Taking ESG strategies for achieving profits: a dynamic panel data analysis

Abstract

Purpose: The goal is to investigate the relationship between financial performance and environmental, social and governance (ESG) indicators and disclosures for a sample of Latin American firms. Design/methodology/approach: Dynamic panel data regressions are used to analyze a sample of 114 companies listed on the Latin American Integrated Market, MILA (Chile, Colombia, Mexico and Peru) for the period 2011–2020. The Altman Z-score and Piotroski F-score are used as indicators of the probability of default and comprehensive financial strength. Models are developed in which the relationship between economic value added (EVA) and Jensen’s alpha are evaluated against firms’ ESG practices. Findings: A direct relationship between ESG strategies and financial performance was found. Better practices and transparency in ESG are related to lower probability of bankruptcy, greater financial strength, greater EVA and superior risk-adjusted returns. Research limitations/implications: ESG data were obtained from the Bloomberg system based on a methodology that may differ from other sources. The sample covers four Latin American countries and large corporations. Independent variables were selected for their perceived validity, given their frequent use in previous studies. Practical implications: Evidence for company management regarding the importance of strengthening ESG practices and reporting should be part of their balanced scorecards. For investors, the results support the importance of evaluating ESG practices in asset selection. Originality/value: The present study is the first research to present empirical evidence on the relationship between ESG scores and disclosures for MILA countries, using a comprehensive set of financial performance indicators (Altman Z-scores, Piotroski F-scores, EVA and Jensen’s alpha).