Environmental, Social and Governance Issues: An Empirical Literature Review Around the World

In economic literature, the search for a relation between Environmental, Social and Governance scores (ESG) and corporate financial performance can be traced back to the beginning of the 1970s.
This field of study has become more relevant over time due to the increasing attention of investors. Needless to say, the challenge is to verify whether considering sustainability, environmental and social issues also payoffs in terms of performance and added value to the firm. Whether it is reasonable to say that such strategies of firms do contribute to the establishment of a more sustainable business context as envisioned in Waddock (2017), there are substantial doubts about the role of ESG in shaping both profitability and firm value [see among others Lee et al. (2018)].
A first strand of literatures focused on the effect that ESG scores have on the cost of capital (equity and debt) and therefore on the related risk, highlighting that companies that have good sustainability standards enjoy significantly lower cost of debt and cost of equity due to a reduction of the relative risk (Bhojraj and Sengupta, 2003; Schauten an van Dijk, 2011; Bauer and Hann, 2010). Researches have also shown that good corporate governance leads to lower cost of equity (Lima ad Sanvincente, 2013), environmental risk management practices, disclosure on environmental policies (El Ghoul, Guedhami, Kim and Park, 2014), good employee relations and product safety (El Ghoul, Guedhami, Kwok and Mishra, 2011) lower firm’s cost of equity.
Further studies also aimed to investigate the effects of sustainability on company’s operating performance. Those studies generally show a positive correlation between the environmental, social and governance topics and operational performance (Fulton, Kahn and Sharples, 2012; Margolis, Elfenbein, and Walsh, 2007; van Beurden and Gossling, 2008).
Moreover, other studies have investigated whether this information increases the benefits for equity investors. On the governance dimension the majority of research suggest that superior governance quality leads to better financial performance (Bebchuk, Cohen and Ferrel, 2010; Gompers, Ishii and Metrick, 2003; Cremers and Ferrel; 2013). On the environmental dimension of sustainability, eco-efficiency and environmentally responsible behavior are viewed as the most important factors leading to superior stock market performance (Derwall, Guenster, Bauer and Koedijk, 2005; Karpoff, Lott and Werly, 2005). Finally, on social dimension, the literature shows a positive relationship between employee satisfaction and stock market performance (Edmans, Li and Zhang, 2014).
But, when considering aggregate ESG scores a more recent literature is already providing researchers with a complex evidence (Fatemi et al., 2017; Capelle-Blancard and Petit, 2017).
Therefore, limited awareness, lack of data jeopardising the ability of investors to make risk adjusted assessments of their expected returns, insufficient harmonised international actions, complexities surrounding valuation methodologies, limited regulatory and tax benefits are only some of the reasons slowing the flow of private capital into adaptation finance and the pace of the growth and innovation in the sector. According to this point of view, corporate and systemic governance are therefore a vital component of this ecosystem.