Sustainable finance: the economic impacts of environmental, social and governance (ESG) factors on stock price, brand value and executive compensation

Environmental, social, and governance (ESG) disclosure is increasingly important for listed companies, representing a key factor that contributes to sustainable finance. However, whether and how the inclusion of ESG scores in investment decisions affects stock prices remains uncertain; the effect of ESG on intangible assets is a neglected area of investigation, and not all executives in global capital markets respond to ESG issues. Moreover, how each of the three dimensions of ESG affects the value of a company has yet to be fully determined. For the first time, this study takes Chinese listed companies from 2014 to 2018 as a sample to examine the impact of ESG on stock price, brand value, and executive compensation. These three main research objectives constitute three independent papers of this DPhil thesis, which address the motivation to engage in ESG disclosure and provide insight into the important role of ESG in financial markets, as well as how investors, entrepreneurs, and board members consider ESG strategies.
Quantitative techniques are employed in this empirical research approach. While existing popular theories have limitations in explaining and predicting the impact of ESG on enterprise value, this study proposes a new theoretical framework, namely the reputation ecosystem. The reputation ecosystem is similar to Adam Smith's "invisible hand" metaphor that maintains a healthy economic order. To enhance the accuracy and efficiency of ESG data collection and scoring, language models and artificial intelligence (AI) are utilized. To address the inherent conflict of interest in ESG data collection and scoring, this study adopts an investor-paid model instead of the issuer-paid model of mainstream rating agencies. The study employs multivariate regression analysis on Chinese stock panel data to investigate their relationship with ESG performance across the E, S, and G dimensions, as well as stock return, brand value, and executive compensation. Cross-listing samples are used in the stock return analysis. Granger causality tests are employed in all three papers for causal analysis.
The thesis identifies positive relationships between ESG performance and stock returns, brand value, and executive compensation, with additional tests suggesting these relationships are causal. Additionally, these positive relationships hold true for all three ESG dimensions, but their effects are not synchronized. It also demonstrates that firms with higher state ownership and those in a more competitive environment tend to have better stock performance and higher executive compensation with better ESG performance. The positive relationship between ESG and brand value only exists for firms in B2C industries, firms with higher state ownership, and firms located in economically developed regions. Specifically, in the mainland China and Hong Kong markets, every one-unit increase in score for overall ESG performance can increase the average annual stock return by 0.022 and 0.017, respectively; every one-percent increase in ESG score increases average brand value by approximately 0.354%; and the average executive compensation increases by approximately 2.65% with every one-unit increase in the total ESG score.
Overall, these three substantive papers verified the new theoretical framework of the reputation ecosystem, proving that the impact of ESG on corporate value occurs through this reputation ecosystem mechanism, which in turn affects the realization of corporate revenue by improving brand value. Creating a framework for the reputation ecosystem and discovering the mechanism of ESG influence on a firm’s performance is my theoretical contribution, while using an investor-paid model and AI for ESG data collection and scoring is my methodological contribution. The new data and theory presented in this thesis also contribute to various literature streams, such as those concerning ESG, sustainable finance, financial geography, corporate finance, responsible investment, executive compensation, and brand management.

Keywords: reputation ecosystem
executive compensation
sustainable finance
investor-paid model
ESG
brand value
stock price
Advisor: Wójcik, D