methodologies used by international profile companies was carried out. The chosen sample consisted of 50 energy sector companies, which were selected according to the level of market capitalisation, revenues, energy production, and environmental impact. Data on ESG scores was collected from 2022 sustainability reports, ESG rating agencies, government reports, and other sources ensuring a comprehensive analysis of these companies' sustainability performance. Findings: Assessing social and governance aspects can be subjective and vary according to individual perspectives and values. Assessing ESG performance among companies in the energy sector is crucial for stakeholders aiming to promote sustainable business practices and mitigate risks. Implications: Evaluating ESG performance requires a long-term perspective, but markets often focus on short-term performance. This can undermine efforts to improve ESG performance for companies that focus too much on short-term results. Limitations: Lack of ESG scores for several companies and lack of access to more diverse databases. The rapid pace of change in the field of ESG and not reflecting the latest developments or trends. Future Research: Ways to integrate ESG criteria more effectively into investment and business decision-making processes, including the development of innovative tools and methodologies, and examining sustainable management and governance practices and their impact on the long-term performance of companies and society.
Purpose: This study reviews the financial implications of ESG business model redesign, focusing on providing higher orientation to ESG principles for firms' supply chains, including training needs, policy requirements, or monitoring tool implementation. It assesses the association between firms' profitability and the efforts firms make to align with principles of sustainable business models. Methodology: Several statistical analyses, including canonical analysis, ANOVA, and multiple regression analysis. The focus of the research is limited to the CAER ex-communist members. Findings: There is significant reluctance from the firms' side to make the transition to the ESG-based and more circular economy business models when reviewing data about ESG supply chains, mainly driven by insufficient know - how transferred on the firm level from the academic side and insufficient understanding on the cost-benefits analysis of such transition. Implications: Better resource allocation, increased environmental innovation capital acquisitions, or reduced waste along business processes lead to increased firms' profitability. Transformation driven by the transition to circular business models also involves supply chain management-related business processes. The direct impact of transforming supply chains on firms' profitability depends especially on the business models, mainly described by the particularities of the sector firms operate in, by countries' institutional framework, and potential for growth. The green transformation of supply chains also generates indirect effects on firms' profitability. Limitations: Data selected for the study is extracted from the Refinitiv database, namely, all the listed companies with assets valued over 10,000 EUR from ex-communist economies. Future Research: An extended database.
