How does environmental, social, and governance (ESG) performance determine investment mix? New empirical evidence from BRICS

Zhichao Yu · Umar Farooq · Mohammad Mahtab Alam · Jiapeng Dai

130 citations0/0 files storedBorsa Istanbul Review

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Corporate Social Responsibility Reporting Corporate Finance and Governance Sustainable Finance and Green Bonds

Abstract

Integrating environmental, social, and governance (ESG) principles into investment decisions has garnered increased attention in the business landscape. Thus, the current study aims to investigate the intricate interplay between ESG performance and investment patterns (capital vs. environmental) within the corporate setting. This study sought to identify the influence of ESG scores on earnings-driven investments (capital investment) and environmental investments, exploring potential trade-offs and implications for corporate decision-making. The analysis was conducted by sampling nonfinancial sector enterprises from BRICS nations from 2010 to 2022. For regression analysis, system generalized method of moments (GMM) was employed to address endogeneity concerns. The findings revealed a significant positive correlation between ESG performance and earnings-driven investments (capital investment). However, a negative relationship emerged between ESG scores and environmental investments, signifying potential trade-offs between financial profitability and dedicated environmental spending within companies. Other variables, including firm size, debt ratios, cash holdings, and CO2 emissions, significantly impacted investment patterns. The study’s outcomes provide valuable guidance for corporate managers navigating sustainable investment strategies. Emphasizing earnings-driven investments, particularly capital projects, with a high ESG focus could align financial objectives with sustainable practices, enhancing long-term viability and stakeholder trust. The study’s insights contribute to the broader discourse on responsible corporate practices and sustainability. The findings shed light on the complexities of balancing financial objectives with environmental responsibilities, emphasizing the need for a balanced approach reconciling financial goals with ESG commitments. This study contributes novel insights by dissecting the nuanced relationships between ESG performance and investment decisions. The analysis provides a novel perspective on companies' trade-offs between the investment mix and pursuing ESG performance.

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