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Honors College Theses Pforzheimer Honors College

2019

The Effect of Corporate Social Responsibility on

the Profitability of Publicly Traded Firms within the
United States
Amanda Lisette Majer
Pace University

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Majer, Amanda Lisette, "The Effect of Corporate Social Responsibility on the Profitability of Publicly Traded Firms within the United
States" (2019). Honors College Theses. 232.
https://digitalcommons.pace.edu/honorscollege_theses/232

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 The Effect of Corporate Social Responsibility on the
Profitability of Publicly Traded Firms within the United
States

Amanda Lisette Majer

A thesis presented for the degree of

Bachelor of Business Administration in Public Accounting
& Master of Science in Finance

Advisor: Professor Edmund H. Mantell

Lubin School of Business, Finance Department

Presentation Date: May 9, 2019

Graduation Date: May 23, 2019
Abstract

Throughout the late 20th and early 21st centuries, investors have sparked an

interest in the social responsibility and sustainability measures of the firms in which they

have ownership in. These qualitative factors are measured through the term, “Corporate

Social Responsibility,” (CSR). The factors have been quantified using environmental,

social and corporate governance (ESG) indices published by mass data houses such as

​ nd ​Thomson Reuters. ​This study bridges the gap between the CSR actions
Bloomberg a

taken by firms and the effects, if any, that those actions have on their profitability. By

using historical profitability data and CSR rankings produced by ​Bloomberg,​ this paper

examines the relationship between the variations in profitability of a NYSE publicly

traded firm between the years 1990 and 2018, and their associated numerical rank on

Bloomberg’s ​ESG Disclosure index. This direct connection between profitability and

disclosure of sustainability and social governance factors allows the reader to deduce a

relationship between investment in CSR and the payoff of this effort on measurable

profitability. This study concludes that there is a moderate to strong positive relationship

between certain historical profitability metrics and a firm’s ESG Disclosure Score, and

that these relationships are most evident within the Technology and Energy industries.

1
Table of Contents

Contents Page

Abstract 1

Table of Contents 2

Introduction 3

Literature Review 4

Hypothesis 14

Methodology 18

Results & Discussion 20

Conclusion 25

Appendix 26

References 30

2
Introduction

The Financial Times defines Corporate Social Responsibility (CSR) as a

“business approach that contributes to sustainable development by delivering

economic, social and environmental benefits for all stakeholders.” This movement is

aimed at encouraging companies to be more aware of the impact of their businesses on

the rest of society, including their own stakeholders and the environment (Financial

Times). The definition of CSR, however, does not include the financial implications for a

firm that installs CSR policies into its their business model. Despite unknown confirmed

financial effects of implementing CSR measures into a business plan, according to the

law of a capitalist economy like that of the US, one would expect to observe financial

implications to any significant CSR policies.

Though CSR is a more modern topic within accounting and finance, the evolution

of the idea of Corporate Social Responsibility began in the early 20th century. With the

development of large businesses between 1900 and 1920, Congress passed new laws

to moderate the impact of these companies on society. Immediately following World

War II, corporate philanthropy paved the way for two of CSR’s most important principles

-- stewardship and charity. Through the 1970s, CSR policy was focused on

responsiveness, and what organizations could do to survive by utilizing environmental

sustainability practices in their business plan. During the 1990s, the concept of CSR

evolved into the definition known today, rooted in stakeholder engagement, social

regulation, business ethics, and corporate social performance (Evolution).

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 Corporate Social Responsibility has evolved dramatically in the last decade, as

noted by Thomas Bognanno in Forbes magazine (2018). Corporations have gone past

funding their social investments only monetarily; many corporations embrace business

objectives which have a social impact and demonstrate real value to the company.

Trends that have become apparent in regards to CSR policy include the involvement of

corporations in social issues and the integration of employees into global marketing

campaigns.

Though previous studies have focused on the effects of CSR measures on profit,

stock price, and market capitalization, few have noted the effect of these initiatives on

profitability measured with analytic ratios like Return on Assets (ROA), Return on Equity

(ROE), Return on Invested Capital (ROIC), and the ratio of Enterprise Value to Earnings

Before Interest, Tax, Depreciation and Amortization (EV/EBITDA). Profitability and profit

cannot be used interchangeably; profit denotes an absolute value defined as income

above costs, while profitability is a relative term that measures efficiency and the extent

of income and profit relative to the size and other metrics of the firm (Horton).

Literature Review

Corporate Social Responsibility (CSR) is rooted in many platforms, and is

implemented for various reasons. Forte (2013) takes the position that the average U.S.

citizen expects companies not to only generate profits, but also conduct themselves in

an ethically and socially responsible manner. Dedication to CSR enhances community

relations and contributes to a favorable public image, which can also manifest itself into

4
long-term profits. Forte also noted that social responsibility benefits long-term stock

prices as the market deems socially responsible firms less risky.

Many corporations are focused on the short-term return of their corporate

actions, but this study concludes that CSR implementation will begin to show equal

importance in the medium to long-term returns that will come in response to the

improvement in consumer image and reputation. Carroll (1991) elaborates on the

consumer’s role in implementing Corporate Social Responsibility by demonstrating the

decisions that management must make when balancing the corporation’s responsibility

in providing a maximum financial return to shareholders and the newly adopted

commitment to stakeholders and the environment. This study notes that there are four

kinds of social responsibility which constitute total CSR: economic, legal, ethical, and

philanthropic.

While maximizing profits as part of a corporation’s economic responsibility,

management must also decide which stakeholders merit and should receive

consideration in the decision-making process. Carroll creates a CSR pyramid which

concludes that the conflict is not “concern for profits” versus “concern for society,” but

rather that the firm must engage in decisions and actions that simultaneously fulfill all

components which constitute CSR. The CSR firm should strive to make a profit, obey

the law, be ethical, and be a good corporate citizen. A socially responsible corporation

is not one in which there is only concern for legal, ethical, and philanthropic principles,

but also one which has a focus on economic responsibility and profit maximization for its

shareholders. Clarkson (1995), proposes that social responsibility can be analyzed and

5
evaluated by using a framework based on the management of a corporation’s

relationships with its stakeholders rather than by using a model which focuses on

corporate social responsibility methodologies and responsiveness. This study

distinguished between stakeholder issues and social issues because corporations and

their managers manage relationships with their stakeholders and not with society. In a

theoretical sense, the economic and social purpose of the corporation is to create and

distribute wealth and value to all primary stakeholder groups without favoring one group

over another, though stakeholder value are not defined only by increased share price,

dividends or profits. According to Business Dictionary, stakeholder value can also

manifest itself through minimized cost and waste while improving the quality of its

products, enhanced skill and satisfaction of employees, and contributions to the

development of the community from which the business draws its resources and

sustenance. This study focuses on the equilibrium that must be maintained between

stakeholder groups; if the corporation favored one stakeholder group’s interests over

another, the disfavored group might seek alternatives and potentially withdraw from the

entity entirely. This view negates the idea that profit maximization is the primary goal of

a business; it reinforces the principle that CSR is based on social responsibility rather

than economic responsibility.

If one accepts the legitimacy and the desirability of adopting Corporate Social

Responsibility policies, there is value in recognizing and analyzing the results of those

policies. The following research focuses on the effect of CSR on stock price and the

equity market. Orlitzky (2013) expands on the idea that the CSR movement may, in the

6
long run, lead to excess market volatility and stock price bubbles. This study challenges

the conventional idea that CSR measures increase the present value of a firm’s future

cash flows and maximize the market value of the socially responsible firm. Though CSR

can materialize into benefits as it increases trust between the firm and its stakeholders,

because of its inherent costliness, CSR may also reduce current and future firm cash

flows. The costs associated with CSR create noise in the stock market because

observers cannot infer that CSR will change a firm’s underlying economic fundamentals.

It is difficult to determine the true benefits of CSR in the stock and equity markets

due to information asymmetry -- the principle that the seller has more information than

the buyer. Because of the information disparity, firms may send false market signals

about their commitment to CSR and the economic results of their actions. Orlitzky

concludes that this noise and information asymmetry associated with CSR may not only

lead to excess stock market volatility but also unjustifiably high stock prices of firms that

are widely regarded as socially responsible. Investors may begin to invest in

companies, not because of their financial performance, but rather because of the

initiation of a social program or initiative. For this reason, it might be difficult for an

efficient market to determine if a company’s increased performance is rooted in true

economic upward mobility, or rather a bubble created by information asymmetry which

will be proven to be untrue and ineffective in the long-run.

Becchetti and Ciciretti (2008) come to a similar conclusion in that individual

“Socially Responsible” stocks have on average significantly lower returns and variance

than control sample stocks when controlling for industry effects. The study is based on

7
the idea that if socially responsible firms underperform a control sample of firms in

regards to shareholders’ interests, the incentive to adopt CSR will weaken because of

loss of competitive position as well as loss of access to a lower cost of capital. They find

that the consequence of social responsibility actions is lower performance in terms of

shareholders’ returns, ultimately rendering these firms more susceptible to takeover.

Lam, Zhang, and Jacob (2015) examine how stock prices are affected within

firms which are socially responsible in certain dimensions of Corporate Social

Responsibility but are socially irresponsible in other aspects. Their study concluded that

these firms, also known as ‘Grey’ companies, earn an annual abnormal return of up to

3.6% relative to neutral portfolios containing neither socially responsible nor

​ nd ​investor recognition theory​ predict that

irresponsible firms. The ​stakeholder theory a

socially responsible firms have a higher valuation, lower returns and lower risk

compared to socially irresponsible firms. The research of these academics adds to the

discussion of firms which do not fall within the category of definitively socially

responsible versus irresponsible. Their research also determined that the ‘Grey’

portfolios are overpriced within the market, contributed in whole by both the

“community” and “environment” sub-dimensions of CSR, of which the market mis-prices

firm’s socially ambiguous actions. Prior research on the relationship between Corporate

Social Responsibility initiatives and stock price reactions have determined that there

may be a positive relationship between being socially responsible and having lower

returns despite higher valuation, but this research explains the ambiguity in measuring

this relationship in a typical business environment with imperfections.

8
 After analyzing literature focusing on CSR in the equity market, the following

scholarly articles emphasize the impact that CSR has on financial performance. Wood

and Jones (1995) add to prior research on the ​stakeholder theory,​ but use this principle

to find a relationship between social and financial performance, rather than market

value or to determine the cost of capital in the equity market. This study focuses on

Wood’s (1991) argument that the stakeholders define the norms for corporate behavior;

these normal behaviors are acted upon by firms, and they make judgments about these

experiences. In prior research, there was a mismatch of variables which are mixed and

correlated with a set of stakeholder-related performance variables that are not

theoretically linked. Wood and Jones spotlight the mismatch of variables in their

research and determine that the relationship between CSR and financial performance is

ambiguous because there is no theory to clarify how they should be related, there is no

valid measure of CSR, and there is confusion about which stakeholders are represented

by which financial measures. Though Wood and Jones came to an inconclusive result

on the relationship between CSR and economic performance, they were again able to

conclude that there is a connection between social and financial performance when

using market-based theory. As such, social performance hurts the company financially,

but it cannot yet be proven if the relationship also works positively, in that good social

performance would help a company financially.

In a Forbes magazine David Vogel (2008), breaks down the idea that CSR

performance will allow firms to gain a competitive advantage by appealing to a growing

number of socially and environmentally oriented consumers, investors and employees.

9
The hard truth, he finds, is that there is little real-world support to back this idea. CSR

does not necessarily pay because ‘ethical’ products are a niche market, and almost all

goods and services continue to be purchased on the basis of price, convenience, and

quality. Consistent with Lam, Zhang, and Jacob’s (2005) study on ‘Grey’ companies,

Vogel found that few firms were consistently responsible or irresponsible across all of

their business operations. Vogel concludes on the idea that managers should try to act

more responsibly, but not because the market will reward their business or punish their

less responsible competitors.

The following empirical studies by Mikolajek-Gocejna (2016) and Nizamuddin

(2018) showcase the impact of Corporate Social Responsibility initiatives and programs

on corporate financial performance, while utilizing data from 53 studies and results

obtained from 16,119 companies. Mikolajek-Gocejna focuses her research on Socially

Responsible Investments (SRI), and whether it pays for organizations to concern

themselves with social responsibility, and whether there are any trade-offs to

sustainable investing. Her conclusion is that the relationship between CSR and

corporate financial performance is a positive one. Upon analysis of the 16,119

companies in this study, the result was that 81.1% of the analyzed companies had data

supporting that CSR pays -- that there is a positive correlation between CSR and

corporate financial performance. Additionally, only 3.1% of the companies analyzed

presented results that CSR costs -- that there is a negative correlation between CSR

and corporate financial performance. One of the limitations of this study may be the

measurement of CSR; it has history of being a subjective variable used to compare to

10
objective measures of financial performance. Nizamuddin (2018) focused his research

on an examination of the various approaches used in a number of empirical studies for

measuring Corporate Social Responsibility and Corporate Financial Performance to

discover measurement challenges and alternative methods of measurement.

Nizamuddin notes that the difficulties related to measuring CSR can be focused

on the fact that CSR is a non-financial variable that is sought out to be quantified in

financial performance. Further, in many countries, CSR reporting is not mandatory but

voluntary. Nizamuddin concluded that all approaches to CSR performance measures

are biased when used to investigate the relationship between CSR and financial

performance. One way to remove this bias would be to implement mandatory disclosure

of CSR programs and information. This research also breaks down the use of CSR into

unidimensional and multidimensional measures. Unidimensional measures have been

used in many empirical studies; multidimensional measures have been in employed in

reputation indices, questionnaire-based surveys, and content analysis. Ultimately each

measurement is limited due to the researcher’s subjectivity and bias in selecting

variables for CSR and selecting companies to analyze.

The explicit disclosure of Corporate Social Responsibility programs and initiatives

began internationally, before being established in the United States. Therefore, there

has been extensive research conducted on the relationship between socially

responsible firms and economic or financial results. Jain, Keneley, and Thomson (2015)

expand on international research on Corporate Social Responsibility by evaluating the

extent of CSR reporting by banks in Japan, China, Australia, and India. During the

11
seven-year period from 2005 to 2011, there was no legislative requirement for CSR

reporting in these Asia-Pacific countries, but the extent of reporting in each of these

countries increased over time, indicating a growing voluntary commitment to CSR

activities. Despite concluding that CSR reporting had increased in international nations,

the motives did not seem to be economic but rather based on strategic incentives. The

European Commission, the governing body of the European Union (EU) responsible for

proposing legislation, implementing decisions, and upholding the EU treaties, has

published their position on Corporate Social Responsibility throughout the European

Union. The European Commission (2017) states that CSR is important to the interest of

enterprises by providing benefits to companies in risk management, cost savings,

access to capital, customer relations, HR management, and ability to innovate.

Additionally, CSR is important for the EU economy, as CSR makes companies more

sustainable and innovative, which contributes to a more sustainable economy. The EU

has also created their own agenda for action to support CSR, which includes improving

and tracking levels of trust in businesses, enhancing market rewards for CSR, as well

as better aligning European and global approaches to CSR. It is evident by the

European Union’s program to implement better Corporate Social Responsibility

initiatives that they believe that support of CSR action could improve the economy of the

union as a whole, as well as businesses, as demonstrated by their enhancement of

market rewards for CSR. To the EU, social responsibility does not seem to be

definitively a social program, but also a matter of financial and economic integration.

The European CSR Awards were launched in 2012, funded by the European

12
Commission, to deliver the European CSR Award Scheme for Partnership, Innovation,

and Impact. These awards are designed to give higher visibility to CSR excellence and

raise global awareness on the positive impact that business can have on society, bring

the best European CSR multi-stakeholder projects into focus, enhance the exchange of

CSR best practice across Europe, encourage CSR collaboration between enterprises

and stakeholders, and finally, create innovative solutions to tackle sustainability issues.

In light of the European CSR Award Scheme, it is evident that the European Union

believes in the benefits of CSR not only on society, but also in the economy, and

dedicated itself to awarding those businesses and projects that have succeeded in

bringing CSR into their trade. From a business and economic standpoint, winning such

an award could bring attention to those business recognized in each accolade category.

That could bring a new group of consumers and investors to their business. For this

reason, the European Union has succeeded in showing their support for Corporate

Social Responsibility, as well as attempting to shed light and success onto those

businesses who have taken the CSR initiative and integrated it into their business plan.

Marsat and Williams (2011) performed empirical research internationally on the

relationship between CSR and market firm valuation, where they distinguish between

the financial benefits resulting from ethical behavior and the possible competitive

disadvantages that can result when taking externalities into account. Their study

separates their empirical observations and results by industry, year, and region, which

allows them to further refine their results based on international expectations. Their

results conclude that there is a negative relationship between CSR performance and

13
firm value, as the market considers the costs of CSR programs to exceed the benefits

received, though this may not be reflected in the equity asset valuation process.

Hypothesis

Though prior research has studied the influence of Corporate Social

Responsibility on profit, cash flow, and market capitalization, there has not been prior

literature produced on the effect of CSR measures on the profitability metrics of a firm

for the years 1990 (or earliest year recorded) through 2018. Based on the published

literature reviewed above, I believe that there may be a strong relationship between

measures of Corporate Social Responsibility and historical profitability metrics.

Valuation metrics are comprehensive measures of a company’s performance,

financial health, and prospects for future earnings. Because valuation metrics typically

compare the market’s opinion to actual reported earnings or company book value, these

metrics reflect the collective opinions of market analysts and investors about the

company’s future prospects (Schmidt). Each of the valuation metrics analyzed in this

study are rooted in earnings. My hypothesis is that they should have a positive

correlation with the level of Environmental, Social, and Governance performance that a

firm discloses. In this study I use Bloomberg ESG Disclosure Score as the measure of

Corporate Social Responsibility, later described in the Methodology section of this

paper.

I hypothesize that if a firm discloses that it has implemented policies directly

related to Corporate Social Responsibility, the market should respond positively

14
manifested by increasing the valuation metrics of the firm. A firm’s net income measures

the after-tax earnings or profit of the firm, so firms with a higher ESG Disclosure Score

should have a higher average net income across the period analyzed. Earnings per

share also measures the value of the firm on a per share basis, so a higher ESG

Disclosure Score as indicated by Bloomberg should translate to a higher metric of

earnings per share. Finally, price to cash flow measures the value of a stock’s price

relative to its operating cash flow per share (Kenton). A higher ESG Disclosure Score

should increase the price per share as a measure of the profitability of the firm, so a

higher ESG Disclosure Score should be related to a higher Price to Cash Flow ratio for

a firm. These theories are summarized in Hypothesis 1.

Hypothesis 1: A higher ESG Disclosure Score will be significantly correlated with higher

valuation related metrics, including Net Income, Earnings per Share (EPS), and Price to Cash

Flow.

If a higher ESG Disclosure Score elevates the public’s favorable perception of a

firm and thereby increases the earnings of the firm through a rise in sales revenue, then

profit metrics that rely on return should also have a positive correlation with the ESG

Disclosure Score.

Three metrics that analyze firm profitability are Return on Equity (ROE), Return

on Assets (ROA), and Return on Invested Capital (ROIC). Each of these metrics have

earnings in their numerator. Both ROE and ROA have net income in their numerator,

15
once again demonstrating the relationship between an ESG Disclosure Score and the

level of income that a firm is able to generate. ROIC, on the other hand, has operating

income (adjusted for tax) in its numerator, but also may show a relationship between

earnings and an ESG Disclosure Score.

The profit metrics considered here evaluate return, or simply put, the money that

is made or lost on an investment (Kenton). If a firm is designated a higher ESG

Disclosure Score, I hypothesize that this firm will also have a higher earnings amount in

the numerator due to market and consumer perceptions of the firm, and the profitability

ratios (ROE, ROA, and ROIC) will be higher as well. For this reason, Hypothesis 2

claims the positive correlation between a higher ESG Disclosure Score and heightened

profitability metrics.

Hypothesis 2: A higher ESG Disclosure Score will be significantly correlated with higher profit

metrics, including Return on Equity (ROE), Return on Assets (ROA), and Return on Invested

Capital (ROIC).

The final metric analyzed in this study is Enterprise Value (EV)/Earnings before

Interest, Tax, Depreciation, and Amortization (EBITDA). Though this metric is

considered to also be a valuation variable, I have chosen to analyze this measure

separately because of its importance in measuring a firm’s value and financial

performance. This measure bridges the gap between the first two categories of metrics

considered: valuation and profitability. The numerator of Enterprise Value is a

company’s total valuation and is a better alternative to market capitalization because it

16
adds components including debt, preferred interest, minority interest, and excludes cash

and cash equivalents. The denominator of EBITDA is an important representation of an

organization’s financial performance and can be used to analyze the profitability of an

organization as it eliminates the effects of financing and accounting decisions (Wall

Street Mojo). EV/EBITDA includes both the value of the firm, as well as its profitability,

so one can hypothesize that a higher ESG Disclosure Score would also be related to an

increase in the EV/EBITDA multiple due to heightened perception from both consumers

and investors. Should investors and consumers have an affinity towards firms with

higher ESG Disclosure Scores, this will translate to a higher EV/EBITDA measure as

investor opinions are reflected in the numerator and consumer opinions are reflected in

the denominator. Hypothesis 3 can be summarized below.

Hypothesis 3: A higher ESG Disclosure Score will be significantly correlated with higher

Enterprise Value (EV) to Earnings before Interest, Tax, Depreciation, and Amortization

(EBITDA) ratio.

In summary, I will evaluate the relationship between historical profitability metrics

and Bloomberg’s ESG Disclosure Score in order to provide for a correlation between

the two variables. Based upon the premise of Corporate Social Responsibility and its

impact on both investors and the general consumer, this study hypothesizes that the

relationship between ESG Disclosure Score and profitability metrics will be a positive

one. In addition, this study concludes that the positive relationship will also be a strong

17
one, as the two metrics should closely align to the goals of both investors and

consumers.

Methodology

In order to examine the relationship or correlation between Corporate Social

Responsibility measures and historical profitability metrics, a sample was needed to

obtain data on assorted industries. The following industries were evaluated:

Technology, Energy, Consumer Non-Durables, Transportation, and Consumer

Services. Within the five industries, ten firms were chosen for analysis. There were two

criteria for a firm to be included in the sample: (1) the company’s stock must be publicly

traded on the NYSE, and (2) Bloomberg publishes the ESG Disclosure Score data for

the firm. The firms selected for this study are listed in Exhibit 1 of the Appendix​.

Bloomberg’s ESG Disclosure Score was used to quantify each firm’s participation

in Corporate Social Responsibility policies. Bloomberg monitors the environmental,

social, and governance (ESG) performance of all public companies, regardless of

whether they issue a sustainability report. The analysts at Bloomberg then compile all

annual reports, sustainability reports, press releases, and third-party research regarding

each firm and create a single variable: an ESG Disclosure Score. This score allows

investors access to each firm’s transparency, risks, and opportunities. On a scale from 0

to 100, Bloomberg analysts rank each firm’s transparency of ESG efforts on the basis of

800 different metrics such as energy & emissions, waste data, women on the board,

independent directors, and workforce accidents, among others (FrameworkESG).

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Exhibit 2​ ​to the Appendix presents the 2018 ESG Disclosure Score published by

Bloomberg for all firms analyzed in this study. This data was collected through the use

of Bloomberg Terminal.

In order to establish a relationship between historical profitability metrics and a

firm’s published Bloomberg ESG Disclosure Score, I compiled the following historical

measures: Net Income, Earnings per Share (EPS), Price to Cash Flow, Return on

Equity (ROE), Return on Assets (ROA), Return on Invested Capital (ROIC), and

Enterprise Value to Earnings before Interest, Tax, Depreciation, and Amortization

(EV/EBITDA).

Historical metrics were sampled for the period from 1990 (or the first year of

business, whichever was earliest) to 2018. The year 1990 was chosen as a starting

point for collection of data because, according to the ​Evolution of Corporate Social

Responsibility by Knowledge Tank referenced earlier, that year was when CSR policies

began to be important for shareholders and managers of the firm. This year should also

correspond to an increase in CSR measures being incorporated into firm culture, the

variable being measured.

After determining the information needed to analyze the relationship between

ESG Disclosure Scores and historical profitability metrics, the data was collected from

YCharts, a Chicago-based financial data research company, that allows investors and

data analysts to download financial metrics for specific firms without the use of

terminals. I calculated an average of each financial metric category for each individual

firm. Ultimately, the final data set included Average Net Income, Average EPS, Average

19
Price to Cash Flow, etc., for all fifty firms included in this study. This data is presented in

Exhibit 3 of the Appendix.

The resulting 350 individual and unique financial data points, were regressed

against the 2018 ESG Disclosure Scores published by Bloomberg. Within the

cross-sectional regression model, each industry was analyzed separately, and each

historical financial metric was analyzed individually. For example, within the Technology

industry, the ten data points representing average Net Income for each of the ten firms

within this industry were directly regressed against the corresponding ten ESG

Disclosure Scores for these Technology firms. The same process was performed to

depict the relationship between the Technology industry’s ESG Disclosure Score and its

underlying average Earnings per Share, and the other five measures of financial

performance. Exhibit 5​ ​of the Appendix presents the relationship between ESG

Disclosure Score and historical profitability metrics, broken down by industry. The

results of this study are discussed in the following section.

Results & Discussion

After analyzing the regression statistics for each historical profitability metric

within all five industries, the following findings are observed for each industry. The

industries with the highest correlation and significance between ESG Disclosure Score

and historical profitability metrics are the Technology sector and the Energy sector.

Within each of these industries, there are four financial metrics that are significantly and

strongly correlated with the underlying firms’ ESG Disclosure Score. At the other end of

20
the study, the Consumer Services industry only presents one profitability metric that has

a moderately strong correlation with the underlying firms’ ESG Disclosure Score. The

results of the study are broken down below. In this study, a correlation coefficient near

0.6 was considered to have a strong relationship between the two variable, per the table

below.

Table 1: Strength of Regression Association

Source: Stats.StockExchange.com

As stated earlier, the Technology and Energy industries show the largest, and

most significant, correlations between historical profitability metrics and ESG Disclosure

Score. The Technology sector is most significantly, and strongly, correlated to ESG

Disclosure Score with the financial metric of ROA. This is significant when considering

the industry because technology firms will invest a large portion of revenue into

research and development expenses. For this reason, it is important to note that a

technology firm has such a strong and significant correlation between ROA and ESG

Disclosure Score. This correlation can be interpreted to mean that an increasing ESG

21
Disclosure Score is systematically associated with an increase in ROA. This same

finding is manifested for the Energy sector as well.

The Consumer Non-Durables and Transportation sectors demonstrate a

moderately-strong and significant relationship between select profitability metrics and

ESG Disclosure Score. The Consumer Non-Durables sector’s ESG Disclosure Score is

most significantly and strongly correlated to the EV/EBITDA profitability metric. This

variable is significant in relation to the industry because as mentioned earlier, this metric

measures both valuation in the numerator and profitability in the denominator. For a

Consumer Non-Durable firm, the relationship is closely monitored because a ratio that is

too high could imply overvalue of the stock, and a ratio that is too low could imply that

the stock is undervalued. These factors are closely monitored for a firm selling physical

products to consumers because their stock is closely watched in the market, and is

explanatory of the future for a firm of such characteristics. The Transportation sector’s

ESG Disclosure Score is also significantly correlated with the EV/EBITDA multiple. The

correlation implies that a firm’s ESG Disclosure Score will vary most closely with the

firm’s valuation and underlying earnings.

The Consumer Services sector’s ESG Disclosure Score was not significantly

correlated with profitability metrics out of all of the industries analyzed in this study.

Those regression results indicate that the policies of the firms in that industrial

classification display weak correlations between ESG Disclosure Score and the Price to

Cash Flow and ROE ratios. A relationship between ESG Disclosure Score and Price to

Cash Flow ratio implies that an increase in investor awareness of ESG Disclosure will

22
increase the price per share traded in the market. Though this relationship may exist,

the data in the sample does not support an inference of a significant systematic

relationship between the two variables. This research finds a relationship between ESG

Disclosure Score and ROE, which implies that an increased level of ESG Disclosure to

the public will increase net income and the return generated on a firm’s given level of

equity. Again, the inference in this study in only suggestive. A firm systematic

relationship between these two variables requires a larger data set.

Considering the five industries together, some tentative inferences emerge from

​ uestions the relationship between ESG Disclosure

the statistical findings. ​Hypothesis 1 q

Score and valuation related metrics, including Net Income, Earnings per Share, and

Price to Cash Flow. Based upon the economic results, we can infer that there is a

strong and significant correlation between Net Income and ESG Disclosure Scores

within those industries that rely heavily on research and development, including

Technology, Energy and Transportation. We can infer that there is not a significant

systematic relationship between ESG Disclosure Score and Earnings per Share since

the data only indicates that there is a significantly positive relationship between these

two variables in the Energy sector. Finally, we conclude that there is a

moderately-significant relationship between Price to Cash Flow and ESG Disclosure

Score. Our findings show that there is a positive, yet weak, relationship between the two

variables within three different sectors.

Hypothesis 2 ​considers the relationship between ESG Disclosure Score and

profitability related metrics, including ROE, ROA and the ROIC. Based upon the

23
econometric findings, we can infer that the relationship between these variables are

strongest. Each of the five industries included in this study had at least one case of a

significant relationship between ESG Disclosure Score and a profitability ratio. Of the

three profitability metrics analyzed, Return on Invested Capital had the strongest

statistical significance. The relationship between ROIC and ESG Disclosure Score was

extremely significant in one industry and negative in two industries, and was marginally

significant in one other. From this relationship, we are may infer that a higher disclosure

of ESG efforts will be associated with an increased earnings in the numerator of the

ROIC formula, and allow for a greater return on shareholders’ investments. If the

inference is valid and durable, we can conclude that a higher ESG score will be

associated with a greater return on the shareholders’ investments.

Hypothesis 3​ examines the relationship between ESG Disclosure Score and the

EV/EBITDA metric. The latter variable is a metric for the profitability as well as the

valuation of a firm. The econometric findings suggest that there is a significant and

strong positive relationship between these two variables within three sectors, the

Energy, Consumer Non-Durables, and Transportation industries. These three industries

represent a wide variety of firms, which indicates that it is possible that the relationship

between EV/EBITDA and ESG Disclosure Score is random and may be attributable to

other factors as well. In order to disentangle and isolate specific relationships among

the data, it may be necessary to analyze a much larger statistical sample drawn from

other firms within each industry. What we can conclude, however, is that there is a

significant relationship between EV/EBITDA and ESG Disclosure Score amongst many

24
firms, and this relationship is also a strong positive one, with an average correlation of

0.56.

Conclusion

Following the exploration of the correlation between Bloomberg’s published ESG

Disclosure Score and various historical profitability metrics, this study tentatively infers

that there are certain relationships that can be noted amongst industries. Given the

theoretical relationship that might exist between the CSR policies implemented by firms

and the reactions that those policies might be expected to generate from investors and

consumers, this study showed surprising results that did not necessarily align with this

thought process. Though all significant relationships between financial metrics and ESG

Disclosure Score did present a fairly high correlation between the variables, the number

of significant relationships were few. In conclusion, we are able to state that there exists

some positive relationships between various historical profitability metrics and ESG

Disclosure Scores, though the relationships and correlation differ amongst industries.

This study also suggests that future research should be conducted by enlarging the

statistical sample of firms in each industry and adding other industries. Additional

research would allow academics to reach firmer conclusions respecting the relationship

between historical profitability metrics and ESG Disclosure Score.

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Appendix

Exhibit 1: Analyzed Firms

Exhibit 2: Analyzed Firms & Respective Bloomberg ESG Disclosure Score (2018)

Source: Bloomberg Terminal

26
Exhibit 3: Historical Profitability Metrics

27
Source: www.YCharts.com

28
Exhibit 4: Regression Results | ESG Disclosure Scores & Profitability Metrics

29
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