AN ANALYSIS ON THE BIDIRECTIONAL CAUSAL RELATIONSHIP BETWEEN ESG PERFORMANCE AND CORPORATE FINANCIAL PERFORMANCE OF
PUBLICLY-LISTED COMPANIES UNDER SENSITIVE INDUSTRIES IN THE ASEAN-4 EMERGING COUNTRIES
A Final Thesis Presented to the Faculty of the Department of Accountancy
RVRCOB, De La Salle University
In Partial Fulfillment
of the Requirements for the Degree Bachelor of Science in Accountancy
by
Beltrano, Sophia Marie R.
Follosco, Sophia Rose S.
Saraza, Ronnie Angelic O.
Vinson, Jewel A.
November 22, 2022
Abstract
With the rise of sustainable investments, the environmental, social, and governance performance (ESGP) of firms has been used to measure sustainability, and its influence on corporate financial performance (CFP) has been an interest of many studies. However, no conclusive evidence can be obtained from extant literature, which primarily focuses on the unidirectional ESGP-CFP relationship in developed economies. This study therefore aims to investigate the bidirectional ESGP-CFP relationship among publicly-listed companies in the ASEAN-4 emerging countries. Sensitive industries are also given focus due to their societal impacts. Using panel vector autoregression, some significant findings were revealed: a) for the ESGP-CFP link, an increase in ESGP may lead to an increase in market performance which reflects a firm’s current value and future prospects; and b) for the CFP-ESGP nexus, an increase in accounting performance based on historical financial data may lead to an increase in ESGP but an inverse impact is found in terms of market performance. Despite this, the study concluded that none of the variables ultimately impact the other as per the Granger causality test. A cross-country analysis, on the other hand, produced four significant, causal relationships. Since ESG reporting is in its infancy in the region, discrepancies between the overall ASEAN-4 and cross-country results may be attributed to the investment culture and ESG reporting practices in each of the sampled countries.
Keywords: ESG; Corporate Financial Performance; Emerging Countries; Sensitive Industries; Sustainability
Acknowledgments
The fulfillment of this study has become possible through the aid of the numerous individuals who extended their valuable contributions and to whom we express our utmost gratitude:
To Dr. Joy S. Rabo, our thesis adviser and mentor, for continuously guiding us every step of the way in approaching the link between ESG performance and corporate financial performance from a newcomer's perspective. We are grateful to you for lending us your time, wisdom, and patience with each draft that we have written. This study would not have been possible and as polished without your instruction and expertise.
To Ms. Editha O. Trinidad and Ms. Michelle A. Ang, our thesis panelists, for providing us the constructive criticisms necessary to improve our research. Your insights allowed us to set a higher bar with the quality of our study and with our development as researchers.
To Dr. Florenz C. Tugas, our Research Methods professor, for imparting knowledge that proved to be useful in the conduct of our study and whose advice helped us achieve a successful thesis defense.
To Mr. Dominic B. Dayta, our statistician, for being the arm that we needed in carrying out the statistical methods vital in analyzing the scope of our study. We thank you for sharing with us your statistical expertise and proficiency.
Lastly, to our family and friends, for your endless support, and for providing prayers and words of encouragement when they were needed the most.
Table of Contents
Abstract i
Acknowledgments ii
Table of Contents iii
List of Tables vi
List of Figures viii
List of Appendices viii
CHAPTER 1: The Research Problem 1
Background of the Study 1
Statement of the Problem 4
Objectives of the Study 6
Frameworks of the Study 7
Theoretical Frameworks 7
Operational Frameworks 17
Research Hypotheses 22
Assumptions of the Study 28
Significance of the Study 29
Scope and Limitations of the Study 32
Definition of Terms 33
CHAPTER 2: Review of Related Literature 36
Corporate Financial Performance 37
Sensitive Industries 39
Environmental, Social, and Governance: An Overview 40
ESG Reporting in the ASEAN-4 Emerging Countries 43
ESG Performance of Companies from Emerging Countries 47 Relationship Between ESG Performance and Corporate Financial Performance 54
Relationship Between ESGP and the Industry 54
ESGP as a Catalyst of CFP 55
CFP as a Catalyst of ESGP 59
ESGP-CFP Studies in the Industry 62
ESGP-CFP Studies in Emerging Countries 65
ESGP-CFP Studies in the ASEAN-4 Emerging Countries 67
Research Synthesis 77
Research Gap 79
CHAPTER 3: Methodology 81
Research Approach and Design 81
Population and Sampling Design 82
Research Procedures 87
Data Analysis 88
Descriptive Statistics 88
Panel Vector Autoregression Based on Generalized Methods of Moments 89
Granger Causality Test 92
CHAPTER 4: Presentation of Findings, Analysis, and Implications 95
Preliminary Procedures 96
Lag-order Selection 96
Model Stability 98
Overall ASEAN-4 Results and Analysis 99
Descriptive Statistics 99
Impact of ESG Performance on Corporate Financial Performance 106 Impact of ESG Performance on Return on Equity 109
Impact of ESG Performance on Tobin’s Q 113
Impact of Corporate Financial Performance on ESG Performance 118 Impact of Return on Equity on ESG Performance 121
Impact of Tobin’s Q on ESG Performance 125
Cross-country Results and Analysis 129
Descriptive Statistics 130
Indonesia 134
Malaysia 144
Philippines 151
Thailand 160
CHAPTER 5: Conclusion and Recommendations 167
Conclusion 167
Recommendations 180
Corporations / Management 180
Investors 182
Regulators 184
Academic Community and Future Researchers 186
References 188
Appendices 221
Appendix A – Catalog of ASEAN-4 Publicly-listed Sensitive Companies 221 Appendix B – Statistical Results for Factor Error Variance Decomposition
Analysis
225
Appendix C – Statistical Results for Post-estimation Analysis Through Orthogonalized Impulse Response Function
228
Appendix D – DLSU Research Ethics Clearance Forms 230
List of Tables
Title Page
1 Variables of the Study 19
2 A-Priori Expectations for ESGP-CFP Relationship 27 3 A-Priori Expectations for CFP-ESGP Relationship 28
4 Summary of Findings for ESGP-CFP Relationship 75
5 Summary of Findings for CFP-ESGP Relationship 76
6 Sensitive Sectors and Subsectors 82
7 Initial List of Publicly-listed Sensitive Companies in the ASEAN-4 Emerging Countries
84
8 Final List of Publicly-listed Sensitive Companies in the ASEAN-4 Emerging Countries
86
9 Lag-order Selection 97
10 Model Stability 98
11 Mean, Standard Deviation, and Kurtosis of CFP Variables 100 12 Mean, Standard Deviation, and Kurtosis of ESG Variables 102 13 Mean, Standard Deviation, and Kurtosis of Control Variables 104 14 PVAR-GMM Results for the Impact of ESGP on CFP 106 15 Granger Causality Test Results for the Impact of ESGP on CFP 107 16 PVAR-GMM Results for the Impact of CFP on ESGP 118 17 Granger Causality Test Results for the Impact of CFP on ESGP 119 18 Descriptive Statistics of Dependent Variables per ASEAN-4 Country 130 19 Descriptive Statistics of Control Variables per ASEAN-4 Country 133 20 PVAR-GMM Results for the Impact of ESGP on CFP – Indonesia 134 21 Granger Causality Test Results for the Impact of ESGP on CFP – Indonesia 135 22 PVAR-GMM Results for the Impact of CFP on ESGP – Indonesia 136 23 Granger Causality Test Results for the Impact of CFP on ESGP – Indonesia 136
Title Page 24 PVAR-GMM Results for the Impact of ESGP on CFP – Malaysia 144 25 Granger Causality Test Results for the Impact of ESGP on CFP – Malaysia 145 26 PVAR-GMM Results for the Impact of CFP on ESGP – Malaysia 146 27 Granger Causality Test Results for the Impact of CFP on ESGP – Malaysia 146 28 PVAR-GMM Results for the Impact of ESGP on CFP – Philippines 151 29 Granger Causality Test Results for the Impact of ESGP on CFP – Philippines 152 30 PVAR-GMM Results for the Impact of CFP on ESGP – Philippines 153 31 Granger Causality Test Results for the Impact of CFP on ESGP – Philippines 153 32 PVAR-GMM Results for the Impact of ESGP on CFP – Thailand 160 33 Granger Causality Test Results for the Impact of ESGP on CFP – Thailand 161 34 PVAR-GMM Results for the Impact of CFP on ESGP – Thailand 162 35 Granger Causality Test Results for the Impact of CFP on ESGP – Thailand 163
36 Summary of Overall ASEAN-4 Results 174
37 Summary of Cross-country Results 175
List of Figures
Title Page
1 Stakeholder Theory 8
2 Legitimacy Theory 10
3 Resource-based View 12
4 Managerial Opportunism Hypothesis 13
5 Slack Resources Theory 14
6 Virtuous / Vicious Cycle Theory 16
7 Schematic Diagram of ESGP-CFP Relationship 17
8 Schematic Diagram of CFP-ESGP Relationship 18
9 Literature Map 36
10 Histogram of Return on Equity and Tobin’s Q 101
11 Histogram of the Combined and Individual ESG Scores 103
12 Histogram of Control Variables 105
List of Appendices
Title Page
1 Catalog of ASEAN-4 Publicly-listed Sensitive Companies 221 2 Statistical Results for Factor Error Variance Decomposition Analysis 225 3 Statistical Results for Post-estimation Analysis Through Orthogonalized
Impulse Response Function
228
4 DLSU Research Ethics Clearance Forms 230
