ESG performance and firm value in the Chinese market

ABSTRACT

While the recent COVID-19 pandemic has accelerated environmental, social, and governance (ESG) investing, there remains a growing sense of uncertainty in this sector. This study investigates the impacts of ESG-related information disclosures on firm value and tests the relationship between ESG scores and firm value. Using a Chinese dataset, we run a fixed-effects panel regression model to assess the impact of ESG performance on firm value in terms of enterprise multiples while controlling for corporate attributes. Our results reveal that disclosing ESG-related information significantly increases firm value, and this relationship has intensified after the pandemic. However, the influence of ESG scores on firm value only seems significant after the pandemic. Environmental score significantly affects firm values whereas social and governance category scores do not.

KEYWORDS:

• Chinese market
• ESG investing
• firm value
• information disclosure
• sustainability

Disclosure statement

No potential conflict of interest was reported by the authors.

Acknowledgment

This work was supported by the 2022 Yeungnam University Research Grant.

Notes

1 Greenwashing refers to the act of giving false or misleading information about a company’s products to create an illusion that they are environmentally friendly. An instance of greenwashing includes overstating commitments and disclosures regarding environmental protection and resource utilisation in ESG reports.

2 Generally, both the enterprise multiple and Tobin’s Q are widely used as indicators of a company valuation. Tobin’s Q is typically used to measure a company’s investment efficiency and market valuation, with a higher value indicating a more efficient investment and a more positive market outlook. However, it may not be applicable to all industries, as it is based on a company’s net asset value rather than its future earnings potential (Bianconi & Tan, 2019).

3 The ‘Big Four’ accounting firms are Pricewaterhouse Coopers, Deloitte Touche Tohmatsu, Ernst & Young, and Klynveld Peat Marwick Goerdeler.

4 The RKS ESG rating is calculated as follows: i) environmental issues include climate changes, wastewater emissions, toxic and hazardous gas emissions, hazardous solid waste emissions, tailings emissions, sludge emissions from wastewater treatment, packaging materials, green financial products, low-carbon products, activities environmental impact, and supply chain environmental impact; ii) social issues include employee management, human resource management, occupational health and safety, philanthropy and charity, community impact, responsible investment, inclusive finance, supply chain labor management, information security, product security, and privacy protection; and iii) corporate governance issues including board effectiveness, executive compensation, ESG risk management, and business ethics.

5 As we adopt the enterprise multiple, which includes the firm’s market value, as the dependent variable, we use data from the same time point as the explanatory variables. This study uses quarterly data; hence, lagged dependent variables may affect the explanatory variables.