The nexus between ESG ratings and financial performance in emerging markets

STATEMENT OF SUBSTANTIVE CHARACTER OF THE COURSE PAPER 2
1. Introduction 4
1.2 Research Relevance and Problem 9
1.3 Research Goal 11
1.4 Research objectives 12
1.5 Research Object and Subject 12
1.6 Characteristics of Research Methodology 12
1.7 Characteristics of research data: 13
2. Literature review 13
2.1 ESG concept 13
2.2 ESG in business 19
2.3 Theoretical approaches to ESG reporting 21
2.4. ESG in developing economies. 24
2.4.1 ESG in India and Brazil 25
2.5 ESG and Financial performance 31
2.6 The effect of State ownership in the ESG-FP relationship 35
3. Research design 38
3.1 Sample criteria 38
3.3 Variables 42
3.4 Methodology 48
4.1 Empirical Results 49
4.2. Discussion of results 62
4.3 Conclusion 65
4.4 Implications and Recommendations 66
4.5 Limitations and Future Results 71
5. List of references: 71
List of tables
Table 1. Active countries on ESG literature (Source: Anastasia Strekalina et al 2023) 10
Table 2. Variables Error! Bookmark not defined
Table 3. Descriptive statistics 49
Table 4. Correlation matrix 51
Table 5. Regression results for H1 53
Table 6. Regression results for H2 56
Table 7. Regression results for H3 58
Table 8. Regression analysis for H4 61
List of Figures
Figure 1. Associations with the word "Sustainability" in different countries 6
Figure 2. Number of empirical studies about the relationship of FP and ESG (Friede et al (2015)) 10
Figure 3. GDP contributions per sector in India 40
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The world is changing, and so is business. We live in a time where business, in addition to the goal of making more money, also has goals of improving the environment, helping society, and taking good care of its employees. This shift happened due to several factors: increased demands of investors, stricter regular environments, increased global awareness of sustainability issues, and changing consumer preferences. The term ESG (Environmental, Social, and Governance) already carries a lot of weight in the business community. This concept helps guide operational performance and corporate risk. By disclosing ESG information, an enterprise can mitigate its information asymmetries, thereby increasing company transparency. Additionally, a better understanding of corporate social responsibility can enhance the company’s image and improve relations with all stakeholders. It is a rule in modern days that we must make informed investment decisions since influence does not only come from financial indicators. The challenge often faced by socially responsible investment (SRI) investors - is how much they should invest in ESG projects. Socially responsible investors generally seek to place their money into firms that go beyond mere financial returns but give some evidence of sustainable practices. Notably, sustainability becomes a critical factor for choosing investment targets as these investors prefer companies that are capable of managing environmental risks, have ethical governance, and contribute positively to society. They do this by taking into consideration both profitability and societal impact when making their decisions on what to invest in; this therefore is a way of linking financial goals with wider ethical considerations. One may also argue that it would be good for companies to balance social welfare against financial success soon after realizing that more knowledge about ESG initiatives will help them understand better their impacts on the performance of such organizations towards sustainability even as they strive harder for financial stability. A McKinsey report highlights the need for detailed and nuanced ESG strategies to create value; according to it an articulate strategy around these three factors could greatly affect how investors perceive a firm thereby influencing its’ valuation materially. This is supported by a study published by Sang Kim and Zhichuan Li (2021) which investigates the impact of ESG factors on corporate profitability and credit ratings where social factors also play a role. This is especially true for markets that have relatively recently begun to actively develop the ESG agenda, mainly meaning countries with developing economies, such as India and Brasil, which are the subject of this study. Studying ESG in new countries, where these principles are either just emerging or have not yet been fully established, gives a different perspective on ESG and can be looked at through the prism of government regulations, public opinion, values, and laws of a particular state, etc.
Using ESG in developing countries is one way to boost its global reputation, which also has interesting implications for the future. Furthermore, public opinion, culture, and values also have a significant impact on how each nation embraces ESG. This is exemplified by a Latin American company study that revealed certain cultural dimensions such as masculinity versus femininity and individualism versus collectivism as well as indulgence versus restraint among others may positively or negatively influence environmental innovations’ effect on ESG performance (Paulo Vitor et al., 2024). According to this viewpoint, national cultural characteristics could moderate between novelty and effectiveness of environment-related practices within enterprise social responsibility both ecological and social components being taken into account hence it becomes necessary not only to transform those but also to create effective strategies applicable across different countries considering them too. Apart from the culture, people perceive world-famous terms differently depending on where they live. Sustainability, for instance, can be interpreted variously because individuals come from diverse contexts with dissimilar environmental settings that shape their understanding of it thereby leading to different public expectations from firms which in turn influences corporate strategies towards this end. In 2022 Ipsos Global Advisor created this diagram showing what people think when they hear global words. The study surveyed over 22 thousand individuals aged between 16 years old and 74 years old residing among 34 nations about sustainability word association where we can see more than one clear connection exists....
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