**Relevance of companies’ size:** Firm size is a determinant of ESG practices: larger companies typically have better ESG ratings compared to SMEs. This is partially due to not only their intrinsic ability to have more sustainable business models and better management practices, but also their ability to provide the ESG rating agencies with adequate information (Berg, Kölbel, Rigobon, 2020).

Our novel “Corporate ESG Responsibility” composite indicator derived from the ES is inspired by the ESG ratings produced by the ESG rating agencies, but it does not follow any of them closely. It relies more on the structure of the Sustainability Accounting Standards Board (SASB).

Taking into account the above mentioned challenges and the available benchmarks, the “Corporate ESG Responsibility” composite indicator has been built taking the following steps:

- i. Assess the entire questionnaire of the Enterprise Survey (more than 200 questions) and select the questions related to ESG practices, allocating them to each pillar (E, S, or G).

- ii. Identify the sub-pillars of E, S and G, and the respective variables, based on relevant frameworks such as SASB and on their relevance in the assessments of the main ESG rating agencies, aiming at identifying a “common denominator” among agencies and standard frameworks.

- iii. Match the topics (i.e. set of questions) covered by the ES with the main building blocks and the sub-pillars used by SASB and ESG rating agencies.

- iv. Align the sub-pillars with SASB standards to the maximum possible extent. We included 3 sub-pillars for E (Environmental awareness, Green management practices, Green measures<sup>8</sup> ), 3 for S (Gender, Education & skills, Training), and 5 for G (Corporate governance, Management practices, Internal controls & audit, Compensation, Innovation).

- v. Manage missing data,<sup>9</sup> use imputation when possible (in line with the OECD-JRC Handbook on Constructing Composite Indicators methodology; OECD-JRC, 2008). In the case of filter questions, answers are imputed to replace some missing values when this is logically straightforward. Answers in the Enterprise Survey can be binary (yes/no), discrete (when various answers are possible), or continuous (a percentage for instance). Others were transformed into percentages.

- vi. Reduce the 60 ESG-related initial questions to 40, for one of the following reasons: i) too many missing data: if more than 55% of answers are missing, (e.g. because some questions are not asked from all firms due to eligibility or based on the sector they belong to), the component is excluded; ii) redundancy of some of the questions: if highly correlated with other variables/questions, they are not adding relevant information.

- vii. Transform the variables (21 related to E, 6 to S and 13 to G for a total of 40) into z-scores with mean 0 and standard deviation 1 (a z-score of 1.0 would indicate a value that is one

> 8 “Environmental awareness” is related to monitoring and target setting; “Green management” is related to the strategic objectives, to managerial responsibility of green targets and to green certifications; “Green measures” are the investments done by firms to improve their environmental impact. The latter can be _pure_ green investments (energy management, waste minimization, air pollution control measures, more climate-friendly energy generation on site, etc.) or _mixed_ green investments (that reduce the environmental impact as a byproduct of achieving other objectives: heating and cooling improvements, machinery and equipments upgrades, upgrade of vehicles, improvements of lighting system, etc.) (EBRD, 2020).

> 9 Missing values partially result from directly instructing companies to answer only questions relevant to them rather than receiving non-response from them. Answers can include refusal or don’t know, which are also typically treated as missing in the analysis, but can sometimes be used as valid information – this is determined on a question-by-question basis.

9