Jian Liu and Xianfeng Ma at the Wuhan university looked at 3,350 domestically listed firms in China from 2019~2024 to see if they could add usefully to the debate about firm value and ESG scoring.
The problem with this kind of analysis in the past is that there are a number of ESG-ranking providers whose conclusions are often not consistent. Moreover, methodology can lack clarity which further undermines the value of the ratings.
In order to solve this problem the researchers took the output from four established ESG rating providers in China and aggregated it. There are caveats galore in their work but the main conclusion is clear and I’ll leave it to them to speak:
“The empirical results reveal a pronounced negative association between firm value and ESG performance.. [And] companies with better ESG performance incur higher costs due to increased ESG investments, which in turn undermines their market value.”
As somebody who reads, and has read a lot of prospectuses and annual reports can I just say ‘Hallelujah!’ The blah-bloat that’s increased the length but decreased the usefulness of corporate communication in the last decade has become a serially tiresome irritation.
If, as this work suggests, it’s also undermining the value of companies a review is due. Good companies advertise themselves very clearly. It’s the rogues who often try to cover their shabbiness with the fig-leaf-respectability of overlong CG or ESG womble and I now skip all discussions on this as I’m sure many other investors do too.
In fact, an overly long section on corporate virtue has become for me a reliable red-flag. Glad to see a long standing hunch at last some analytical basis.
You can read the paper in full via the following link The Impact of ESG Performance on Corporate Value.
Happy Sunday.