Does ESG Performance Affect the Enterprise Value of China’s Heavily Polluting Listed Companies?

By inergency On Mar 28, 2024

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1. Introduction

With the high attention given to climate, resources, and environmental protection issues, enterprises should not only achieve efficiency growth, but also pay attention to environmental protection and social responsibility. In April 2022, “Guidelines for Investor Relations Management of Listed Companies” containing “corporate environmental, social, and governance information” were first introduced by the China Securities Regulatory Commission. In June 2022, “an ‘Implementation Plan for Enhancing Pollution Reduction and Carbon Synergy’ was jointly released by the Ministry of Ecology and Environment, the National Development and Reform Commission, and seven other government departments”. It is proposed that, by 2030, the synergistic capacity of reducing pollution and reducing carbon will be significantly improved to help achieve the goal of carbon peak. This is of great significance to enhance the transparency, accountability, and efficiency of global sustainable development information disclosure. This paper takes China‘s heavily polluting listed industrial and commercial enterprises as the research object, and tries to explore the impact of ESG performance of heavily polluting enterprises on enterprise value, aiming to promote heavily polluting enterprises to protect the ecological environment, fulfil their social responsibilities, improve corporate governance, and foster the advancement of eco-friendly and sustainable growth among corporations.

Although there have been many studies on the impact of ESG performance on corporate value at home and abroad, the research conclusions are different, and overall they can be divided into three types: First, researchers believe that ESG and corporate value are positively correlated, and ESG will promote the increase of corporate value [1,2,3,4]. With a change of research variables, ESG has a positive nonlinear (U-shaped) impact on enterprise value [5]. ESG can improve enterprise value by enhancing investor confidence [6]. ESG can not only improve the enterprise value of the enterprise, but also improve the innovation level of the enterprise [7,8]. For different research areas, the factors of ESG that play the leading role are not the same. The automotive industry is mainly affected by G [9], and for European companies, the main concern is S [10]. Second, researchers believe that good environmental performance is at the expense of corporate interests [11]. Enterprise ESG information disclosure will increase corporate costs and reduce corporate value [12,13,14,15]. ESG disputes will also weaken corporate value to a certain extent. Third, researchers believe that there is no significant relationship between ESG performance and corporate value [16,17]. The ESG policy has little impact on corporate value in the short-term [18,19,20]. Focusing solely on environmental factors in ESG is not enough to improve corporate value [21,22]. For non-key pollution monitoring enterprises, the relationship between ESG and enterprise value is not significant [23]. For high-tech enterprises, the relationship between G in ESG and enterprise value is not significant [24]. The majority of academics focus solely on the influence of ESG single factors on enterprise value, while neglecting the other relevant factors’ importance in determining enterprise value. Additionally, most researchers have a single perspective on the path of ESG performance affecting corporate value, such as profitability [25], working capital management efficiency (WCME) [26], corporate social responsibility [27], sustainability [28,29,30], debt financing [31], enterprise scale [32], transparency [33], etc. There are few researchers who choose green technology innovation, financing costs, and internal control as research perspectives.

Based on the above, this study’s sample consists of Chinese shares in heavy-polluting industries listed on the Shanghai and Shenzhen stock exchanges from 2015 to 2022. This paper presents the following contributions: First, ESG comprehensive indicators are selected from the perspective of ESG as a whole, and the performance of enterprises comprehensively considered. Second, the mechanism effect of ESG performance on enterprise value is studied from three aspects: green technology innovation, financing cost, and internal control. Third, the regulating effect of economic policy uncertainty on the relationship between ESG performance and enterprise value is studied. Fourth, heterogeneity analysis is carried out from the aspects of resource endowment, ownership nature, and overseas background of executives. Finally, the findings can help government departments to promote the construction of an ESG evaluation system with Chinese characteristics, and open up a new path for heavy-polluting enterprises to achieve green and low-carbon development.

2. Literature Review and Research Hypotheses

(1): ESG performance and enterprise value

According to research on ESG performance, ESG can bring many opportunities and benefits to the development of enterprises. For example, ESG performance can improve the market and book value of enterprises [34,35], enhance the capacity for sustainable development and informatization level of enterprises [36], and reduce the financing constraints and financing costs of enterprises [37]. In addition, enterprises improve their management and governance models and constantly solve various problems in their development, which is of great help to realize the strategic objectives of enterprises and improve the development of governance.

According to the stakeholder theory [38], various stakeholders contribute to the development of enterprises in different ways. With their support, enterprises can continue to survive and grow. Enterprises should maintain the interests and relationships of all parties, fulfil the contracts with stakeholders, and meet the needs of all stakeholders from the perspective of ESG practice [39]. The first is the environmental level. Enterprises should take sustainable development as the principle; pay attention to protecting the ecological environment and resources; improve energy conservation, emission reduction measures, and environmental cost accounting; and bear the responsibility of protecting the environment. Secondly, at the social level, enterprises should strengthen their product quality supervision, strengthen the protection of user privacy data and the protection of women’s rights and interests, actively participate in the process of rural revitalization, and give full play to the value of enterprises. Finally, at the management level, enterprises should continue to improve corporate governance, attach importance to information disclosure, adhere to anti-unfair competition, and contribute to maintaining a good competitive environment. ESG helps to enhance the corporate image from the above three aspects, meet the needs of all stakeholders, assist businesses in building a favorable image, and foster the continual advancement of enterprises. Based on the above analysis, we propose Hypothesis 1:

Hypothesis 1:

ESG performance has a positive impact on corporate value.

(2): ESG performance, green technology innovation, and enterprise value

Generally speaking, policies, resources, and investors are inclined to ESG-performing enterprises, and technological innovation is an important way to improve ESG performance. Therefore, in order to obtain the support of policies, resources, and investors, enterprises will continuously enhance their innovation ability. In addition, the competition and comparison between enterprises make enterprises place greater emphasis on ESG performance, so as to accelerate the rate of technological advancement. The technological transformation and upgrading of enterprises are not only conducive to making up for the shortcomings of enterprises, but also conducive to obtaining higher accounting profits, improving the stability of enterprise operation, and coping better with external risks, so as to realize a virtuous circle.

The theory of sustainable development emphasizes the significance of not only focusing on economic efficiency but also giving equal consideration to social equity. In order to improve their own ESG performance, enterprises actively increase the number of R&D personnel in ESG practice [40]. The technological innovation activities of enterprises not only improve their own innovation ability but can also promote the upgrading of production technology, reduce production costs, enhance competitive advantages, improve operating efficiency, and, thus, contribute to the sustainable development of enterprises. Based on the above analysis, Hypothesis 2 is proposed:

Hypothesis 2:

Enterprise ESG performance is helpful to improve green technology innovation, thereby increasing corporate value.

(3): ESG performance, internal control, and enterprise value

Internal control refers to various procedures, methods, and means implemented by the organization to achieve specific goals under certain conditions. According to research, internal control can indeed bring many benefits to the development of enterprises, such as curbing management corruption and fraud and improving the innovation ability of enterprises [41]. In terms of theoretical logic, enterprises improve their ESG performance, formulate strategies more suitable for enterprise development, and adjust their organizational structure, which is conducive to improving the level of operation and management, and realizing an improvement in enterprise value.

According to the theory of information asymmetry [42], the difference in information mastery will make different subjects make different choices. In the management of enterprises, the management will be more inclined to obtain short-term benefits, while the board of directors will be more inclined to long-termism, and the difference between the two will make them choose different business strategies. Enhancing the internal control mechanisms within enterprises, elevating the governance standards, and intensifying management oversight all contribute to the reduction of fraudulent practices, enhanced protection of shareholders’ interests, and the facilitation of long-term, sustainable growth for companies. In summary, enterprise ESG performance helps to improve internal control. Internal control can mitigate the issue of principal–agent conflict arising from the imbalance of information. This paper proposes Hypothesis 3:

Hypothesis 3:

Enterprise ESG performance helps to improve internal control, thereby improving corporate value.

(4): ESG performance, financing cost, and enterprise value

ESG can reflect the non-financial performance of enterprises, and good ESG performance can provide positive information for enterprises and send positive signals to investors [43]. Enterprises with higher ESG evaluation are often more likely to attract long-term investment. In addition, the government actively promotes the development of green finance. For enterprises with good environmental performance, it is easier to obtain bank loans, thereby reducing financing costs, reducing the burden on enterprises, and helping to enhance corporate value. The financing cost directly affects the financial situation of the enterprise. High-cost financing methods will increase the financial burden on enterprises and reduce profits, thus affecting the solvency and profitability of enterprises.

The cost of financing will affect the capital structure of the enterprise, that is, the proportion of debt and equity. When the debt cost is relatively low, companies are more inclined to use debt financing, and when the debt cost rises, companies may be more inclined to use equity financing [44]. The change of capital structure will affect the risk and value of enterprises. Financing costs will also affect the competitiveness of enterprises in the market. Low-cost financing methods can help companies reduce the price of products or services, increase market share, and, thus, increase the value of the company. Financing cost directly affects the financial situation, capital structure, investment decision, stock price, and competitiveness of enterprises, so it has an important impact on enterprise value. In summary, the better the ESG performance of the enterprise, the smaller the financing cost of the enterprise. Based on the above analysis, we can propose Hypothesis 4:

Hypothesis 4:

Enterprise ESG performance helps to reduce financing costs and increase corporate value.

(5): ESG performance, economic policy uncertainty, and enterprise value

The uncertainty of macroeconomic policy is an unavoidable risk in the business process of enterprises, but from the law of economic operation, any uncertainty contains many opportunities, brings new market opportunities, and promotes enterprise investment. On the other hand, the uncertainty of economic policy will also bring risks and challenges. Based on the above analysis, we propose Hypothesis 5:

Hypothesis 5:

The uncertainty of economic policy positively regulates the relationship between ESG and enterprise value.

Based on this logical reasoning, a mechanism framework of ESG rating influencing the value of enterprises is established in this paper, which includes three components: green technology innovation [45,46,47], internal control, and financing cost, as shown in Figure 1.

5. Discussion

Firstly, government departments should actively promote the construction of an ESG evaluation system with Chinese characteristics, strengthen the supervision and management of ESG rating agencies, enhance the legislation and regulations pertaining to the disclosure of ESG information, thereby encouraging enterprises to proactively reveal their ESG information, and accelerate the construction of ESG information infrastructure and promote the establishment of a unified ESG regulatory agency. Additionally, they should offer tax benefits and environmental grants to heavily polluting corporations that exhibit commendable ESG practices, intensify penalties for companies with subpar ESG performance, and elevate the significance of ESG for enterprises.

Secondly, enterprises should understand correctly the positive effect of ESG performance on the improvement of enterprise value, the reduction of financing costs, and the improvement in enterprise value. At the same time, enterprises should pay attention to the formation of ESG management teams, strengthen cooperation with ESG rating agencies, strengthen their own ESG data collection and management, actively disclose ESG information, actively assume social responsibility, integrate emission reduction paths and methods suitable for their own development, and realize the unity of economic development and environmental protection.

6. Conclusions

Based on the data from heavily polluting listed companies from 2015 to 2022, we evaluate the impact of ESG rating on enterprise value. The results show that ESG performance helps to enhance enterprise value. Green technology innovation, enterprise internal control, and financing cost play an intermediary role. Good ESG performance can improve the level of enterprise green technology innovation, contribute to the sustainable development of enterprises, and enhance enterprise value. ESG performance helps to improve the internal control level. The better the ESG performance, the lower the financing cost, which helps to enhance the value of the enterprise. According to the heterogeneity analysis of resource endowment, ownership nature, and overseas background of executives, it is found that the ESG performance of heavily polluting enterprises in non-resource-based cities has a more obvious effect on the promotion of enterprise value; the ESG performance of non-state-owned enterprises is more conducive to enhancing corporate value; and the ESG performance of enterprises with an overseas background is more conducive to the improvement of enterprise value. By studying the moderating effect of economic policy uncertainty, it is found that economic policy uncertainty will affect the relationship between ESG performance and enterprise value. The uncertainty of economic policy positively regulates ESG and ROA. The conclusion of the study provides empirical evidence to demonstrate the relationship between ESG performance and enterprise value in heavy-polluting industries and the path of influence, which is helpful for heavy-polluting enterprises to improve ESG performance, and further provides experience for the transformation and development of similar enterprises. It is helpful to promote the sustainable and healthy development of China’s economy and strengthen the construction of an ESG information disclosure system in China.

As an important indicator to evaluate corporate social sustainable development, an ESG rating can not only enhance corporate image and value but also enhance corporate financial and social responsibility risk management capabilities and promote corporate green development. Therefore, poor ESG performance is contrary to high-quality development of enterprises. Enterprises with higher ESG ratings can obtain more favorable financing conditions, such as low-interest loans, preferential bond pricing, etc. By improving environmental, social, and governance performance, companies can reduce financing costs, increase financial leverage, and enhance competitive advantages.

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