Understanding the Impact of ESG Practices in Corporate Finance

Sang Kim and Zhichuan (Frank) Li
Additional contact information
Sang Kim: Economics Department, Western University, London, ON N6A 3K7, Canada
Zhichuan (Frank) Li: Ivey Business School, Western University, London, ON N6A 3K7, Canada

Sustainability, 2021, vol. 13, issue 7, 1-15

Abstract: This study examines the relationship between environmental, social, and governance (ESG) factors and corporate financial performance. Specifically, we study various individual ESG categories, both ESG strengths and concerns, and aggregate ESG factor and their impact on corporate financial performance including profitability and financial risk. We find a positive effect of ESG factors on corporate profitability, and the effect is more pronounced for larger firms. Among different ESG categories, corporate governance has the most significant impact, particularly for firms with weak governance. We also find that ESG variables generally have a positive influence on credit rating. In particular, the social factor has the most significant impact on credit rating, while environmental score surprisingly has a negative effect. Overall, this research provides a rationale for ESG integration in the context of investment management and portfolio construction to maximize value and minimize risk.

Keywords: corporate financial performance; corporate governance; ESG; credit ratings; ESG investing; risk management (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

Downloads: (external link)
https://www.mdpi.com/2071-1050/13/7/3746/pdf (application/pdf)
https://www.mdpi.com/2071-1050/13/7/3746/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:13:y:2021:i:7:p:3746-:d:525282

Access Statistics for this article

Sustainability is currently edited by Ms. Alexandra Wu

More articles in Sustainability from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().