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The Influence of Environmental, Social, and Governance (ESG) Disclosure on Firm Financial Performance

The Influence of Environmental, Social, and Governance (ESG) Disclosure on Firm Financial... The Influence of Environmental, Social, and Governance (ESG) Disclosure on Firm Financial Performance 1 1 Raisa Almeyda , and Asep Darmansyah Abstract―The aim of this study is to do research about non- governance aspect, firms might also have to consider their financial aspect that has influence toward the companies’ both their environmental and also social responsibilities so financial performance, that will highlight the scores of as to get the legitimacy for the social role and companies’ ESG (Environment, Social, Governance) disclosure. environmental concerns that have been carried out by the Nowadays, investors take into account the non-financial aspect company, so that the company will gain trust and support into their investment decision, such as ESG performance as a from the community because rust and support obtained risk measurement. The mixed of results found in the previous from the community might give a big impact on the studies regarding the correlation between company ESG/CSR sustainability of the firms in the future [1]. and financial performance warranted us to conduct more research in this particular topic. We conducted research on The environmental actions of the company relate to their companies in the real estate sector since its long-term nature of efforts in building a good impact for the environment by investment is aligned with long-term ESG goals. The samples of following the regulations related to that particular aspect. companies were collected from seven countries with the The social actions is more about how they well they threat strongest economy worldwide, the G7. The financial the stakeholders as well as the communities in which the performance is measured by both in the perspectives of firm is operating. The governance aspect is incorporating accounting and stock market, which are ROA, ROC, Stock the firm’s integrity and ethical behavior within the Price, and P/E. The panel data was collected over five years management system of the company including the board of (2014-2018), using STATA to run multivariate regressions to directors. test for the correlations. The results indicate that there is a The word ESG was introduced in 2005 where a study statistically significant positive relationship between the ESG disclosure with firm’s ROA and ROC, but no significant called “Who Cares Wins” initiated to search ways in relationship with Stock Price and P/E. Furthermore, we found incorporating the ESG aspects into the capital market. that there is a statistically significant positive relationship Moreover, the UNEP/Fi also created “Freshfield Report” between the Environmental factor towards the firm’s ROC and that proved the relevance between the ESG issues and the Stock Price. Lastly, the study also reveals that there’s no financial valuation. Moreover, these studies also created significant relationship between the Social factor and the foundation of the Principles for Responsible Investment Governance factor with firm financial performance. The results (PRI) launching in New York Stock Exchange. As an show that a high transparency regarding ESG information addition, the Sustainable Stock Exchange Initiative (SSEI) could improve the financial performance. Thus, it is advisable for investors, company management, decision-makers, and was also launched one year after that. industry regulators to consider the importance of the ESG Recently, the financial markets around the world have disclosure. been exposed with environmental, social and governance (ESG) factors as one of the tools for the investment Keywords―ESG, CSR, G7, Financial Risk Measurement. decision-making process [2]. A firm's ESG activities are considered as crucial because both institutional and I. INTRODUCTION individual investors see that ESG serves opportunities and Environmental degradation is a quite serious problem risks facing the firm, as there is a study done by [3], stated along with the growth and development of companies in that investors now use nonfinancial data such as ESG every country. One of the causes of environmental factors to decide whether to invest in a firm. degradation is the use of resources carried out in ways that Therefore, from the investment perspective, the are not suitable for obtaining large economic benefits. In responsible investing is defined as the ethical investment, addition, the company's production activities can also Socially Responsible Investing (SRI), and also Corporate produce environmental pollution which will have an impact Social Performance (CSP). Aside from considering the on social conflict. Therefore, aside from improving their financial performance, they also take into account the Corporate Social Responsibility (CSR) actions as it has been growing rapidly around the world. In the United Raisa Almeyda and Asep Darmansyah are with School of Business States and Europe, the market size is accounted for up to and Management, Institut Teknologi Bandung, Indonesia. Email: 17.9% and 58.8% respectively. It has been said that such raisa.almeyda@sbm-itb.ac.id; asep.darmansyah@sbm-itb.ac.id. amount have a huge enough impact on the financial market industry. They cover 120 ESG factors and would penalize as a whole [4]. Those socially responsible investors the companies if there is any “missing data”. Therefore, consider the ethical investments, and try to avoid the “sin” this study is collecting data from Bloomberg to obtain the investments. These are the reasons why the ESG disclosure ESG scores. is considered as important and being recognized by many The real estate sector has been engaged with the regulators, investors as well as other related stakeholders. Responsible Property Investment (RPI) and is gaining a lot On the other hand, [5] has found out that although many of attention within the real estate investment world. It is stock exchanges in the world have regulated the listed defined as the integration of environmental, social, and companies to disclose their CSR actions, most of them are governance (ESG) factors that is considered as investment still considered as voluntary. decisions for the investors in real estate sector. The RPI Nowadays, many countries are creating their effort in principles are needed to understand about the improving their regulations and laws that incorporate the environmental, and social issues like resource scarcity firm’s compliance with GCG and Transparency & climate change, mass urbanization on macro property Disclosure (T&D) standards so that the firms are getting trends, and many other potential issues that might hazard their governance and T&D practices rated in order to give a the long-term performance of the property businesses and sense of their quality regarding such issues and keep trying assets. to do improvement. The corporate governance is now Despite the difference in names, the core value of these becoming an important evaluation in investment decision- definitions is the bridge between business and the making tool because many research findings proved a incorporation of non-business related values. Since most correlation between the corporate governance and financial companies in the real estate sector are asset-managed based valuations, stock price performance as well as financial and thus have long-term nature of investment, it is aligned ratios. Therefore, a lot of investors now take a look at the with long-term ESG and CSR goals. A good ESG actions corporate governance element when they create investment give implications about the expected cash flow distribution, decision. They might think a poor performance of decreased costs of agents, and might as well reduce corporate governance as a risk facing the firm itself. investors’ risk premiums. Moreover, the cost of capital Therefore, it is important for the firms to improve their would also be reduced as these socially responsible corporate governance qualities to attract the capital from investors might be ready to receive a lower return from a investment [6]. socially responsible firms. This is by meaning that the For the guidelines of firm’s CSR reports, there are firms with good ESG commitment would be more stable numerous frameworks existed, such as the UN (Global and resilient in terms of their operations and financials. Compact), Global Reporting Initiative (GRI), Integrated Environmental, social and governance risk is not just an Reporting Council (IIRC), etc. These are the guidelines issue for developing market investments. In developed that cover the environmental, social, and governance countries the stakeholders such as the shareholders, aspects. But, these guidelines do not serve as a reliable regulators, creditors, media, environmentalists pay more measure that could be used as a comparison between firms attention to the CSR information than those in developing in different or same industries. Furthermore, the countries [10]. Many different aspects that drive the CSR complexity, content and style of the CSR information reports in developed and developing nations. Therefore, we disclosed by the firms are different from one to another, it need to understand these differences since there are many therefore created difficulties among the stakeholders to different elements of CSR in developing countries [11], it judge the ESG performance of these firms in order to can be different because of the religious influences [12] as understand which one might perform better from another well as levels of their state of economy. Therefore, it has [7]. been questioned whether or not the CSR frameworks Bloomberg ESG data gives detail reports regarding the between nations are transferable. This study chooses board independence, employee turnover, as well as board nations included in the Group of Seven as the subject of the composition, etc. These data are updated every year. The research in order to avoid the impact of the difference in usage of the ESG ratings are similar with the common the economy on the results. These countries are the seven investment trends around the ESG integration practices and largest economies in the world as described by the IMF. It currently also being observed in the financial markets [8], accounts up to 58% of the global net wealth. [9], stated how it can also be a credible source of In international scope, there are many negotiations about information that can give considerable advantages for the environmental and social issues that cover areas such as researchers in terms of saving cost as well as saving time. (corruption, supply chain, diversity, human rights, etc). Bloomberg provided evaluation of the companies annually And it has been taken place within many different to obtain public ESG information done by the companies institutions. Some of them are from intergovernmental like through their CSR reports, annual reports, websites, and the ILO, EU or European Union, UN or United Nations, even company direct contact. This data will be cross- the Council of Europe, Group of Seven, International checked and will be standardized according to their Finance Corporation, and etc). In 2007, the Group of Eight which is now known as Group of Seven due to the when it comes to analyzing the financial data derived from suspension of Russia’s membership, did a summit firm’s financial statement, which is the ratio analysis. It is declaration which had the topic about promoting the crucial because pas performance is usually considered as opportunities offered by doing more actions regarding the an indicator of the future performance [18]. These ratios prevention of climate change, in terms of innovating, are in correlation among the figures in the financial development of technology and reducing the poverty. statements. The ratio analysis is one of a techniques to These strong economies were together forming range of examine the accounting statements which means that it policies in terms of market-based mechanism, which could be used to create a trend over years as well as for includes tax incentives, emission-trade, regulatory comparing them among different firms in the same measurement and also technology cooperation. Moreover, industry. Therefore, as a measure of accounting-based they also shared a long-term vision in guiding investment performance, we would be using ROA and ROC. decisions in order to strengthen the energy security, promote sustainable development, then cut the global Problem Identification emissions of greenhouse gases significantly. After explaining the background, the growing market Moreover, during the summit declaration, they also size of Socially Responsible Investing (SRI) along with mentioned to encourage the information and transparency how ESG disclosure has been becoming more recognized from the companies in terms of their actions regarding by more and more regulatory agencies, exchanges, and Corporate Social Responsibility actions. A number of new investors pique our interest in conducting a study in this standards and principles in this particular topic was issued. particular field. As we have discussed earlier, most The also invited the listed firms in their Stock Exchange companies in the real estate sector have long-term nature of markets to pay more attention in assessing their Corporate investment which is aligned with long-term ESG and CSR Social Responsibility standards and principles compliance goals. The increasing concept of Responsible Property in the same way they do to their annual reports nu asking Investment (RPI) within the real estate investment that the OECD and cooperated with Global Compact as well as integrates the ESG aspects into investors’ decisions also the ILO in order to assess the most suitable Corporate gives signal that there is a need to conduct research about Social Responsibility standards so that it would give more this particular issue in this sector. holistic picture in the various guidelines and principles. In Moreover, in the developed nations, the stakeholders addition, they also declared that they emphasized the UN including the media, regulators, and society are more Global Compact as their Corporate Social Responsibility concerned about the firms CSR actions. For instance, the initiative. In 2018. The G7 did summit again in Canada to countries in G7 declared that they emphasized, that United proclaim that they were committed to measuring their Nations Global Compact is an important initiative. On the Corporate Social Responsibility and Sustainability summit declaration, they also mentioned to improve the Progress. transparency of the companies in terms of disclosing their The growing idea of ESG investment can be proved by CSR related information to the public by issuing more the rising of global investment in the Environmental, policies and regulations. Social, and Governance related firms from seventeen Therefore, we are curious whether or not there is a trillion dollars to twenty-eight trillion dollars started from correlation between the real estate company’s ESG the 2012 until 2014 [13]. A study done by [14] proved a disclosure score in developed markets with their financial significant and positive relationship between performance. This study will try to analyze the impact of Environmental, Social, and Governance (ESG) and firms ESG disclosure score to the financial performance such as valuations that indicated firms with higher ESG perform ROA, ROC, Stock Price, and P/E as well as enlarging the better in terms of their corporate financial performance. subtopics on the current literature, by including the each This gives a sense of the relevance for them to be component of Environmental, Social, and Governance considered as investment decision factors. Therefore, in disclosure variables as well as assessing them with a order to be successful, corporations should not only be different set of data because by including the three responsible to the holders of the shares, but also their individual factors of ESG disclosure score, it would give us stakeholders that take care in the social and financial of the the chance to assess how each ESG factor could give firm [15]. A lot of other previous research that has been considerable impact to the financial performance using different indicators of firm financial performance, improvement and which of these three ESG scores is the such as a research done by [16], [17] who compared key driver for improving financial performance. different corporate governance to their ROA, ROE and This large data set will be derived from 77 listed real Tobin’s Q. Results were varied, some found it to be estate companies with the total of 380 observations. The positively correlated, negatively correlated, and even no G7 is being chosen in order to avoid the influence of the correlation at all. economic difference on the results as well as due to some Many different methods could be used to analyze firm’s reasons that have been mentioned earlier on the financial performance. One of the most important one is background of this study. Against this background, the aim of this study was to: It covers all the environmental factors including the 1. To examine whether the ESG disclosure score has reduction in emission, the resources’ consumption and significant influence toward the firm’s financial other innovations related to increasing the protection of the performance. environment [24]. 2. To examine whether the Environmental factor of ESG 2) Social disclosure score has significant influence toward the Social score is a score that measures issues that deal with firm’s financial performance. consumers and how they respond to the products, also 3. To examine whether the Social factor of ESG disclosure other societal issues like donations, the ethics in conducting score has significant influence toward the firm’s business activities and how their effort in respecting the financial performance. human rights [24]. The social performance is a crucial 4. To examine whether the Governance factor of ESG indicator of how the company performs including their disclosure score has significant influence toward the performance within the ESG framework [25]. There has firm’s financial performance. been a trend of putting the focus on Corporate Social The rest of the paper will be built from the review of Responsibility which is more concerning about the social relevant literature on the subject addressed, the details on aspects [22]. Furthermore, this dimension includes some the research methods used for this study, the results and aspects concerning the labor force, with regard to their discussions, and the last part will be consisted of the health and safety as well as diversity of human resources. summary, conclusion and recommendations based on The relevance of this specific indicator is also laid within findings. the Socially Responsible Investment (SRI) strategies as it tries to evaluate the concept of firm’s long-term II. LITERATURE REVIEW performance as it relates to their risk evaluation [26]. 3) Governance A. Environmental, Social, and Governance (ESG) Governance in the ESG framework could be described Environmental, Social and Governance or ESG in short, as a set of process, structure and system that are integrated is a common term used in Corporate Social Responsibility for the company to be able to grow successfully [27]. The (CSR) of a company. Recently, ESG information has now corporate governance is more about how the firms are becoming everybody’s concerns due to the potential long- managed and controlled by the managerial roles [28]. term impact given to the investment of the stakeholders Therefore, it is a vital factor that is useful in terms of rather than limited only to the shareholders. There are improving the efficiency of the economic development numerous names given to ESG, but not limited to issues along with the needs to enhance the trusts of the Corporate Social Disclosure (CSD), Corporate Social shareholders. Moreover, the governance also takes into Responsibility Disclosure (CSRD), etc [19]. account the relationship among the board of directors, It is the practice to measure, disclose as well as to shareholders, managerial roles, as well as other related become accountable to all the stakeholders both within and stakeholders within the firms or organizations [25]. outside of the companies. ESG score of a company reports This particular aspect has been gaining a lot of attention the performance of them towards the goal of sustainable lately due to the separation of ownership control and development. The ESG report covers the firm’s usage of managerial roles in the business activities within the firms. sources, natural resources, human rights, and their level of Oftentimes, the managers’ interest clashed with the corruption, how they invest in community relations, etc. shareholders’ interest. This is why the issue about The shareholders often see the ESG report as it is linked to principal-agent occurred when the management direction is the firm’s strength, risk management, as well as their different with the stakeholders’ interest. We can conclude effectiveness [20]. that actually the definition of the corporate governance 1) Environmental itself is still unclear due to many perspectives of describing Climate change is a topic that has been around in the it. Berle, et al., 1932 has been describing the governance as st early 21 century, as it is one of the urgent prominent the structure of the capital, the incentive of the managerial issues for all the human race. Which is why this issue has roles, the ownership distribution, the competition of the particular relevance for companies in regard to its financial products in the market, and even the structure of the markets [21]. In the near future, firms will most likely have organization itself. to operate under harsher environments. For instance, B. ESG Disclosure changes in regulations on various industry in respond to The economic markets globally have been moving activist demand in stopping climate changes will have a direct impact on how business operates [22]. towards the models of investing strategy that incorporate the ESG dimensions [29]. The ESG disclosure score is able Environmental disclosure results of corporate are generally obtained from the analysis of the firm’s publicly to quantify the company’s voluntary disclosure in terms of their environmental, social, and governance (ESG) available information including their annual reports, their reports regarding environmental actions, websites etc [23]. information. It is considered as a significant variable due to its ability to enable a business showing their Directive 2014/95/EU, big firms (more than 500 workers) management performance, thus able to identify risks are required to publish reports on their policies regarding relating to their ESG performance [30]. environmental protection, social responsibility and One of the issues that we currently face is how to assess employee treatment, respect for human rights, anti- the quality of the ESG reports as many global organizations corruption and bribery, diversity on members of the including United Nations Conference on Trade and business board. Public companies must reveal all material Development (UNCTAD), Global Reporting Initiative data under Canadian securities laws, including material (GRI), European Federation of Financial Analysts Societies data on environmental and social issues, as well as extra (EFFAS), etc are trying their utmost to develop the disclosure responsibilities under the timely disclosure performance indicators for assessing the ESG report. Many strategies of TSX and TSX Venture Exchange [34]. other organizations like G20, the EU, and other nations Therefore, we can conclude that the organizational such as France, Germany, UK, Japan, etc are trying to climate promotes businesses to reveal data, albeit restricted initiate the integrated reporting of ESG data. These factors information, on environmental, social and governance generated the issues of firms could cherry-pick the problems. Because institutional pressures are seen as a indicators that might give them advantage outcomes [31]. significant reporting driver. Therefore, a distinctive set of key performance D. ESG Measurement indicators for ESG is essential to support investor choices. In 1996, reports on corporate social responsibility (CSR) The data derived from the ESG could help the investors to were produced by only 300 companies globally. 19 years have broader information that can be taken into account later in 2014, this number had increased to more than 7,000 when considering an investment. Therefore, they could participating companies around the globe [35]. While the take a look at businesses that might reveal more ESG Global Reporting Initiative (GRI) guidelines and more information as they are more ready to be analyzed. recently the framework recommended by the International C. CSR Reporting Regulation in G7 Countries Integrated Reporting Council have been adopted by many As explained in the previous chapter, this paper is companies, the extent and quality of ESG disclosure concerned with the seven economic power of the world, the remains heterogeneous. members of the G7 group, namely the France, Germany, The database of ESG has several benefits over other Italy, Canada, United States, United Kingdom and Japan. It databases that are openly accessible. The ESG database is has been said that the most crucial and robust drivers of adopting the most extensive methodology for calculating worldwide CSR reporting regulation are a country's GDP and assessing the environmental, social and governance level and international organizations' attempts to promote it operations and performance of businesses [36]. It evidently [32]. The author also indicated that one of the variables separates processes and results of governance related to stimulating the development of CSR regulation is the CSR. Bloomberg's ESG group initially created the ESG growing expectation of stakeholders and civil society about database in early 2008. the behaviors of governments to regulate companies. The Bloomberg's product offers over 9,000 businesses in company's primary stakeholders include customers, over 70 nations with insight into ESG metrics. Their investors, community, employees, company partners, product involves derived ratios and sector-specific areas. It governments, and the public, particularly for large offers up to 10 years of historical information in addition to companies with important environmental and social effects. comprehensive coverage. 900+ areas are included ESG [33] has stated that from all 850 leaders’ opinions Disclosure Scores and span across several sustainability coming from the United States, United Kingdom, France key topics. and Germany, around half of them agree with the The database of Bloomberg ESG offers comprehensive declaration that these nations want to be stricter in creating ratings ranging from 0 to 100 for each of the classifications regulations for the private businesses operating in their of environment, social and governance. The Bloomberg countries. And with the economic and social development, Sustainalytics says that the ESG disclosure could help stakeholders and the effects of civil society are becoming investors with a macro-level assessment of how the firms more important as they are getting more channels to voice manage their ESG capita. This allows investors to add the their complaints and request, which therefore created the ESG indicators into their basic valuation. Thus, adequate needs for the government to initiate an action in regulating data is provided by the ESG database to examine the the CSR. interactions between CSR operations, CSR performance In 2010, the US Securities and Exchange Commission or and financial performance. also known as the SEC published Interpretive Guidance on E. Financial Performance Measurement Climate Change Disclosure. This offers guidance on Financial performance can be described as a description disclosure regulations that may require a company to reveal of the financial circumstances of a given period for the effect on its business that climate change-related legal fundraising and fund allocation elements, which are developments may have impacted. In the EU, under generally measured by capital adequacy, liquidity and by many possible factors, including the variable profitability indices [37]. Accounting performance and information sources for CSR outcomes and the market performance measurements are generally used to consideration of moderation and mediation factors [44]. evaluate firms ' financial performance. Measures for accounting results include return on asset, return on III. METHODOLOGY investment, profit margins and etc. While market A. Research Design performance includes market value to book value, stock The following are the steps for conducting the research: performance and etc [38]. 1. Finding problem identification A restriction of financial measures is that they reflect 2. Defining research objectives stock market investor expectations that could alter rapidly 3. Reviewing the literature due to uncontrollable occurrences managed by the firm 4. Defining the methodology to collect data (e.g. economic changes due to international crisis or 5. Analyzing data and presenting results/findings investor perceptions of interest and inflation rates due 6. Concluding result as well as giving recommendation mainly to domestic fiscal policy). Although accounting and market-based measures supposedly evaluate overall firm B. Data Collection performance, they provide different evaluations of a firm's The data that was used in this study derived from the performance due to the timing (past or present) and the Bloomberg Terminal in year on year basis in order for us to nature (retrospective or prospective) of these different be able to get the quantitative data and transform them into measures [39]. a panel data format. The other necessary data were taken F. Financial Performance and ESG from secondary data such as websites, reports, journals, etc. The Bloomberg Terminal was used to gather the ESG The issue of how ESG variables impact the economic data due to small number of previous studies using it. Most performance of a company and, eventually, its value was of the previous researchers have been using Asset4, the topic of contentious discussion. The early knowledge FTSE4Good, Goldman, Dow Jones Sustainability Index, was based on neoclassical theory that the connection manually transform qualitative data into quantitative by between ESG and economic results was consistently using GRI frameworks, etc. negative [40]. But, in particular, decision-makers should take into account company ethics and social accountability, C. Data Analysis and specifically environmental management. In reality, the In order to be able to evaluate the influence between concept of corporate social responsibility is being given environmental, social and governance disclosure on rising attention by enterprises and communities [41]. financial indicators, multi regression will be performed Because of the connection between financial based on panel data analysis. Panel data is defined as data performance and investment in environmental concerns, set constructed from cross sectional and over time data. companies are generally double-minded about investing in Regressions will be run to evaluate the correlation between environmental problems. Some companies believe that the dependent and independent variables by considering the environmental programs by cost savings provide a time dimension of the variables [45]. The independent competitive advantage (using less energy, recycling of variable of this research is the ESG disclosure score based wastes etc.) and by achieving higher customer satisfaction, on Bloomberg ESG data index. And the dependent staff loyalty and acquiring a favorable reputation as well as variables are ROA, ROC, Stock Price and P/E. The ESG compliance with regulations. On the other side, if the scores of the companies are measured for five years period company invests in bad environmental attempts, due to from 2014 to 2018 as well as the financial performance inefficiency and unnecessary investment, economic data. performance will be negatively impacted [42]. The sample was selected from listed real estate G. Previous Research / Prior Studies companies in the G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, and the United States), with Empirical literature used qualitative and quantitative a total observation of 380. techniques to examine the connection between CSR For instance, if we would like to evaluate the influence performance and economic performance. Some empirical of ESG disclosure on stock price of G7 listed real estate studies were case studies using a qualitative approach to companies, the basic equation would be as follows: the implementation of environmental management. These studies evaluated specific companies and lacked FPi,t = β0 +β1 ESGi,t + β Controli,t + εi,t generalizations of statistics [43]. The literature disclosed Where : mixed outcomes for the correlation between performance FPi,t is for the financial performance of the company i on of CSR / ESG and financial performance, demonstrating the last year of the year t. that the region could be further investigated. The diverse ESGi,t is a measure of ESG disclosure score of the findings reported by these past research could be explained company i Controli,t is the control variable εi the error term results. Moreover, since this is a panel data, we also use year effect as dummy variable. TABLE 1. MODEL DESCRIPTION E. Classical Linear Assumption Test Model Dependent Independent Before running the regression, Classical Linear Variable Variable Assumption Test is needed. With this assumption of the Model 1 ROA ESG Score classical linear regression model (CLRM), we were able to Model 2 ROA Environmental Score, fulfill several statistical things such as unbiasedness, Social Score and minimum variance, etc [47]. For panel data, the analysis Governance Score Model 3 ROC ESG Score will be conducting the multicollinearity test, Model 4 ROC Environmental Score, heteroscedasticity test, and normality test to reduce Social Score and potential biases which may appear in regression model and Governance Score to confirm the validity of data that will be used in Model 5 Stock Price ESG Score regression. Model 6 Stock Price Environmental Score, 1) Multicollinearity Test Social Score and The multicollinearity test is used to validate whether Governance Score there is any linear correlation between an independent Model 7 P/E ESG Score variable with the other independent variables [48]. Model 8 P/E Environmental Score, Assumption 10 of the Classical Linear Regression Model Social Score and (CLRM) is that there should be no multicollinearity Governance Score problems between regressors. For more reason in time series data, there is a common trend in the regressors. The D. Variables hypothesis of multicollinearity test is: 1) Dependent and Independent Variables H0: There is multicollinearity The definitions of the dependent and independent H1: There is no multicollinearity variables and their expected signs are as given on the table When the coefficient between variables >0.8, accept H0 below. or there is multicollinearity. On the contrary, if coefficient <0.8 reject H0. TABLE 2. DEPENDENT AND INDEPENDENT VARIABLES The VIF test could help us reveal whether or not there Variables Types Def inition are multicollinearity issues in the specified model. The VIF ROA Dependent Return on Asset indicates how strong is the linear dependencies and how ROC Dependent Return on much the variances of every regression coefficient is Capital inflated because of the collinearity comparing when the Stock Price Dependent Stock price in the end of period independent variables are not linearly related. The VIF for P/E Dependent Price-to- the predictor variable Xk is given by 1/(1−R2k). Therefore, Earnings ratio this test could be conducted to test for the multicollinearity Environmental Independent Firm issues among the independent variables. And if the result Environmental disclosure level of the VIF is below or equal to ten, that means it shows no Social Independent Firm social multicollinearity. While a value of VIF above 10 indicates disclosure level multicollinearity issues. Governance Independent Firm governance 2) Heteroscedasticity Test disclosure level An assumption of the classical linear regression model is ESG Independent Bloomberg ESG data index that the disturbance appeared in the regression function should be homoscedastic which means that all of them 2) Control Variable have the same variance. We could conduct the Breusch- Control Variables are also used in this research. Using Pagan / Cook-Weisberg test in order to detect the control for the effect of that the size of the company and heteroscedasticity. H0: Constant variance, means the robust leverage may have correlation between share price and standard error is relatively consistent with standard error. If CSR disclosure in robustness test [46]. This research use prob>chi2 is less than significant level, it is indicating Total Asset of every company as well as their Market presences of heteroscedasticity. However, if Capitalization as control variable. As an addition, we will heteroscedasticity presents in our model, by default Stata also use Country variable to represent the country effect statistical software assumes homoscedastic standard errors and will not use the economic variable like GDP for every if we adjust our model to account for heteroskedasticity. To country since our subjects are countries with the seven do this, we can use the option robust in the regress economic power of the world thus have removed the command. influence of difference in the state of the economy on the 3) Normality Test using 5% significance level, it means our model has a 95% The normality test is used to determine whether the data of confidence interval. Econometricians usually advise to used are normal or not based on the available distribution use 1% instead for larger samples [51]. These are the [49]. Normality test could be conducted using several factors why this study will use both 5% and 1% due to our methods. We use Shapiro-Wilk W test for normality for large sample size. each variable. If the prob > z is higher than significant level, it means the data is normal. However, in the practice IV. RESULT AND DISCUSSION of normality, it would not be a problem if we have such a A. Data Presentation big sample size. Because if the sample is greater than 30, PERCENTAGE OF SAMPLES OBSERVED IN EACH COUNTRY the central limit theory would be applied. This theory says Germany that the methods would be the same as if the population 4% itself were distributed normally when it comes to evaluating probabilities related with the values of statistical Japan tests [49]. USA 16% Italy 39% F. Regression Analysis 3% France If we have passed the classical linear assumption tests, 8% we will start conducting the regression models in order to find the correlation between variables mentioned earlier. UK 21% We choose to use panel data by combining time series of cross-section observations. The output of this regression is Canada coefficient determination, F-test, and T-test. The use of the 9% panel data format would provide us a more useful result USA Canada UK Fra nce Ita ly Japan Germa ny with less collinearity between the many different variables, Figure 1. Percentage of Samples Observed in Each Country panel data is usually defined as a more appropriate and The proportion of the data observed (listed real estate efficient for multidimensional analysis due to its ability in companies period 2014-2018) from every country can be identifying some correlations that might not be noticeable seen in Figure 1. USA has the highest population for listed in a time-series data set or simple cross-section [50]. real estate companies, therefore, the samples derived from Regression method in panel data have three models, USA was the highest among other countries in G7, which such as: accounts for 39% of the observations. Followed by UK,  OLS Regression Japan, Canada, France, Germany and Italy respectively. This regression model is considered as the simplest B. Descriptive Statistics Analysis approach that ignore the time as well as the space element of the pooled data. TABLE 3.  Fixed Effect DESCRIPTIVE STATISTICS Fixed effect is the way to consider the individuality of Variable Obs Mean Std. Dev. Min Max every company or every cross sectional unit to let the ESG 382 33.07 12.34 11.16 59.09 intercept vary for each company however it still assumes Env 382 25.04 15.61 1.55 65.89 that the slope coefficient is constant across firm.  Random Effect Soc 382 30.32 16.51 3.51 82.46 Using of random effect is if we include the error term in Gov 382 54.87 7.94 14.29 75.00 the intercept of time series and cross-section data to make ROA 382 4.55 4.38 -13.19 27.22 more efficient approach. Several test is needed before we decide what approach ROC 382 5.63 5.22 -13.79 30.17 we need. Breusch-Pagan Lagrange Multiplier or LM test to Stock 382 76.41 407.16 0.57 6258.49 help us in deciding whether to run a random effects _Price regression and a simple OLS regression. If Prob > Chi2 PE 380 42.32 74.74 3.65 905.46 less than the significance level, we can use random effects Total_Asset 382 1.09e+10 1.02e+10 -9875497 5.70e+10 regression. Hausman test helps us to decide whether to use Marketcap 382 8.51e+09 9.53e+09 -2.74e+09 6.02e+10 fixed or random effects where the null hypothesis is that preferred model is random effect of fixed effect. Country 382 2.90 1.98 1.00 7.00 G. Significance Level Table 3 shows the descriptive statistics of the variables. The significance level we choose would reflect our It depicts the number of observations sample of each accuracy level, usually the standard is below 5%, but it variables (N), mean, standard deviation, minimum, would be better at the 1% significance level. Because by maximum of the variables used. The mean value of the overall ESG score of the listed companies is 33.07 with a 2) Heteroscedasticity Test standard deviation of 12.34. This means that the ESG score Heteroscedasticity test aims to see whether the data is is spread out over a wide range of value from the time of homogeneous or not, in other words, the data do not have observation. Meanwhile, the specific factors of ESG which any heteroscedasticity problems. We conduct Breusch- are environmental, social, and governance have a varying Pagan/Cook-Weisberg test in order to detect such mean between each of them. Environmental with only problems. Table 6 summarizes the results. 25.04 score, followed by Social with 30.32, and TABLE 6. Governance with the largest mean score of 54.87. With a Tab H le ETERO 6. He StCED erosAS ceT da IC sItTY ic ity T E TS eT stR R EeSsU ul L T low score and high standard deviation, means that the M odel Chi2(1) Prob > Chi2 Social and Governance factor of the listed companies have Mode l 1 0.19 0.6642 a wide range of scores. While the Governance factor is quoted to have a considerably low score when comparing Mode l 2 0.30 0.5843 the standard deviation to its mean. Mode l 3 0.23 0.6290 C. Classical Linear Assumption Test Mode l 4 0.36 0.5486 1) Multicollinearity Test Mode l 5 13.63 0.0002 TABLE 4. PAIR Tab -W le IS 4. E PaC ir-ORRELAT W ise CorrelI aON tion M MaA trTR ix. IX Mode l 6 6.53 0.0106 Variable ESG Env Soc Gov Total_Asse t Marketcap Country Mode l 7 4.01 0.0451 ESG 1 Mode l 8 3.36 0.0670 Env 0.9425 1 Soc 0.8371 0.6599 1 If prob>chi2 is less than significant level, it is indicating Gov 0.5822 0.4292 0.4452 1 presences of heteroscedasticity. The result shows that model 5, model 6 and model 7 have some Total_Asset 0.2425 0.2649 0.1096 0.1458 1 heteroscedasticity problems. However, if heteroscedasticity Marketcap 0.1115 0.127 -0.0429 0.2154 0.6833 1 presents in our model, by default Stata statistical software Country 0.2212 0.2569 0.3117 -0.3843 0.0523 -0.3021 1 would assume homoscedastic standard errors if we adjust our model to account for heteroskedasticity. To do this, we Refer to Table 4, the Pair-Wise correlation shows that can use the option robust in the regress command. there is multicollinearity problem in Environmental and Social variables if we correlate it with ESG. However, this D. Normality Test problem cannot be considered as a problem when the VIF Refer to Table 7, it is shown that the residual value of test shows the VIF result <10 [52]. this research is not distributed normally. This research has After doing the VIF test, we can see the results as seen a total of 380 observations. Therefore, when the sample on Table 5, indicate that multicollinearity problems in the size is large, the central limit theory applies. This theory specified model are unlikely existed, as the highest mean states that the methods would be similar, as if the VIF value is 2.25, followed by the least value of 1.76. The population itself were normally distributed, when value of VIF is beyond 10 means the multicollinearity is evaluating probabilities related with the values of a test considered problematic. The number from Table 5 is well statistic. When the sample size is large enough (greater within the limit of 10, so we can assume that there are no than 30), the central limit theory applies and normality is problems that arise from the test result. assumed [49]. TABLE 5. TABLE 7. VIF TEST Table 5. VIF Test NORMALITY TEST Table. 7. Normality Test M ode l Mean VIF Variable Obs W V z Prob> z Mode l 1 1.77 ESG 382 0.95343 12.304 5.959 0.0000 Env 382 0.95032 13.124 6.113 0.0000 Mode l 2 2.22 Soc 382 0.97891 5.571 4.078 0.0002 Mode l 3 1.77 Gov 382 0.95447 12.029 5.906 0.0000 Mode l 4 2.23 Total_Asset 382 0.80632 51.169 9.343 0.0000 Market_Ca p 382 0.75813 63.898 9.871 0.0000 Mode l 5 1.76 Country 382 0.95916 10.789 5.648 0.0000 Mode l 6 2.25 Ln_ROA 362 0.98437 3.936 3.245 0.0059 Mode l 7 1.76 Ln_ROC 363 0.97634 5.973 4.234 0.0001 Ln_SP 382 0.97632 6.256 4.354 0.0001 Mode l 8 2.25 Ln_PE 380 0.97919 5.473 4.035 0.0003 E. Regression Analysis variables (ESG, Total Asset, Market Capitalization, and Country). The other regression estimation includes six 1) Breusch-Pagan Lagrange Multiplier (LM) Test independent variables (Environmental, Social, Governance, Before running the regression, conducting the LM test Total Asset, Market Capitalization and Country). helps us decide between a random effects regression and a The Table 10 presents the result of regression of G7 simple OLS regression. The null hypothesis in the LM test listed Real Estate companies’ ROA and ROC on ESG is that variances across entities is zero. This is, no disclosure score while Table 11 presents the result of significant difference across units (i.e. no panel effect). If regression of G7 listed Real Estate companies’ Stock Price the prob>chibar2 is >significant level, then we can use and P/E on ESG disclosure score. Since the objective of this OLS regression. study is limited to only analyzing whether or not there is any TABLE 8. significant influence between the ESG disclosure and the BREUSCH-PAGAN LAGRANGE MULTIPLIER (LM) TEST Table 8. Lagrange Multiplier Te st Result firm performance, the analysis part and the discussion part Mode l chibar 2(01) Prob>chibar2 will not discuss the coefficient of every variable. However, Mode l 1 84.00 0.0000 the author still presents the information regarding the Mode l 2 82.77 0.0000 coefficients in the regression results tables. Mode l 3 62.04 0.0000 TABLE 10. Table 11. Regre ssion Re sult Mode l 1-4 REGRESSION RESULT MODEL 1-4 Mode l 4 63.56 0.0000 Models 1 2 3 4 Mode l 5 361.02 0.0000 ROA ROA ROC ROC Variable Coefficient Coefficient Coefficient Coefficient Mode l 6 368.01 0.0000 ESG 0.0113893** 0.0135145*** Env 0.005953 8 0.0094025** Mode l 7 204.86 0.0000 Soc -0.00116 69 -0.00350 45 Mode l 8 200.04 0.0000 Gov 0.0134 8 4 6 * 0.0138 1 7 6 * Total Asset -3.13E-11*** -3.33E-11*** -3.22E-11*** -3.39E-11*** After doing the LM test for all models, the results have Market Cap 3.14E-11*** 3.27E-11*** 3.50E-11*** 3.54E-11*** Country 0.044816 0.0743 9 9 6 * 0.0824362** 0.1130349*** shown that all models are appropriate for using random Constant 0.8213441*** 0.269708 7 0.844264*** 0.329015 2 effects regression. Ob serva ti o n s 362 362 363 363 R-squared 0.1727 0.144 0.2381 0.1995 2) Hausman Test Number of In order for us to choose whether to use random Company 77 77 77 77 Prob>chi2 0.0000 0.0000 0.0000 0.0000 effects or fixed effects, running a Hausman test is needed. Statistic al Random Random Random Random If the Prob>chi2 is < 0.05 (i.e. significant) use fixed Sign ificance effects. Level *p<0.1 **p<0.05 ***p<0.01 TABLE 9. TABLE 11. HAUSMAN TEST RESULT Table 9. Ha usman Test Re sult REGRESSION RESULT MODEL 5-8 Mode l Prob> chi2 Models 5 6 7 8 Variable Stock Price Stock Price P/E P/E Mode l 1 0.9590 Coefficient Coefficient Coefficient Coefficient ESG 0.0182185 * -0.0108014 Mode l 2 0.4872 Env 0.0236367*** -0.0014739 Mode l 3 0.9657 Soc -0.0044102 -0.00816 35 * Gov -0.0234034 -0.01424 35 * Mode l 4 0.3001 Total Asset -8.75E-11* -7.37E-11* -2.23E-11 * * -3.12E-12 Market Cap 1.29E-10*** 1.14E-10*** 4.47E-11** 2.25E-11** Mode l 5 0.0000 Country -1.44397 -1.918713 0.7534185*** 0.1734825*** Mode l 6 0.0142 Constant 6.623518 9.403315 1.233127** 4.621167*** Observations 382 382 380 380 Mode l 7 0.0458 R-squared 0.2768 0.3344 0.2421 0.3709 Number of Mode l 8 0.2283 77 77 77 77 Company Prob>chi2 0.0000 0.0000 0.0000 0.0000 Based on the result, only model 5, 6, and 7 have value of Statistical Significance Prob>chi2 below the significant level. Therefore, it Level Fixed Fixed Fixed Random indicates that the random effect model is not appropriate *p<0.1 **p<0.05 ***p<0.01 and the fixed effect specification is preferred for the three models. Based on the regression result in the Table 10, we can 3) Regression Result see that the ESG variable is highly significant and positive In order to test whether there is influence of ESG correlation with ROA and ROC. While on the other hand, disclosure on the Financial Performance, we run the there is no significant influence from individual ESG regression analysis. There are eight regression models factors (Environmental, Social, and Governance) towards which are consisted of four dependent variables. Every the firm’s ROA. Moreover, the Environmental factor has dependent variable is consisted of two regression models. positive significant correlation with the firm’s ROC. The One regression estimation includes four independent R-square for the model one until four are 0.1727, 0.144, The results from the observations collected from the 0.2381 and 0.1995 respectively. seven markets have revealed that there is a significant Moving on to Table 11, there is no significant influence of the ESG disclosure as a whole on the real correlation between the ESG as a whole and Stock Price. estate companies financial performance as measured by However, the Environmental aspect is significant and accounting indicators such as ROA and ROC. However, positively correlated to the firm’s Stock Price. While on the the market based measure such as Stock Price and P/E do other hand, there is no sign of a significant correlation not have any correlation with the ESG factor as a whole. between the ESG and the firm’s P/E. The R-square for the This highlights the difference in the firms performance model five until eight are 0.2768, 0.3344, 0.2421 and based on returns or market value. ROA and ROC measure 0.3709 respectively. the overall effectiveness of management in generating returns, whereas Stock Price and P/E measure the financial markets performance. This is aligned with the previous V. CONCLUSION study done by [53] who stated that a strong ESG This study tries to find the correlation between commitment would imply more information about the Environmental, Social, and Governance (ESG) disclosures expected cash flow distribution, decrease principal-agent on firm financial performance as measured by its costs, as well as lower the investors’ risk premiums. accounting and market based. The financial indicators are Moreover, cost of capital might be decreased due to the measured by considering the data from listed real estate readiness of the socially responsible investors in accepting companies from year 2014 until 2018 within the G7 (Italy, a lower return from a socially responsible company. The Japan, United Kingdom, Canada, France, Germany, and the study also suggests that the firms with higher ESG United States) context as group of developed countries. commitments are better in terms of their operations and The countries in G7 was chosen as subject of the study due financial. the high concerns of specific stakeholders, for example, The study results also indicate that there is a statistically regulators, shareholders, creditors, investors, significant positive relationship between Environmental environmentalists, and the media in disclosing CSR disclosure and firm ROC as well as Stock Price. Meaning information in the developed nations. that more common stock investors take firm’s G7 also declared that they emphasized, in particular, the Environmental concerns into consideration. This finding is UN Global Compact as an important CSR initiative. On the aligned with the previous research by [54] for investors, summit declaration, they mentioned to strengthen the paying attention to environment-related risks is particularly voluntary approach of CSR by encouraging the important in the age of social media. Today’s consumers improvement of the transparency of private companies' can easily spread news and communicate much faster in a performances with respect to CSR. Moreover [32], stated sense that they could shame a company for its that the most notable and robust drivers of global CSR unsustainable practices. Because of this heightened reporting regulation are the GDP level of a country and the awareness, [54] predicts that new environmental promotion efforts from international organizations targeted regulations would follow public protest faster than in the to that country. The author also stated that one of the past. Thus, the aims of building a positive image of the factors which stimulates the growth of CSR regulation is companies made Corporate Social Responsibility became the increasing expectation from stakeholders and the civil one of the ways in increasing the value of the companies. society on governments to regulation firms’ behavior. This study results also revealed that there’s no The author chooses this particular topic because there is significant influence of the Social and Governance factor a growing interest in ESG criteria while at the same time, on firm financial performance. Since prior studies usually these ratings have not been around for very long, so the examine the relationship between firm financial data are sparse. Moreover, the growing market size of performance and CSR/ESG as a whole and not specific Socially Responsible Investing (SRI) along with the aspects of ESG. Therefore, our study contributes new importance of ESG disclosure that has been recognized by knowledge to the extant literature on ESG as well as firm more and more regulatory agencies, exchanges, and financial performance of real estate companies. investors pique our interest in conducting a study in this particular field. The environmental actions of the company Recommendations is related to their efforts in building a good impact for the The main recommendation is that the corporations, environment by following the regulations related to that investors, regulator and stakeholders need to consider ESG particular aspect. The social actions is more about how disclosure. 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The Influence of Environmental, Social, and Governance (ESG) Disclosure on Firm Financial Performance

IPTEK Journal of Proceedings SeriesDec 25, 2019

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The Influence of Environmental, Social, and Governance (ESG) Disclosure on Firm Financial Performance 1 1 Raisa Almeyda , and Asep Darmansyah Abstract―The aim of this study is to do research about non- governance aspect, firms might also have to consider their financial aspect that has influence toward the companies’ both their environmental and also social responsibilities so financial performance, that will highlight the scores of as to get the legitimacy for the social role and companies’ ESG (Environment, Social, Governance) disclosure. environmental concerns that have been carried out by the Nowadays, investors take into account the non-financial aspect company, so that the company will gain trust and support into their investment decision, such as ESG performance as a from the community because rust and support obtained risk measurement. The mixed of results found in the previous from the community might give a big impact on the studies regarding the correlation between company ESG/CSR sustainability of the firms in the future [1]. and financial performance warranted us to conduct more research in this particular topic. We conducted research on The environmental actions of the company relate to their companies in the real estate sector since its long-term nature of efforts in building a good impact for the environment by investment is aligned with long-term ESG goals. The samples of following the regulations related to that particular aspect. companies were collected from seven countries with the The social actions is more about how they well they threat strongest economy worldwide, the G7. The financial the stakeholders as well as the communities in which the performance is measured by both in the perspectives of firm is operating. The governance aspect is incorporating accounting and stock market, which are ROA, ROC, Stock the firm’s integrity and ethical behavior within the Price, and P/E. The panel data was collected over five years management system of the company including the board of (2014-2018), using STATA to run multivariate regressions to directors. test for the correlations. The results indicate that there is a The word ESG was introduced in 2005 where a study statistically significant positive relationship between the ESG disclosure with firm’s ROA and ROC, but no significant called “Who Cares Wins” initiated to search ways in relationship with Stock Price and P/E. Furthermore, we found incorporating the ESG aspects into the capital market. that there is a statistically significant positive relationship Moreover, the UNEP/Fi also created “Freshfield Report” between the Environmental factor towards the firm’s ROC and that proved the relevance between the ESG issues and the Stock Price. Lastly, the study also reveals that there’s no financial valuation. Moreover, these studies also created significant relationship between the Social factor and the foundation of the Principles for Responsible Investment Governance factor with firm financial performance. The results (PRI) launching in New York Stock Exchange. As an show that a high transparency regarding ESG information addition, the Sustainable Stock Exchange Initiative (SSEI) could improve the financial performance. Thus, it is advisable for investors, company management, decision-makers, and was also launched one year after that. industry regulators to consider the importance of the ESG Recently, the financial markets around the world have disclosure. been exposed with environmental, social and governance (ESG) factors as one of the tools for the investment Keywords―ESG, CSR, G7, Financial Risk Measurement. decision-making process [2]. A firm's ESG activities are considered as crucial because both institutional and I. INTRODUCTION individual investors see that ESG serves opportunities and Environmental degradation is a quite serious problem risks facing the firm, as there is a study done by [3], stated along with the growth and development of companies in that investors now use nonfinancial data such as ESG every country. One of the causes of environmental factors to decide whether to invest in a firm. degradation is the use of resources carried out in ways that Therefore, from the investment perspective, the are not suitable for obtaining large economic benefits. In responsible investing is defined as the ethical investment, addition, the company's production activities can also Socially Responsible Investing (SRI), and also Corporate produce environmental pollution which will have an impact Social Performance (CSP). Aside from considering the on social conflict. Therefore, aside from improving their financial performance, they also take into account the Corporate Social Responsibility (CSR) actions as it has been growing rapidly around the world. In the United Raisa Almeyda and Asep Darmansyah are with School of Business States and Europe, the market size is accounted for up to and Management, Institut Teknologi Bandung, Indonesia. Email: 17.9% and 58.8% respectively. It has been said that such raisa.almeyda@sbm-itb.ac.id; asep.darmansyah@sbm-itb.ac.id. amount have a huge enough impact on the financial market industry. They cover 120 ESG factors and would penalize as a whole [4]. Those socially responsible investors the companies if there is any “missing data”. Therefore, consider the ethical investments, and try to avoid the “sin” this study is collecting data from Bloomberg to obtain the investments. These are the reasons why the ESG disclosure ESG scores. is considered as important and being recognized by many The real estate sector has been engaged with the regulators, investors as well as other related stakeholders. Responsible Property Investment (RPI) and is gaining a lot On the other hand, [5] has found out that although many of attention within the real estate investment world. It is stock exchanges in the world have regulated the listed defined as the integration of environmental, social, and companies to disclose their CSR actions, most of them are governance (ESG) factors that is considered as investment still considered as voluntary. decisions for the investors in real estate sector. The RPI Nowadays, many countries are creating their effort in principles are needed to understand about the improving their regulations and laws that incorporate the environmental, and social issues like resource scarcity firm’s compliance with GCG and Transparency & climate change, mass urbanization on macro property Disclosure (T&D) standards so that the firms are getting trends, and many other potential issues that might hazard their governance and T&D practices rated in order to give a the long-term performance of the property businesses and sense of their quality regarding such issues and keep trying assets. to do improvement. The corporate governance is now Despite the difference in names, the core value of these becoming an important evaluation in investment decision- definitions is the bridge between business and the making tool because many research findings proved a incorporation of non-business related values. Since most correlation between the corporate governance and financial companies in the real estate sector are asset-managed based valuations, stock price performance as well as financial and thus have long-term nature of investment, it is aligned ratios. Therefore, a lot of investors now take a look at the with long-term ESG and CSR goals. A good ESG actions corporate governance element when they create investment give implications about the expected cash flow distribution, decision. They might think a poor performance of decreased costs of agents, and might as well reduce corporate governance as a risk facing the firm itself. investors’ risk premiums. Moreover, the cost of capital Therefore, it is important for the firms to improve their would also be reduced as these socially responsible corporate governance qualities to attract the capital from investors might be ready to receive a lower return from a investment [6]. socially responsible firms. This is by meaning that the For the guidelines of firm’s CSR reports, there are firms with good ESG commitment would be more stable numerous frameworks existed, such as the UN (Global and resilient in terms of their operations and financials. Compact), Global Reporting Initiative (GRI), Integrated Environmental, social and governance risk is not just an Reporting Council (IIRC), etc. These are the guidelines issue for developing market investments. In developed that cover the environmental, social, and governance countries the stakeholders such as the shareholders, aspects. But, these guidelines do not serve as a reliable regulators, creditors, media, environmentalists pay more measure that could be used as a comparison between firms attention to the CSR information than those in developing in different or same industries. Furthermore, the countries [10]. Many different aspects that drive the CSR complexity, content and style of the CSR information reports in developed and developing nations. Therefore, we disclosed by the firms are different from one to another, it need to understand these differences since there are many therefore created difficulties among the stakeholders to different elements of CSR in developing countries [11], it judge the ESG performance of these firms in order to can be different because of the religious influences [12] as understand which one might perform better from another well as levels of their state of economy. Therefore, it has [7]. been questioned whether or not the CSR frameworks Bloomberg ESG data gives detail reports regarding the between nations are transferable. This study chooses board independence, employee turnover, as well as board nations included in the Group of Seven as the subject of the composition, etc. These data are updated every year. The research in order to avoid the impact of the difference in usage of the ESG ratings are similar with the common the economy on the results. These countries are the seven investment trends around the ESG integration practices and largest economies in the world as described by the IMF. It currently also being observed in the financial markets [8], accounts up to 58% of the global net wealth. [9], stated how it can also be a credible source of In international scope, there are many negotiations about information that can give considerable advantages for the environmental and social issues that cover areas such as researchers in terms of saving cost as well as saving time. (corruption, supply chain, diversity, human rights, etc). Bloomberg provided evaluation of the companies annually And it has been taken place within many different to obtain public ESG information done by the companies institutions. Some of them are from intergovernmental like through their CSR reports, annual reports, websites, and the ILO, EU or European Union, UN or United Nations, even company direct contact. This data will be cross- the Council of Europe, Group of Seven, International checked and will be standardized according to their Finance Corporation, and etc). In 2007, the Group of Eight which is now known as Group of Seven due to the when it comes to analyzing the financial data derived from suspension of Russia’s membership, did a summit firm’s financial statement, which is the ratio analysis. It is declaration which had the topic about promoting the crucial because pas performance is usually considered as opportunities offered by doing more actions regarding the an indicator of the future performance [18]. These ratios prevention of climate change, in terms of innovating, are in correlation among the figures in the financial development of technology and reducing the poverty. statements. The ratio analysis is one of a techniques to These strong economies were together forming range of examine the accounting statements which means that it policies in terms of market-based mechanism, which could be used to create a trend over years as well as for includes tax incentives, emission-trade, regulatory comparing them among different firms in the same measurement and also technology cooperation. Moreover, industry. Therefore, as a measure of accounting-based they also shared a long-term vision in guiding investment performance, we would be using ROA and ROC. decisions in order to strengthen the energy security, promote sustainable development, then cut the global Problem Identification emissions of greenhouse gases significantly. After explaining the background, the growing market Moreover, during the summit declaration, they also size of Socially Responsible Investing (SRI) along with mentioned to encourage the information and transparency how ESG disclosure has been becoming more recognized from the companies in terms of their actions regarding by more and more regulatory agencies, exchanges, and Corporate Social Responsibility actions. A number of new investors pique our interest in conducting a study in this standards and principles in this particular topic was issued. particular field. As we have discussed earlier, most The also invited the listed firms in their Stock Exchange companies in the real estate sector have long-term nature of markets to pay more attention in assessing their Corporate investment which is aligned with long-term ESG and CSR Social Responsibility standards and principles compliance goals. The increasing concept of Responsible Property in the same way they do to their annual reports nu asking Investment (RPI) within the real estate investment that the OECD and cooperated with Global Compact as well as integrates the ESG aspects into investors’ decisions also the ILO in order to assess the most suitable Corporate gives signal that there is a need to conduct research about Social Responsibility standards so that it would give more this particular issue in this sector. holistic picture in the various guidelines and principles. In Moreover, in the developed nations, the stakeholders addition, they also declared that they emphasized the UN including the media, regulators, and society are more Global Compact as their Corporate Social Responsibility concerned about the firms CSR actions. For instance, the initiative. In 2018. The G7 did summit again in Canada to countries in G7 declared that they emphasized, that United proclaim that they were committed to measuring their Nations Global Compact is an important initiative. On the Corporate Social Responsibility and Sustainability summit declaration, they also mentioned to improve the Progress. transparency of the companies in terms of disclosing their The growing idea of ESG investment can be proved by CSR related information to the public by issuing more the rising of global investment in the Environmental, policies and regulations. Social, and Governance related firms from seventeen Therefore, we are curious whether or not there is a trillion dollars to twenty-eight trillion dollars started from correlation between the real estate company’s ESG the 2012 until 2014 [13]. A study done by [14] proved a disclosure score in developed markets with their financial significant and positive relationship between performance. This study will try to analyze the impact of Environmental, Social, and Governance (ESG) and firms ESG disclosure score to the financial performance such as valuations that indicated firms with higher ESG perform ROA, ROC, Stock Price, and P/E as well as enlarging the better in terms of their corporate financial performance. subtopics on the current literature, by including the each This gives a sense of the relevance for them to be component of Environmental, Social, and Governance considered as investment decision factors. Therefore, in disclosure variables as well as assessing them with a order to be successful, corporations should not only be different set of data because by including the three responsible to the holders of the shares, but also their individual factors of ESG disclosure score, it would give us stakeholders that take care in the social and financial of the the chance to assess how each ESG factor could give firm [15]. A lot of other previous research that has been considerable impact to the financial performance using different indicators of firm financial performance, improvement and which of these three ESG scores is the such as a research done by [16], [17] who compared key driver for improving financial performance. different corporate governance to their ROA, ROE and This large data set will be derived from 77 listed real Tobin’s Q. Results were varied, some found it to be estate companies with the total of 380 observations. The positively correlated, negatively correlated, and even no G7 is being chosen in order to avoid the influence of the correlation at all. economic difference on the results as well as due to some Many different methods could be used to analyze firm’s reasons that have been mentioned earlier on the financial performance. One of the most important one is background of this study. Against this background, the aim of this study was to: It covers all the environmental factors including the 1. To examine whether the ESG disclosure score has reduction in emission, the resources’ consumption and significant influence toward the firm’s financial other innovations related to increasing the protection of the performance. environment [24]. 2. To examine whether the Environmental factor of ESG 2) Social disclosure score has significant influence toward the Social score is a score that measures issues that deal with firm’s financial performance. consumers and how they respond to the products, also 3. To examine whether the Social factor of ESG disclosure other societal issues like donations, the ethics in conducting score has significant influence toward the firm’s business activities and how their effort in respecting the financial performance. human rights [24]. The social performance is a crucial 4. To examine whether the Governance factor of ESG indicator of how the company performs including their disclosure score has significant influence toward the performance within the ESG framework [25]. There has firm’s financial performance. been a trend of putting the focus on Corporate Social The rest of the paper will be built from the review of Responsibility which is more concerning about the social relevant literature on the subject addressed, the details on aspects [22]. Furthermore, this dimension includes some the research methods used for this study, the results and aspects concerning the labor force, with regard to their discussions, and the last part will be consisted of the health and safety as well as diversity of human resources. summary, conclusion and recommendations based on The relevance of this specific indicator is also laid within findings. the Socially Responsible Investment (SRI) strategies as it tries to evaluate the concept of firm’s long-term II. LITERATURE REVIEW performance as it relates to their risk evaluation [26]. 3) Governance A. Environmental, Social, and Governance (ESG) Governance in the ESG framework could be described Environmental, Social and Governance or ESG in short, as a set of process, structure and system that are integrated is a common term used in Corporate Social Responsibility for the company to be able to grow successfully [27]. The (CSR) of a company. Recently, ESG information has now corporate governance is more about how the firms are becoming everybody’s concerns due to the potential long- managed and controlled by the managerial roles [28]. term impact given to the investment of the stakeholders Therefore, it is a vital factor that is useful in terms of rather than limited only to the shareholders. There are improving the efficiency of the economic development numerous names given to ESG, but not limited to issues along with the needs to enhance the trusts of the Corporate Social Disclosure (CSD), Corporate Social shareholders. Moreover, the governance also takes into Responsibility Disclosure (CSRD), etc [19]. account the relationship among the board of directors, It is the practice to measure, disclose as well as to shareholders, managerial roles, as well as other related become accountable to all the stakeholders both within and stakeholders within the firms or organizations [25]. outside of the companies. ESG score of a company reports This particular aspect has been gaining a lot of attention the performance of them towards the goal of sustainable lately due to the separation of ownership control and development. The ESG report covers the firm’s usage of managerial roles in the business activities within the firms. sources, natural resources, human rights, and their level of Oftentimes, the managers’ interest clashed with the corruption, how they invest in community relations, etc. shareholders’ interest. This is why the issue about The shareholders often see the ESG report as it is linked to principal-agent occurred when the management direction is the firm’s strength, risk management, as well as their different with the stakeholders’ interest. We can conclude effectiveness [20]. that actually the definition of the corporate governance 1) Environmental itself is still unclear due to many perspectives of describing Climate change is a topic that has been around in the it. Berle, et al., 1932 has been describing the governance as st early 21 century, as it is one of the urgent prominent the structure of the capital, the incentive of the managerial issues for all the human race. Which is why this issue has roles, the ownership distribution, the competition of the particular relevance for companies in regard to its financial products in the market, and even the structure of the markets [21]. In the near future, firms will most likely have organization itself. to operate under harsher environments. For instance, B. ESG Disclosure changes in regulations on various industry in respond to The economic markets globally have been moving activist demand in stopping climate changes will have a direct impact on how business operates [22]. towards the models of investing strategy that incorporate the ESG dimensions [29]. The ESG disclosure score is able Environmental disclosure results of corporate are generally obtained from the analysis of the firm’s publicly to quantify the company’s voluntary disclosure in terms of their environmental, social, and governance (ESG) available information including their annual reports, their reports regarding environmental actions, websites etc [23]. information. It is considered as a significant variable due to its ability to enable a business showing their Directive 2014/95/EU, big firms (more than 500 workers) management performance, thus able to identify risks are required to publish reports on their policies regarding relating to their ESG performance [30]. environmental protection, social responsibility and One of the issues that we currently face is how to assess employee treatment, respect for human rights, anti- the quality of the ESG reports as many global organizations corruption and bribery, diversity on members of the including United Nations Conference on Trade and business board. Public companies must reveal all material Development (UNCTAD), Global Reporting Initiative data under Canadian securities laws, including material (GRI), European Federation of Financial Analysts Societies data on environmental and social issues, as well as extra (EFFAS), etc are trying their utmost to develop the disclosure responsibilities under the timely disclosure performance indicators for assessing the ESG report. Many strategies of TSX and TSX Venture Exchange [34]. other organizations like G20, the EU, and other nations Therefore, we can conclude that the organizational such as France, Germany, UK, Japan, etc are trying to climate promotes businesses to reveal data, albeit restricted initiate the integrated reporting of ESG data. These factors information, on environmental, social and governance generated the issues of firms could cherry-pick the problems. Because institutional pressures are seen as a indicators that might give them advantage outcomes [31]. significant reporting driver. Therefore, a distinctive set of key performance D. ESG Measurement indicators for ESG is essential to support investor choices. In 1996, reports on corporate social responsibility (CSR) The data derived from the ESG could help the investors to were produced by only 300 companies globally. 19 years have broader information that can be taken into account later in 2014, this number had increased to more than 7,000 when considering an investment. Therefore, they could participating companies around the globe [35]. While the take a look at businesses that might reveal more ESG Global Reporting Initiative (GRI) guidelines and more information as they are more ready to be analyzed. recently the framework recommended by the International C. CSR Reporting Regulation in G7 Countries Integrated Reporting Council have been adopted by many As explained in the previous chapter, this paper is companies, the extent and quality of ESG disclosure concerned with the seven economic power of the world, the remains heterogeneous. members of the G7 group, namely the France, Germany, The database of ESG has several benefits over other Italy, Canada, United States, United Kingdom and Japan. It databases that are openly accessible. The ESG database is has been said that the most crucial and robust drivers of adopting the most extensive methodology for calculating worldwide CSR reporting regulation are a country's GDP and assessing the environmental, social and governance level and international organizations' attempts to promote it operations and performance of businesses [36]. It evidently [32]. The author also indicated that one of the variables separates processes and results of governance related to stimulating the development of CSR regulation is the CSR. Bloomberg's ESG group initially created the ESG growing expectation of stakeholders and civil society about database in early 2008. the behaviors of governments to regulate companies. The Bloomberg's product offers over 9,000 businesses in company's primary stakeholders include customers, over 70 nations with insight into ESG metrics. Their investors, community, employees, company partners, product involves derived ratios and sector-specific areas. It governments, and the public, particularly for large offers up to 10 years of historical information in addition to companies with important environmental and social effects. comprehensive coverage. 900+ areas are included ESG [33] has stated that from all 850 leaders’ opinions Disclosure Scores and span across several sustainability coming from the United States, United Kingdom, France key topics. and Germany, around half of them agree with the The database of Bloomberg ESG offers comprehensive declaration that these nations want to be stricter in creating ratings ranging from 0 to 100 for each of the classifications regulations for the private businesses operating in their of environment, social and governance. The Bloomberg countries. And with the economic and social development, Sustainalytics says that the ESG disclosure could help stakeholders and the effects of civil society are becoming investors with a macro-level assessment of how the firms more important as they are getting more channels to voice manage their ESG capita. This allows investors to add the their complaints and request, which therefore created the ESG indicators into their basic valuation. Thus, adequate needs for the government to initiate an action in regulating data is provided by the ESG database to examine the the CSR. interactions between CSR operations, CSR performance In 2010, the US Securities and Exchange Commission or and financial performance. also known as the SEC published Interpretive Guidance on E. Financial Performance Measurement Climate Change Disclosure. This offers guidance on Financial performance can be described as a description disclosure regulations that may require a company to reveal of the financial circumstances of a given period for the effect on its business that climate change-related legal fundraising and fund allocation elements, which are developments may have impacted. In the EU, under generally measured by capital adequacy, liquidity and by many possible factors, including the variable profitability indices [37]. Accounting performance and information sources for CSR outcomes and the market performance measurements are generally used to consideration of moderation and mediation factors [44]. evaluate firms ' financial performance. Measures for accounting results include return on asset, return on III. METHODOLOGY investment, profit margins and etc. While market A. Research Design performance includes market value to book value, stock The following are the steps for conducting the research: performance and etc [38]. 1. Finding problem identification A restriction of financial measures is that they reflect 2. Defining research objectives stock market investor expectations that could alter rapidly 3. Reviewing the literature due to uncontrollable occurrences managed by the firm 4. Defining the methodology to collect data (e.g. economic changes due to international crisis or 5. Analyzing data and presenting results/findings investor perceptions of interest and inflation rates due 6. Concluding result as well as giving recommendation mainly to domestic fiscal policy). Although accounting and market-based measures supposedly evaluate overall firm B. Data Collection performance, they provide different evaluations of a firm's The data that was used in this study derived from the performance due to the timing (past or present) and the Bloomberg Terminal in year on year basis in order for us to nature (retrospective or prospective) of these different be able to get the quantitative data and transform them into measures [39]. a panel data format. The other necessary data were taken F. Financial Performance and ESG from secondary data such as websites, reports, journals, etc. The Bloomberg Terminal was used to gather the ESG The issue of how ESG variables impact the economic data due to small number of previous studies using it. Most performance of a company and, eventually, its value was of the previous researchers have been using Asset4, the topic of contentious discussion. The early knowledge FTSE4Good, Goldman, Dow Jones Sustainability Index, was based on neoclassical theory that the connection manually transform qualitative data into quantitative by between ESG and economic results was consistently using GRI frameworks, etc. negative [40]. But, in particular, decision-makers should take into account company ethics and social accountability, C. Data Analysis and specifically environmental management. In reality, the In order to be able to evaluate the influence between concept of corporate social responsibility is being given environmental, social and governance disclosure on rising attention by enterprises and communities [41]. financial indicators, multi regression will be performed Because of the connection between financial based on panel data analysis. Panel data is defined as data performance and investment in environmental concerns, set constructed from cross sectional and over time data. companies are generally double-minded about investing in Regressions will be run to evaluate the correlation between environmental problems. Some companies believe that the dependent and independent variables by considering the environmental programs by cost savings provide a time dimension of the variables [45]. The independent competitive advantage (using less energy, recycling of variable of this research is the ESG disclosure score based wastes etc.) and by achieving higher customer satisfaction, on Bloomberg ESG data index. And the dependent staff loyalty and acquiring a favorable reputation as well as variables are ROA, ROC, Stock Price and P/E. The ESG compliance with regulations. On the other side, if the scores of the companies are measured for five years period company invests in bad environmental attempts, due to from 2014 to 2018 as well as the financial performance inefficiency and unnecessary investment, economic data. performance will be negatively impacted [42]. The sample was selected from listed real estate G. Previous Research / Prior Studies companies in the G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom, and the United States), with Empirical literature used qualitative and quantitative a total observation of 380. techniques to examine the connection between CSR For instance, if we would like to evaluate the influence performance and economic performance. Some empirical of ESG disclosure on stock price of G7 listed real estate studies were case studies using a qualitative approach to companies, the basic equation would be as follows: the implementation of environmental management. These studies evaluated specific companies and lacked FPi,t = β0 +β1 ESGi,t + β Controli,t + εi,t generalizations of statistics [43]. The literature disclosed Where : mixed outcomes for the correlation between performance FPi,t is for the financial performance of the company i on of CSR / ESG and financial performance, demonstrating the last year of the year t. that the region could be further investigated. The diverse ESGi,t is a measure of ESG disclosure score of the findings reported by these past research could be explained company i Controli,t is the control variable εi the error term results. Moreover, since this is a panel data, we also use year effect as dummy variable. TABLE 1. MODEL DESCRIPTION E. Classical Linear Assumption Test Model Dependent Independent Before running the regression, Classical Linear Variable Variable Assumption Test is needed. With this assumption of the Model 1 ROA ESG Score classical linear regression model (CLRM), we were able to Model 2 ROA Environmental Score, fulfill several statistical things such as unbiasedness, Social Score and minimum variance, etc [47]. For panel data, the analysis Governance Score Model 3 ROC ESG Score will be conducting the multicollinearity test, Model 4 ROC Environmental Score, heteroscedasticity test, and normality test to reduce Social Score and potential biases which may appear in regression model and Governance Score to confirm the validity of data that will be used in Model 5 Stock Price ESG Score regression. Model 6 Stock Price Environmental Score, 1) Multicollinearity Test Social Score and The multicollinearity test is used to validate whether Governance Score there is any linear correlation between an independent Model 7 P/E ESG Score variable with the other independent variables [48]. Model 8 P/E Environmental Score, Assumption 10 of the Classical Linear Regression Model Social Score and (CLRM) is that there should be no multicollinearity Governance Score problems between regressors. For more reason in time series data, there is a common trend in the regressors. The D. Variables hypothesis of multicollinearity test is: 1) Dependent and Independent Variables H0: There is multicollinearity The definitions of the dependent and independent H1: There is no multicollinearity variables and their expected signs are as given on the table When the coefficient between variables >0.8, accept H0 below. or there is multicollinearity. On the contrary, if coefficient <0.8 reject H0. TABLE 2. DEPENDENT AND INDEPENDENT VARIABLES The VIF test could help us reveal whether or not there Variables Types Def inition are multicollinearity issues in the specified model. The VIF ROA Dependent Return on Asset indicates how strong is the linear dependencies and how ROC Dependent Return on much the variances of every regression coefficient is Capital inflated because of the collinearity comparing when the Stock Price Dependent Stock price in the end of period independent variables are not linearly related. The VIF for P/E Dependent Price-to- the predictor variable Xk is given by 1/(1−R2k). Therefore, Earnings ratio this test could be conducted to test for the multicollinearity Environmental Independent Firm issues among the independent variables. And if the result Environmental disclosure level of the VIF is below or equal to ten, that means it shows no Social Independent Firm social multicollinearity. While a value of VIF above 10 indicates disclosure level multicollinearity issues. Governance Independent Firm governance 2) Heteroscedasticity Test disclosure level An assumption of the classical linear regression model is ESG Independent Bloomberg ESG data index that the disturbance appeared in the regression function should be homoscedastic which means that all of them 2) Control Variable have the same variance. We could conduct the Breusch- Control Variables are also used in this research. Using Pagan / Cook-Weisberg test in order to detect the control for the effect of that the size of the company and heteroscedasticity. H0: Constant variance, means the robust leverage may have correlation between share price and standard error is relatively consistent with standard error. If CSR disclosure in robustness test [46]. This research use prob>chi2 is less than significant level, it is indicating Total Asset of every company as well as their Market presences of heteroscedasticity. However, if Capitalization as control variable. As an addition, we will heteroscedasticity presents in our model, by default Stata also use Country variable to represent the country effect statistical software assumes homoscedastic standard errors and will not use the economic variable like GDP for every if we adjust our model to account for heteroskedasticity. To country since our subjects are countries with the seven do this, we can use the option robust in the regress economic power of the world thus have removed the command. influence of difference in the state of the economy on the 3) Normality Test using 5% significance level, it means our model has a 95% The normality test is used to determine whether the data of confidence interval. Econometricians usually advise to used are normal or not based on the available distribution use 1% instead for larger samples [51]. These are the [49]. Normality test could be conducted using several factors why this study will use both 5% and 1% due to our methods. We use Shapiro-Wilk W test for normality for large sample size. each variable. If the prob > z is higher than significant level, it means the data is normal. However, in the practice IV. RESULT AND DISCUSSION of normality, it would not be a problem if we have such a A. Data Presentation big sample size. Because if the sample is greater than 30, PERCENTAGE OF SAMPLES OBSERVED IN EACH COUNTRY the central limit theory would be applied. This theory says Germany that the methods would be the same as if the population 4% itself were distributed normally when it comes to evaluating probabilities related with the values of statistical Japan tests [49]. USA 16% Italy 39% F. Regression Analysis 3% France If we have passed the classical linear assumption tests, 8% we will start conducting the regression models in order to find the correlation between variables mentioned earlier. UK 21% We choose to use panel data by combining time series of cross-section observations. The output of this regression is Canada coefficient determination, F-test, and T-test. The use of the 9% panel data format would provide us a more useful result USA Canada UK Fra nce Ita ly Japan Germa ny with less collinearity between the many different variables, Figure 1. Percentage of Samples Observed in Each Country panel data is usually defined as a more appropriate and The proportion of the data observed (listed real estate efficient for multidimensional analysis due to its ability in companies period 2014-2018) from every country can be identifying some correlations that might not be noticeable seen in Figure 1. USA has the highest population for listed in a time-series data set or simple cross-section [50]. real estate companies, therefore, the samples derived from Regression method in panel data have three models, USA was the highest among other countries in G7, which such as: accounts for 39% of the observations. Followed by UK,  OLS Regression Japan, Canada, France, Germany and Italy respectively. This regression model is considered as the simplest B. Descriptive Statistics Analysis approach that ignore the time as well as the space element of the pooled data. TABLE 3.  Fixed Effect DESCRIPTIVE STATISTICS Fixed effect is the way to consider the individuality of Variable Obs Mean Std. Dev. Min Max every company or every cross sectional unit to let the ESG 382 33.07 12.34 11.16 59.09 intercept vary for each company however it still assumes Env 382 25.04 15.61 1.55 65.89 that the slope coefficient is constant across firm.  Random Effect Soc 382 30.32 16.51 3.51 82.46 Using of random effect is if we include the error term in Gov 382 54.87 7.94 14.29 75.00 the intercept of time series and cross-section data to make ROA 382 4.55 4.38 -13.19 27.22 more efficient approach. Several test is needed before we decide what approach ROC 382 5.63 5.22 -13.79 30.17 we need. Breusch-Pagan Lagrange Multiplier or LM test to Stock 382 76.41 407.16 0.57 6258.49 help us in deciding whether to run a random effects _Price regression and a simple OLS regression. If Prob > Chi2 PE 380 42.32 74.74 3.65 905.46 less than the significance level, we can use random effects Total_Asset 382 1.09e+10 1.02e+10 -9875497 5.70e+10 regression. Hausman test helps us to decide whether to use Marketcap 382 8.51e+09 9.53e+09 -2.74e+09 6.02e+10 fixed or random effects where the null hypothesis is that preferred model is random effect of fixed effect. Country 382 2.90 1.98 1.00 7.00 G. Significance Level Table 3 shows the descriptive statistics of the variables. The significance level we choose would reflect our It depicts the number of observations sample of each accuracy level, usually the standard is below 5%, but it variables (N), mean, standard deviation, minimum, would be better at the 1% significance level. Because by maximum of the variables used. The mean value of the overall ESG score of the listed companies is 33.07 with a 2) Heteroscedasticity Test standard deviation of 12.34. This means that the ESG score Heteroscedasticity test aims to see whether the data is is spread out over a wide range of value from the time of homogeneous or not, in other words, the data do not have observation. Meanwhile, the specific factors of ESG which any heteroscedasticity problems. We conduct Breusch- are environmental, social, and governance have a varying Pagan/Cook-Weisberg test in order to detect such mean between each of them. Environmental with only problems. Table 6 summarizes the results. 25.04 score, followed by Social with 30.32, and TABLE 6. Governance with the largest mean score of 54.87. With a Tab H le ETERO 6. He StCED erosAS ceT da IC sItTY ic ity T E TS eT stR R EeSsU ul L T low score and high standard deviation, means that the M odel Chi2(1) Prob > Chi2 Social and Governance factor of the listed companies have Mode l 1 0.19 0.6642 a wide range of scores. While the Governance factor is quoted to have a considerably low score when comparing Mode l 2 0.30 0.5843 the standard deviation to its mean. Mode l 3 0.23 0.6290 C. Classical Linear Assumption Test Mode l 4 0.36 0.5486 1) Multicollinearity Test Mode l 5 13.63 0.0002 TABLE 4. PAIR Tab -W le IS 4. E PaC ir-ORRELAT W ise CorrelI aON tion M MaA trTR ix. IX Mode l 6 6.53 0.0106 Variable ESG Env Soc Gov Total_Asse t Marketcap Country Mode l 7 4.01 0.0451 ESG 1 Mode l 8 3.36 0.0670 Env 0.9425 1 Soc 0.8371 0.6599 1 If prob>chi2 is less than significant level, it is indicating Gov 0.5822 0.4292 0.4452 1 presences of heteroscedasticity. The result shows that model 5, model 6 and model 7 have some Total_Asset 0.2425 0.2649 0.1096 0.1458 1 heteroscedasticity problems. However, if heteroscedasticity Marketcap 0.1115 0.127 -0.0429 0.2154 0.6833 1 presents in our model, by default Stata statistical software Country 0.2212 0.2569 0.3117 -0.3843 0.0523 -0.3021 1 would assume homoscedastic standard errors if we adjust our model to account for heteroskedasticity. To do this, we Refer to Table 4, the Pair-Wise correlation shows that can use the option robust in the regress command. there is multicollinearity problem in Environmental and Social variables if we correlate it with ESG. However, this D. Normality Test problem cannot be considered as a problem when the VIF Refer to Table 7, it is shown that the residual value of test shows the VIF result <10 [52]. this research is not distributed normally. This research has After doing the VIF test, we can see the results as seen a total of 380 observations. Therefore, when the sample on Table 5, indicate that multicollinearity problems in the size is large, the central limit theory applies. This theory specified model are unlikely existed, as the highest mean states that the methods would be similar, as if the VIF value is 2.25, followed by the least value of 1.76. The population itself were normally distributed, when value of VIF is beyond 10 means the multicollinearity is evaluating probabilities related with the values of a test considered problematic. The number from Table 5 is well statistic. When the sample size is large enough (greater within the limit of 10, so we can assume that there are no than 30), the central limit theory applies and normality is problems that arise from the test result. assumed [49]. TABLE 5. TABLE 7. VIF TEST Table 5. VIF Test NORMALITY TEST Table. 7. Normality Test M ode l Mean VIF Variable Obs W V z Prob> z Mode l 1 1.77 ESG 382 0.95343 12.304 5.959 0.0000 Env 382 0.95032 13.124 6.113 0.0000 Mode l 2 2.22 Soc 382 0.97891 5.571 4.078 0.0002 Mode l 3 1.77 Gov 382 0.95447 12.029 5.906 0.0000 Mode l 4 2.23 Total_Asset 382 0.80632 51.169 9.343 0.0000 Market_Ca p 382 0.75813 63.898 9.871 0.0000 Mode l 5 1.76 Country 382 0.95916 10.789 5.648 0.0000 Mode l 6 2.25 Ln_ROA 362 0.98437 3.936 3.245 0.0059 Mode l 7 1.76 Ln_ROC 363 0.97634 5.973 4.234 0.0001 Ln_SP 382 0.97632 6.256 4.354 0.0001 Mode l 8 2.25 Ln_PE 380 0.97919 5.473 4.035 0.0003 E. Regression Analysis variables (ESG, Total Asset, Market Capitalization, and Country). The other regression estimation includes six 1) Breusch-Pagan Lagrange Multiplier (LM) Test independent variables (Environmental, Social, Governance, Before running the regression, conducting the LM test Total Asset, Market Capitalization and Country). helps us decide between a random effects regression and a The Table 10 presents the result of regression of G7 simple OLS regression. The null hypothesis in the LM test listed Real Estate companies’ ROA and ROC on ESG is that variances across entities is zero. This is, no disclosure score while Table 11 presents the result of significant difference across units (i.e. no panel effect). If regression of G7 listed Real Estate companies’ Stock Price the prob>chibar2 is >significant level, then we can use and P/E on ESG disclosure score. Since the objective of this OLS regression. study is limited to only analyzing whether or not there is any TABLE 8. significant influence between the ESG disclosure and the BREUSCH-PAGAN LAGRANGE MULTIPLIER (LM) TEST Table 8. Lagrange Multiplier Te st Result firm performance, the analysis part and the discussion part Mode l chibar 2(01) Prob>chibar2 will not discuss the coefficient of every variable. However, Mode l 1 84.00 0.0000 the author still presents the information regarding the Mode l 2 82.77 0.0000 coefficients in the regression results tables. Mode l 3 62.04 0.0000 TABLE 10. Table 11. Regre ssion Re sult Mode l 1-4 REGRESSION RESULT MODEL 1-4 Mode l 4 63.56 0.0000 Models 1 2 3 4 Mode l 5 361.02 0.0000 ROA ROA ROC ROC Variable Coefficient Coefficient Coefficient Coefficient Mode l 6 368.01 0.0000 ESG 0.0113893** 0.0135145*** Env 0.005953 8 0.0094025** Mode l 7 204.86 0.0000 Soc -0.00116 69 -0.00350 45 Mode l 8 200.04 0.0000 Gov 0.0134 8 4 6 * 0.0138 1 7 6 * Total Asset -3.13E-11*** -3.33E-11*** -3.22E-11*** -3.39E-11*** After doing the LM test for all models, the results have Market Cap 3.14E-11*** 3.27E-11*** 3.50E-11*** 3.54E-11*** Country 0.044816 0.0743 9 9 6 * 0.0824362** 0.1130349*** shown that all models are appropriate for using random Constant 0.8213441*** 0.269708 7 0.844264*** 0.329015 2 effects regression. Ob serva ti o n s 362 362 363 363 R-squared 0.1727 0.144 0.2381 0.1995 2) Hausman Test Number of In order for us to choose whether to use random Company 77 77 77 77 Prob>chi2 0.0000 0.0000 0.0000 0.0000 effects or fixed effects, running a Hausman test is needed. Statistic al Random Random Random Random If the Prob>chi2 is < 0.05 (i.e. significant) use fixed Sign ificance effects. Level *p<0.1 **p<0.05 ***p<0.01 TABLE 9. TABLE 11. HAUSMAN TEST RESULT Table 9. Ha usman Test Re sult REGRESSION RESULT MODEL 5-8 Mode l Prob> chi2 Models 5 6 7 8 Variable Stock Price Stock Price P/E P/E Mode l 1 0.9590 Coefficient Coefficient Coefficient Coefficient ESG 0.0182185 * -0.0108014 Mode l 2 0.4872 Env 0.0236367*** -0.0014739 Mode l 3 0.9657 Soc -0.0044102 -0.00816 35 * Gov -0.0234034 -0.01424 35 * Mode l 4 0.3001 Total Asset -8.75E-11* -7.37E-11* -2.23E-11 * * -3.12E-12 Market Cap 1.29E-10*** 1.14E-10*** 4.47E-11** 2.25E-11** Mode l 5 0.0000 Country -1.44397 -1.918713 0.7534185*** 0.1734825*** Mode l 6 0.0142 Constant 6.623518 9.403315 1.233127** 4.621167*** Observations 382 382 380 380 Mode l 7 0.0458 R-squared 0.2768 0.3344 0.2421 0.3709 Number of Mode l 8 0.2283 77 77 77 77 Company Prob>chi2 0.0000 0.0000 0.0000 0.0000 Based on the result, only model 5, 6, and 7 have value of Statistical Significance Prob>chi2 below the significant level. Therefore, it Level Fixed Fixed Fixed Random indicates that the random effect model is not appropriate *p<0.1 **p<0.05 ***p<0.01 and the fixed effect specification is preferred for the three models. Based on the regression result in the Table 10, we can 3) Regression Result see that the ESG variable is highly significant and positive In order to test whether there is influence of ESG correlation with ROA and ROC. While on the other hand, disclosure on the Financial Performance, we run the there is no significant influence from individual ESG regression analysis. There are eight regression models factors (Environmental, Social, and Governance) towards which are consisted of four dependent variables. Every the firm’s ROA. Moreover, the Environmental factor has dependent variable is consisted of two regression models. positive significant correlation with the firm’s ROC. The One regression estimation includes four independent R-square for the model one until four are 0.1727, 0.144, The results from the observations collected from the 0.2381 and 0.1995 respectively. seven markets have revealed that there is a significant Moving on to Table 11, there is no significant influence of the ESG disclosure as a whole on the real correlation between the ESG as a whole and Stock Price. estate companies financial performance as measured by However, the Environmental aspect is significant and accounting indicators such as ROA and ROC. However, positively correlated to the firm’s Stock Price. While on the the market based measure such as Stock Price and P/E do other hand, there is no sign of a significant correlation not have any correlation with the ESG factor as a whole. between the ESG and the firm’s P/E. The R-square for the This highlights the difference in the firms performance model five until eight are 0.2768, 0.3344, 0.2421 and based on returns or market value. ROA and ROC measure 0.3709 respectively. the overall effectiveness of management in generating returns, whereas Stock Price and P/E measure the financial markets performance. This is aligned with the previous V. CONCLUSION study done by [53] who stated that a strong ESG This study tries to find the correlation between commitment would imply more information about the Environmental, Social, and Governance (ESG) disclosures expected cash flow distribution, decrease principal-agent on firm financial performance as measured by its costs, as well as lower the investors’ risk premiums. accounting and market based. The financial indicators are Moreover, cost of capital might be decreased due to the measured by considering the data from listed real estate readiness of the socially responsible investors in accepting companies from year 2014 until 2018 within the G7 (Italy, a lower return from a socially responsible company. The Japan, United Kingdom, Canada, France, Germany, and the study also suggests that the firms with higher ESG United States) context as group of developed countries. commitments are better in terms of their operations and The countries in G7 was chosen as subject of the study due financial. the high concerns of specific stakeholders, for example, The study results also indicate that there is a statistically regulators, shareholders, creditors, investors, significant positive relationship between Environmental environmentalists, and the media in disclosing CSR disclosure and firm ROC as well as Stock Price. Meaning information in the developed nations. that more common stock investors take firm’s G7 also declared that they emphasized, in particular, the Environmental concerns into consideration. This finding is UN Global Compact as an important CSR initiative. On the aligned with the previous research by [54] for investors, summit declaration, they mentioned to strengthen the paying attention to environment-related risks is particularly voluntary approach of CSR by encouraging the important in the age of social media. Today’s consumers improvement of the transparency of private companies' can easily spread news and communicate much faster in a performances with respect to CSR. Moreover [32], stated sense that they could shame a company for its that the most notable and robust drivers of global CSR unsustainable practices. Because of this heightened reporting regulation are the GDP level of a country and the awareness, [54] predicts that new environmental promotion efforts from international organizations targeted regulations would follow public protest faster than in the to that country. The author also stated that one of the past. Thus, the aims of building a positive image of the factors which stimulates the growth of CSR regulation is companies made Corporate Social Responsibility became the increasing expectation from stakeholders and the civil one of the ways in increasing the value of the companies. society on governments to regulation firms’ behavior. This study results also revealed that there’s no The author chooses this particular topic because there is significant influence of the Social and Governance factor a growing interest in ESG criteria while at the same time, on firm financial performance. Since prior studies usually these ratings have not been around for very long, so the examine the relationship between firm financial data are sparse. Moreover, the growing market size of performance and CSR/ESG as a whole and not specific Socially Responsible Investing (SRI) along with the aspects of ESG. Therefore, our study contributes new importance of ESG disclosure that has been recognized by knowledge to the extant literature on ESG as well as firm more and more regulatory agencies, exchanges, and financial performance of real estate companies. investors pique our interest in conducting a study in this particular field. The environmental actions of the company Recommendations is related to their efforts in building a good impact for the The main recommendation is that the corporations, environment by following the regulations related to that investors, regulator and stakeholders need to consider ESG particular aspect. The social actions is more about how disclosure. 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