The association of ESG factors on financial performance in the energy and utility companies
Partanen, Petra (2024-04-26)
Partanen, Petra
P. Partanen
26.04.2024
© 2024 Petra Partanen. Ellei toisin mainita, uudelleenkäyttö on sallittu Creative Commons Attribution 4.0 International (CC-BY 4.0) -lisenssillä (https://creativecommons.org/licenses/by/4.0/). Uudelleenkäyttö on sallittua edellyttäen, että lähde mainitaan asianmukaisesti ja mahdolliset muutokset merkitään. Sellaisten osien käyttö tai jäljentäminen, jotka eivät ole tekijän tai tekijöiden omaisuutta, saattaa edellyttää lupaa suoraan asianomaisilta oikeudenhaltijoilta.
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:oulu-202404262983
https://urn.fi/URN:NBN:fi:oulu-202404262983
Tiivistelmä
The aim of the thesis is to examine the possible association of companies’ financial performance and ESG factors within the energy and utility sectors. The study is conducted from a within industry point of view to examine the differences of renewable and fossil-based companies globally. The energy and utility sectors are confronting constantly growing demand and shifting from fossil-based to renewable energy forms. Energy as an industry and a commodity are closely tied to societal and economic issues related to shortcoming of resources, pollution, employment, and climate change.
Corporate social responsibility (CSR) and sustainability of companies have been theorized widely with different perspectives of legitimacy and social performance theories which have been criticized to lack measurability and comparability. This study gathers theories to compare and utilize different frameworks of Global Reporting Initiative (GRI), Principles of Responsible Investing (PRI), Global Sustainable Investment Alliance (GSIA) and United Nation’s Sustainable Development Goals (SDGs). The application of external ratings with environmental, social, and governmental factors provides externally audited information and measures for the companies’ actions and performance.
The traditional outlook in finance has focused on the perceived risk with a measure of beta that essentially sets the required return for the investments. Justification of including sustainability as an additional factor to consider has been rationalized to lower the possible risks, reduce the unnecessary use of resources, and gain competitive advantage. This study conducts an overview of adding a behavioural aspect to asset pricing and its association with risk, stakeholder theory and agency theory with the issue of asymmetric information. The idea of a premium for “being green” raises the issue of lowering the discount rate to value the companies and thus raises the valuation compared to low performers. The issue of perceiving sustainability as a component for valuation derives from investors’ different utilities.
The study conducts multiple linear regression models to demonstrate does the comprehensive ESG or its sub-factors statistically explain financial performance. Price to Earning (P/E) as a market ratio examines the perception of investors for their required return whereas Return on Equity (ROE) utilizes accounting-based information to measure effectiveness and profitability. The results of the study align with the mixed results regarding the previous studies in the field. ESG factors association with financial performance was not evident, but industry and size of the companies provided significant differences. Renewable companies are perceived to have a lower risk measured by beta but higher P/E ratio. The constant change and growth in the energy sector provides a remarkable sector to examine the perception of sustainability and the possibilities of taxation, policies, and development for a broader shift within the industry.
Corporate social responsibility (CSR) and sustainability of companies have been theorized widely with different perspectives of legitimacy and social performance theories which have been criticized to lack measurability and comparability. This study gathers theories to compare and utilize different frameworks of Global Reporting Initiative (GRI), Principles of Responsible Investing (PRI), Global Sustainable Investment Alliance (GSIA) and United Nation’s Sustainable Development Goals (SDGs). The application of external ratings with environmental, social, and governmental factors provides externally audited information and measures for the companies’ actions and performance.
The traditional outlook in finance has focused on the perceived risk with a measure of beta that essentially sets the required return for the investments. Justification of including sustainability as an additional factor to consider has been rationalized to lower the possible risks, reduce the unnecessary use of resources, and gain competitive advantage. This study conducts an overview of adding a behavioural aspect to asset pricing and its association with risk, stakeholder theory and agency theory with the issue of asymmetric information. The idea of a premium for “being green” raises the issue of lowering the discount rate to value the companies and thus raises the valuation compared to low performers. The issue of perceiving sustainability as a component for valuation derives from investors’ different utilities.
The study conducts multiple linear regression models to demonstrate does the comprehensive ESG or its sub-factors statistically explain financial performance. Price to Earning (P/E) as a market ratio examines the perception of investors for their required return whereas Return on Equity (ROE) utilizes accounting-based information to measure effectiveness and profitability. The results of the study align with the mixed results regarding the previous studies in the field. ESG factors association with financial performance was not evident, but industry and size of the companies provided significant differences. Renewable companies are perceived to have a lower risk measured by beta but higher P/E ratio. The constant change and growth in the energy sector provides a remarkable sector to examine the perception of sustainability and the possibilities of taxation, policies, and development for a broader shift within the industry.
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