Forecasting the Environmental, Social, and Governance Rating of Firms by Using Corporate Financial Performance Variables: A Rough Set Approach

Fernando Garcia Garcia, Jairo González-Bueno, Francisco Guijarro and Javier Oliver
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Jairo González-Bueno: Faculty of Business Administration, Universidad Pontificia Bolivariana, Bucaramanga 681017, Colombia
Francisco Guijarro: Research Institure for Pure and Applied Mathematics, Universidad Politécnica de Valencia, 46022 Valencia, Spain
Javier Oliver: Business School, Universidad de Valencia, 46022 Valencia, Spain

Sustainability, 2020, vol. 12, issue 8, 1-18

Abstract: The environmental, social, and governance (ESG) rating of firms is a useful tool for stakeholders and investment decision-makers. This paper develops a rough set model to relate ESG scores to popular corporate financial performance measures. This methodology permits handling with information in an uncertain, ambiguous, and imperfect context. A large database was gathered, including ESG scores, as well as industry sector and financial variables for publicly traded European companies during the period 2013–2018. We carried out 500 simulations of the rough set model for different values in the discretization parameter and different grouping scenarios of firms regarding ESG scores. The results suggest that the variables considered are useful in the prediction of ESG rank when firms are clustered in three or four equally balanced groups. However, the prediction power vanishes when a larger number of groups is computed. This would suggest that industry sector and financial variables serve to find big differences across firms regarding ESG, but the significance of the model drops when small differences in ESG performance are scrutinized.

Keywords: corporate financial performance; corporate social performance; ESG rating; rough sets (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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