Assessing the business case for environmental, social and corporate governance practices in South Africa

Abstract

Background: By focusing on sustainable financial and environmental, social and corporate governance (ESG) returns, companies and investors can do well by doing good. Despite growing interest in sustainable corporate practices, limited ESG-related research has been conducted in South Africa. Previous researchers have mainly focused on corporate governance. All three ESG aspects should, however, be addressed to ensure corporate sustainability. It is possible that the consideration of a composite ESG measure can conceal varying levels of consistency in the individual aspects.

Aim: The main objective was to investigate the relationship between ESG and corporate financial performance (CFP) measures.

Setting: Firms listed on the Johannesburg Stock Exchange between 2011 and 2016. A total of 66 firms were considered from six sectors.

Methods: Data for the sample (359 firm-year observations) were analysed by conducting panel regressions. In line with international research, ESG was considered as the independent variable, while eight measures of CFP were individually considered as the dependent variables. Composite and individual ESG disclosure scores were obtained from Bloomberg. The respective accounting-based, market-based and value-based CFP measures were sourced from IRESS.

Results: Two main trends emerged from this study. The majority of the significant relationships identified between variables were only observed: (1) once the composite ESG disclosure score was disaggregated and (2) when a distinction was made among sectors.

Conclusion: The empirical evidence suggests that ESG aspects are not homogeneous across sectors. Firm leaders should hence employ a differentiated approach to address the most important risks relevant to their operating environments.