A Comparison of Europe Indexes and Emerging Markets Indexes on ESG Activities
Keywords:
ESG, MSCI, ESG reporting, developed economies vs emerging economiesAbstract
The introduction of the United Nations’ Principles for Responsible Investment in 2006 marked the incorporation of environmental, social, and governance factors into the financial evaluation of companies. To promote corporate social responsibility, many governments have mandated that listed companies report on their environmental, social, and governance activities. Developed economies, such as the European Union will mandate that all listed and large companies report on risks related to environmental and social factors from 2025. Emerging economies, such as China will require large listed companies to report environmental, social, and governance activities starting in 2026. India even already started the requirements since 2022–23. This paper seeks to compare the performance of ESG-focused companies in (Europe) with those in emerging markets. The goal is to understand
whether developed markets exhibit more mature environmental, social, and governance practices and whether these contribute more positively to financial performance. It is also important to investigate whether active environmental, social, and governance engagement positively affects financial performance from the country level. This study also compares the cases of Germany, China, and India. This study utilized selected data from Morgan Stanley Capital International Index indexes spanning between 2021 and 2022. The results showed that companies in developed European markets performed better than their counterparts in emerging markets among the strong environmental, social, and governance companies while the Indian environmental, social, and governance Index outperformed the German and Chinese environmental, social, and governance indexes.
References
Forbes. Demystifying ESG: its history & current status. 2020. Available at https://www.forbes.com/sites/betsyatkins/2020/06/08/demystifying-esgits-history--current-status/?sh=337663532cdd.
Preqin. (2022). Historical Timeline of ESG. Available at https://www.preqin.com/preqin-academy/lesson-5-esg/history-of-esg.
European Commission. (2024). Corporate sustainability reporting. Available at https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
China Briefing. What is ESG reporting and why is it gaining traction in China? 2022. Available at https://www.china-briefing.com/news/what-is-esg-reporting-and-why-is-it-gaining-traction-in-china/.
ESG News. (2024). China releases first corporate sustainability disclosure standards. Available at https://esgnews.com/china-releases-first-corporate-sustainability-disclosure-standards/.
MSCI various Index Factsheets (2024).
Cormier D, Lapointe-Antunes P, Magnan M. Does corporate governance enhance the appreciation of mandatory environmental disclosure by financial markets? J Manag Govern. 2015;19:897–925.
Aureli S, Salvatori F, Magnaghi E. A country-comparative analysis of the transposition of the EU non-financial directive: an institutional approach. Acc Econ Law Conv. 2020;10(2):1–27. doi: https://doi.org/10.1515/ael-2018-0047.
Yen M, Shiu Y, Wang C. Socially responsible investment returns and news: evidence from Asia. Corp Soc Resp Environ Manag. 2019;26:1565–78
Giese G, Lee LE, Melas D, Nagy Z, Nishikawa L. Foundations of ESG investing: how ESG affects equity valuation, risk, and performance. J Portf Manag. 2019;45(5):69–83.
Bae JC, Yang XT, Kim MI. ESG and stock price crash risk: role of financial constraints. Asia-Pacif J Fin Stud. 2021;50:556–81.
Feng JW, Goodell JW, Shen DH. ESG rating and stock price crash risk: evidence from China. Fin Res Lett. 2022;46(Part B):102476.
Chen Z, Xie G. ESG disclosure and financial performance: moderating role of ESG investors. Int Rev Fin Anal. 2022;83:102291.
Arvidsson S, Dumay J. Corporate ESG reporting quantity, quality and performance: where to now for environmental policy and practice? Bus Strat Env. 2022;31:1091–1110.
Mao Z, Wang S, Lin Y. ESG, ESG rating divergence and earnings management: evidence from China. Corp Soc Resp Environ Manag. 2024;31:3328–47.
Sodjahin A, Champagne C, Coggins F. Are changes in extra-financial ratings a (un) sustainable source of abnormal returns? Acad Acc Fin Stud J. 2018;22(1):1–8.
Lo K, Kwan C. The effect of environmental, social, governance and sustainability initiatives on stock value – examining market response to initiatives undertaken by listed companies. Corp Soc Resp Environ Manag. 2017;24:606–19.
Landi G, Sciarelli M. Towards a more ethical market: the impact of ESG rating on corporate financial performance. Soc Resp J. 2019;15(1):11–27
Miralles‐Quirós M, Miralles‐Quirós J, Redondo‐Hernández J. The impact of environmental, social, and governance performance on stock prices: evidence from the banking industry. Corp Soc Resp Environ Manag. 2019;26:1446–56.
Auer B, Schuhmacher F. Do socially (ir)responsible investments pay? New evidence from international ESG data. Quart Rev Econ Fin. 2016;59:51–62.
Serafeim G, Aaron Yoon A. Stock price reactions to ESG news: the role of ESG ratings and disagreement. Rev Acc Stud. 2023;28:1500–30. doi: https://doi.org/10.1007/s11142-022-09675-3.
Elamer A, Boulhaga M. ESG controversies and corporate performance: the moderating effect of governance mechanisms and ESG practices. Corp Soc Responsib Environ Manag. 2024;31:3312–27.
Zhou G, Liu L, Luo S. Sustainable development, ESG performance and company market value: mediating effect of financial performance. Bus Strat Environ. 2022;31(7):3371–87. doi: https://doi.org/10.1002/bse.3089.
CFA Institute. MSCI Data. 2024. Available at https://rpc.cfainstitute.org/research-foundation/msci.
