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Relating Environmental, Social, and Governance Scores and Sustainability

Performances of Firms: An Empirical Analysis

Article  in  Business Strategy and the Environment · November 2019

DOI: 10.1002/bse.2429

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DOI: 10.1002/bse.2429

RESEARCH ARTICLE

Relating Environmental, Social, and Governance scores and

sustainability performances of firms: An empirical analysis

R. Rajesh1 | Chandrasekharan Rajendran2

1
Management Division, ABV-Indian Institute
of Information Technology and Management,,
Gwalior, India
2
Department of Management Studies (DoMS),
Indian Institute of Technology Madras,
Chennai, India
Correspondence
R. RAJESH, ABV-Indian Institute of
Information Technology and Management,
Gwalior, India.
Email: rajeshambzha@gmail.com; rajesh@iiitm.
ac.in; craj@iitm.ac.in
Funding information
Indian Institute of Technology Madras
Abstract
Environmental, Social, and Governance (ESG) scores can act as an indicator for sus-
tainability performance of organizations. This paper explores an empirical evidence
for the relationship binding ESG scores and sustainability performances of firms. We
observe and evaluate the ESG performance scores of 1,820 firms globally for 5 years,
from 2014 to 2018 on 10 major themes and over 400 different indicators, as listed
by Thomson Reuters and is captured from the Bloomberg terminal data. We posit
five hypotheses to check the relations binding ESG scores and the total sustainability
performances of firms. A Partial Least Square (PLS) analysis and standard boo-
tstrapping using Smart PLS 3.0 software is used to observe the results and to evi-
dence the direct and moderating effects among latent variables contributing to
sustainability performances. We observe a significant and negative moderating effect
of ESG performances, independently over the all direct relations, considering their
relationship to ESG performances. One of the major implications of this research is in
the direction of assigning priorities while considering environmental-, social-, and
governance-related themes in the implementation of any strategies or policies into
practice.

KEYWORDS

bootstrapping, ESG scores, PLS analysis, sustainability performances, sustainable development

1 | I N T RO DU CT I O N
Sustainability in the context of supply chains is a key research topic
for academics and practitioners now (Carter and Easton, 2011; Rajeev,
Pati, Padhi, & Govindan, 2017; Carter & Washispack, 2018).
Measuring the performance of supply chains on sustainability has
far-reaching impact on the company's profitability and to achieving
competitive advantages for the future (Shibin, Gunasekaran, & Dubey,
2017; Moktadir, Ali, Rajesh, & Paul, 2018; Moktadir, Rahman, Jabbour,
et al., 2018; Moktadir, Rahman, Rahman, et al. 2018; Nikolaou,
Tsalis, & Evangelinos, 2019). Considering the sustainability perfor-
mance of organizations, Environmental, Social, and Governance (ESG)
scores appear to be a widely acceptable measure of evaluation (Ahi,
Searcy, & Jaber, 2018; Xiao, Wang, van der Vaart, & van Donk, 2018).
In brief, ESG scores find a positive connection to the sustainability
performances of organizations. Stakeholders are more demanding
than before, as for the past decade, as several initiatives such as the
Socially Responsible Investments are experiencing notable advances
(Chatzitheodorou, Skouloudis, Evangelinos, & Nikolaou, 2019). In spite
of the maximization of supply chain surplus (the value generated in a
supply chain) being the primary target, inclusion of nonfinancial issues
such as ESG aspects are gaining importance in the mind of stake-
holders (Balatbat, Siew, & Carmichael, 2012). ESG ratings given by
specialized rating agencies play a critical role in the decision-making
process of managers and various stakeholders for decisions to invest-
ment and for collaboration.
Considering the ESG scores provided by various rating agencies,
Thomson Reuters ESG Scores are a widely accepted measure of ESG
performances amongst industries (Pagano, Sinclair, & Yang, 2018).
These ESG ratings are available for over 7,000 companies globally

Bus Strat Env. 2019;1–21. wileyonlinelibrary.com/journal/bse © 2019 John Wiley & Sons, Ltd and ERP Environment 1
2 RAJESH
represented as time series data on ESG performances of the firms on
10 major themes with history going back to 2002 (Thomson Reuters
ESG Scores, February, 2019). A combined ESG score and an ESG con-
troversial score are provided for companies. These scores form the
basis for generating the total sustainability scores of firms based on a
final ESG score (ESG, 2019). We observe and evaluate the ESG per-
formance scores of 2,578 firms for 5 years from 2014 to 2018 on
10 major themes, as listed by Thomson Reuters and captured from
the Bloomberg terminal data. On initial sorting and removal of any
missing data values, we reduce the number of firms from 2,578 to
1,820. The average performances of firms in 5 years on the 10 themes
of ESG performances, as listed by Thomson Reuters, make the final
data for analysis. We employ a 7-point scale to sort the average ESG
performances using a conversion scale and study empirically the role
of each constructs and the latent variables for determining the overall
ESG scores of firms that in turn determine their sustainability
performances.
An empirical study on the role of constructs and latent variables
leading to the ESG performances and the overall sustainability perfor-
mances of firms seems to be absent in the literature. The study is
motivated from this observation, and we use the big data representing
1,820 firms for analysis to accurately interpret those relations and to
avoid any potential bias. The research questions posed in the study
are as follows. What are the constructs and latent variables leading to
the sustainability performance of firms? What is the individual contri-
bution of the ESG scores on ESG performances of firms? Is there any
significant interaction effects among ESG scores that moderates the
relation to ESG performances? We observe the sorted ESG data of
1,820 firms globally to study these research questions. These firms
represent different countries and are of different industrial sector
classifications. The research focuses on an empirical study that utilizes
a technique of analyzing partial least squares to gain some insights,
followed by a path analysis to determine the path coefficients to evi-
dence major relations. The major contributions of the research are as
follows. (a) It is evidenced that the constructs for measuring ESG per-
formances are true indicators of ESG performances and the combined
ESG scores have more or less equal weightings on the latent variables
representing the individual ESG indicators with path coefficients of
0.382, 0.322, and 0.396, respectively. (b) We observe significant nega-
tive interaction effects on moderation analysis, for the latent variables
representing each of the ESG performances, individually on the other
two. (c) Also, it is observed that the latent variables representing
individual ESG indicators do not have any mediating effects on the
relations connecting any one of them and ESG performances.
This paper is organized as follows. Section 2 represents a brief lit-
erature analysis on the theoretical perspective of this research, the
ESG scores, and the sustainability performances of firms. Section 3
discusses the model development based on the constructs and latent
variables for predicting the ESG scores and total sustainability perfor-
mances of firms. Section 4 consolidates the results of empirical analy-
sis of the measurement model, as well the structural model for
analysis. Section 5 analyses and discusses on the moderation analysis
and results, which is followed by the results and discussion in
Highlights
• Explore empirical evidence to relating Environmental,
Social, and Governance (ESG) scores and sustainability
performances of firms.
• Analyzes ESG scores of 1,820 firms globally for 5 years,
from 2014 to 2018 on 10 major themes.
• A Partial Least Square (PLS) analysis and standard boo-
tstrapping using Smart PLS 3.0 is employed.
• A significant and negative moderating effect of ESG per-
formances independently, is observed.
• Implications are in the direction of assigning priorities
while implementing ESG in practice.
Section 6. Section 7 elaborates the conclusions, delimitations of the
study, and scope of future works.
2 | LI T E RA T U R E RE V I E W
2.1 | Ecological modernization theory
We construct our model based on the ecological modernization the-
ory that states the economic benefits of environmentalism (Hajer,
1995). The theory presents a discussion on the environmental rea-
daptation of economic growth and industrial development and lays
the foundation for several process innovations such as environmental
management, sustainable supply chain management, clean technolo-
gies, design for environment, and so forth. The theory not only
discusses on the role of technoindustrial progress, aspects of policy,
and economy, but also on the social and cultural aspects (Mol &
Spaargaren, 2000). The theory recommends the pluralism, as the con-
cept of ecological modernization shall function as a multilevel gover-
nance structure incorporating the government, the markets and the
entrepreneurs, and the civil society. Hence, considering a supply chain
perspective, the stakeholders should consider the ESG performances
of companies to gaining sustainable competitive advantages for firms.
The ecological modernization theory has challenged the tradi-
tional idea of fundamental reorganization of the core institutions of
modern society for environmental movement, which is essential to
enter a path of long-term sustainable development (Mol, 1996). The
ecological modernization theory was followed by many debates
(Murphy & Gouldson, 2000), and the adherents of the theory
acknowledged the importance of certain fundamental transformations
in projects to modify structural design faults that caused severe envi-
ronmental destructions. They also argue that these transformations
need not necessitate that one has to do away with those institutions
of society that are involved in modern organization of production and
consumption. Extending this theory toward supply chain management
gave birth to the principles of sustainable supply chain management.
RAJESH
And sustainability enables the supply chain to monitor, trigger, and
improve their strategies to achieving better ESG performances, so as
to gain competitive advantages for future (Costantini, Crespi, Marin, &
Paglialunga, 2017; Jabbour, de Sousa Jabbour, Govindan, Teixeira, &
de Souza Freitas, 2013; Jabbour & Santos, 2008; Seles, de Sousa
Jabbour, Jabbour, Latan, & Roubaud, 2019).
2.2 | ESG scores
Halbritter and Dorfleitner (2015) investigated the link between the
corporate social and financial performance based on ESG ratings of
firms and evidenced this relationship through empirical studies.
Dorfleitner, Halbritter, and Nguyen (2015) empirically analyzed and
compared different rating approaches of corporate social performance
using ESG scores of various sustainability rating providers, considering
the ESG level and the risk of changes in the ESG level of companies.
They pointed out an evident lack in the convergence of different ESG
measurement concepts. Balatbat, Siew, and Carmichael (2012) investi-
gated the impact of ESG practices on the financial performance of
companies and concluded that the correlation between financial
performance and ESG scores is found to be weakly positive in lag ana-
lyses. They also found a weak negative association among errors in
analysts' forecasts and ESG scores. Harjoto, Laksmana, and Lee (2015)
investigated the impact of board diversity on firms' corporate social
responsibility (CSR) performance and evidenced that board diversity is
associated with several areas in which CSR is strong and a fewer num-
ber of areas in which CSR is a concern. The findings of their study
support the stakeholder theory, and the authors suggested that board
diversity could enhance the firms' ability to satisfy the needs of their
broader groups of stakeholders.
The ESG scores provided by Thomson Reuters are so designed to
transparently and objectively evaluate a company's relative ESG per-
formance, commitment, and effectiveness (Thomson Reuters ESG
Scores, February, 2019). These scores use 10 major themes (emis-
sions, environmental innovation, resource use, community, human
rights, product responsibility, workforce, CSR strategy, management,
and shareholders) to evaluating the performance considering the data
reported from companies. The overall ESG scores reflects the
discounted measure of any significant controversies regarding the
ESG performances as recorded for companies. The ESG scores given
by Thomson Reuters is an enhanced replacement to the existing
®
ASSET4 Equal Weighted Ratings. These ESG ratings reflect a firm's
strategic ESG framework and represent a data-driven assessment of
their ESG performances, where company size and transparency biases
are minimal. These ESG scores provided by Thomson Reuters claim to
overestimate the ASSET4 ratings in the following, as per the dis-
claimer (Thomson Reuters ESG Scores, February, 2019).
1. ESG controversies overlay to identify and enlarge the impact of any
controversies on total ESG scoring;
2. Industry and Country benchmarks to conduct comparative analysis
within peer groups at the data point scoring level;
3
3. Data-driven category weights to enhance a precise differentiation
across firms that reflect the data availability within each category;
and
4. Percentile rank scoring is a methodology implemented to eliminating
any hidden layers of calculations.
The global representation of firms, which are assessed for their ESG
capabilities by Thomson Reuters, is shown in Figure 1.
2.3 | Sustainability performances
Sustainability is referred to as the development that meets the needs
of the present, without compromising the ability of future generations
to meet their needs (Ali, Arafin, Moktadir, Rahman, & Zahan, 2018;
Carter & Rogers, 2008; Dubey et al., 2017). Sustainability perfor-
mances are based on investigating the potential negative impacts of
economic activities on environments both in emerging and advanced
economies (Miras-Rodríguez, Carrasco-Gallego, & Escobar-Pérez,
2015; Welford & Gouldson, 1993). Organizational sustainability lies in
the intersection of a firm's economic, environmental, and social per-
formances (Rahdari & Rostamy, 2015; Rajesh, 2018). Achieving sus-
tainability and resilience for organizations and their supply chains is a
topic of contemporary research interest (Rajesh 2019 a, b, c, d). Vari-
ous sustainability reporting initiativesp are gaining increased attention
in the minds of stakeholders (Escrig-Olmedo, Muñoz-Torres,
Fernández-Izquierdo, & Rivera-Lirio, 2017; Lai, Melloni, &
Stacchezzini, 2016; Mervelskemper & Streit, 2017; Pérez-López,
Moreno-Romero, & Barkemeyer, 2015). We use the ESG scores of
firms as an indicator of firm's sustainability measure. These ESG
scores are derived from two predictors: the combined ESG scores,
based on the performance of the firm in ESG measures, as well as the
ESG controversies scores that represent any controversies of firms
regarding the ESG performances for a considered period.
Wang and Sarkis (2013) investigated on the association between
companies' environmental and social supply chain activities and their
financial performances. They observed that integrated sustainable
supply chain management efforts (combining social and environmental
supply chain management) are positively associated with corporate
financial performance that was measured by return on assets and
return on equity. Kocmanová and Dočekalová (2013) discussed on
economic performance in relation to environmental, social, and corpo-
rate governance indicators, which are increasingly used by investors
to understand the processes and key factors in companies. They
proved empirically on manufacturing sector that the environmental,
social, and corporate governance performance indicators of firms can
positively influence their economic performances.
Siew, Balatbat, and Carmichael (2013) explored empirically the
impact of nonfinancial reporting on the financial performance of
construction companies. They investigate on reporting initiatives of
publicly listed construction companies on climate change, environ-
mental management, environmental efficiency, health and safety,
human capital, conduct, stakeholder engagement, governance, and
other matters that are likely to be of concern to institutional investors.
4 RAJESH
Chvatalová, Kocmanová, and Dočekalová (2011) discussed on several
corporate sustainability reporting initiatives and measurement of envi-
ronmental, social, economic, and governance performances. They
emphasized on the need to developing advanced methods and metrics
to identify and quantify those performance indicators with the aid of
information and communication technology. Eccles, Krzus, Rogers,
and Serafeim (2012) pointed that the greatest challenge for investors
and companies for using ESG performance information is the absence
of standards, and the authors argue that reporting standards must be
developed on a sector-by-sector basis, which are illustrated with
several cases. Also they point out other challenges, such as to
understanding the exact ESG dimension that is most beneficial for a
company in terms of creating value for shareholders and stakeholders.
A detailed literature review has been conducted, connecting the
areas of ESG and sustainability performances of firms. Some of the
major recent works in these areas are elaborated and attached as
Annexure 2 in the Appendix.
3 | MODEL DEVELOPMENT
3.1 | Environmental, Social, Governance
performances and ESG combined scores
For the recent past, there is a strategic shift of firms from the short-
term goals of maximizing profits to long-term goals of sustainable ESG
performances (Min & Mentzer, 2004; Studer, Welford, & Hills, 2006).
Connecting CSR and ESG has been a topic of discussion to many
researchers of the decade (Block & Wagner, 2014; Welford, 2016;
Welford & Young, 2017). Several studies agree that ESG has emerged
as an important source of corporate risk and can directly or indirectly
affect firms' financial performances, as well profitability (Hawn,
Chatterji, & Mitchell, 2018). Carter and Jennings (2004) investigated
the role of purchasing in CSR practices of the firm using empirical
studies. Zhao et al. (2018) investigated on the relations to ESG perfor-
mance indicators and firms' financial performances. They observed
that the firm's performance on ESG could improve their financial
F I G U R E 1 Global representation of
firms assessed for Environmental, Social,
and Governance ratings. (Source:
Thomson Reuters)
performances and hence be beneficial to investors, managers, and
decision-makers. In a parallel study, Yoon, Lee, and Byun (2018) inves-
tigated on the role of firm's CSR in promoting its market value in
emerging markets. They have used ESG scores to evaluating CSR
performances and studied their effect on firm valuation and con-
cluded that CSR practices positively and significantly affect a firm's
market valuation.
We formulate a model based on the indicators of firm's ESG per-
formances based on 10 major indicators, as listed by Thomson
Reuters. The combined ESG score provided by Thomson Reuters can
represent an overall measure of the aggregated performance of the
firm on these 10 major indicators. Thomson Reuters provides the ESG
data of firms on 10 major indicators, of which the details are provided
in the Appendix as Annexure 1. Thomson Reuters captures and calcu-
lates over 400 company-level ESG measures and a subset of the
178 most comparable and relevant fields, toward an effective overall
company assessment and scoring process. As we use the secondary
data provided by Thomson Reuters for analysis, the details of 400+
indicators are not unveiled as per the disclaimer policies of the firm.
Instead the 10 themes formulated to measure the ESG performances
of firms based on ESG indicators are shown. These themes represen-
ted as major indicators are based on several company-level measures
of the firm as measured by the rating provider. These measures of
indicators are selected based on comparability, data availability and
industry relevance. The indicators are grouped into 10 categories and
through a combination of these 10 categories; a weighted proportion-
ality to the count of measures within each category is estimated that
forms the three pillar scores on ESG performances. Based on the
above, the following hypotheses are formulated.
H1a: The environmental performance score of a firm is positively
and significantly related to its ESG performances.
H1b: The social performance score of a firm is positively and sig-
nificantly related to its ESG performances.
H1c: The governance performance score of a firm is positively
and significantly related to its ESG performances.
The ESG performance indicators of firms provided by Thomson
Reuters are provided based on 10 themes and over 400 indicators;
RAJESH
F I G U R E 2 ESG measures and the indicators
of performances. The values shown here
represent the number of major indicators used to
obtain the ESG score. CSR, corporate social
responsibility; ESG, Environmental, Social, and
Governance (Source: Thomson Reuters)
these measures and themes are presented in Figure 2. A detailed
description of these themes is added in the Appendix as Annexure 2.
3.2 | ESG combined scores, ESG controversies
scores, and sustainability performances
The ESG combined score overlays the Thomson Reuters ESG Score
with ESG controversies to provide a comprehensive evaluation on the
firm's sustainability impact and conduct. The final ESG Score or the
score on the total sustainability performances of the firm is a reflec-
tion of the company's ESG performance, commitment, and effective-
ness based on publicly reported information. We attempt to observe
the relations among ESG combined scores, as provided by the Thom-
son Reuters ESG and the sustainability performances of the firm,
which is constructed based on publically reported information. The
combined ESG score is a cumulative indicator of the firm's ESG per-
formance measures and is based on more than 400 indicators
observed on 10 major themes, as discussed above.
Thomson Reuters measures the ESG controversies scores based
on 23 ESG controversy topics (Thomson Reuters ESG Scores, Febru-
ary, 2019). These controversies scores check whether the company is
involved and penalized for any scandals that affect their overall ESG
scores and grading. The impact of controversies will be continued to
be measured for the next year if there are any developments related
to the negative event. Thomson Reuters captures all the legal docu-
ments and the media materials regarding the controversy process.
Hence, the ESG controversies score has a negative impact on the total
ESG score of firms, and therefore, it is assumed to impact negatively
and significantly toward the total sustainability performance score of
the firms. The main objective of a total ESG score is to discount the
ESG performance score, based on any negative media or reports of
controversies. This process incorporates any significant material ESG
controversies into the calculation of the overall ESG combined score.
Based on the above discussions, the following hypotheses are
formulated.
H2a: The ESG performance score of a firm is positively and signif-
icantly related to its total sustainability performances.
5
H2b: The ESG controversies score of a firm is negatively and sig-
nificantly related to its total sustainability performances.
The model constructed and the hypotheses to be evaluated
empirically are presented in Figure 3. We also check for a multiple
moderation analysis of the model, and for this, we examine the effect
of moderation of any independent latent variable (Environmental,
Social, and Governance), separately, on the relation to other two inde-
pendent latent variables and the dependent latent variable, ESG per-
formances. Hence, the modified model considering the moderation
effects is represented in Figure 4.
4 | MODEL EVALUATION
We have used the Partial Least Square (PLS) analysis using Smart PLS
3.0, in this research to evaluate the measurement and the structural
models. The PLS is an important technique used for producing a linear
equation to describe or predict differences in the values of one or
more properties, from the differences in the values of other proper-
ties. PLSs are regarded as a major generalization of the technique of
Multiple Regression (MR), because for similar problem formulations,
PLS and MR can produce similar answers. The major advantages for
the use of PLS over MR in structure–activity studies are (Cramer,
1993) as follows. (a) It is possible to generate useful and robust equa-
tions, when the number of independent variables or the coefficients
to be evaluated exceeds the number of experimental observations,
(b) Predictions from PLS models are accurate in comparison with
MR-derived models, (c) PLS models are stable when there is correla-
tion among sets of independent variable values, rather than being
orthogonal. (d) A PLS study can simultaneously derive models for
more than one dependent variable.
4.1 | Background of the data
We evaluate empirically the relationships among the constructs and
the latent variables for building the ESG combined scores and the
total sustainability performance of firms. We conduct an initial
6 RAJESH
F I G U R E 4 Reconstructed model connecting ESG scores and sustainability performances. ESG, Environmental, Social, and Governance (M1 to
M6 indicates the Moderating effects)
evaluation of the secondary data containing 2,578 firms extracted
from the Thomson Reuters ESG scores through Bloomberg terminal.
The initial data contain the ESG scores of firms on 10 major themes,
as mentioned earlier covering all the constructs for measurement. The
evaluation is based on the periodical performances of the companies
on ESG domains for a period of 10 years from 2009 to 2018. It is
noteworthy that many firms particularly based on the Asia-Pacific
regions joined this evaluation scheme after 2012. Hence, there are
several missing data, if the analysis has been done with 10-year data.
Hence, to avoiding any bias in the analysis, we limit our studies on the
periodical performance of firms on ESG scores for a period of 5 years
from 2014 to 2018.
We have conducted a manual sorting of the initial data to
extract the list of those companies consistently rated on their ESG
F I G U R E 3 Constructed model
connecting ESG scores and sustainability
performances. ESG, Environmental, Social,
and Governance
scores, considering a 5-year window. Firms having any missing
values for any of the ESG indicators are excluded from the analysis.
On final sorting of the data on ESG indicators, we have observed
1,820 firms without any missing data and were consistently rated
for their ESG performances considering a 5-year window. We use a
PLS approach (Chin, 1998) to evaluating the latent variables and
the constructs contributing to firms' ESG ratings and their sustain-
ability performances. The model has been constructed and
implemented in Smart PLS 3.0 and was tested for the validity and
reliability of constructs using several statistical indicators. The
secondary data, after final sorting, contain 1,820 companies with
average ESG scores for periods ranging from 2014 to 2018, and
we evaluate over 10 themes of measurement. This forms the input
data for analysis.
RAJESH
4.2 | Measurement model evaluation
Because the latent variables are all formative in nature than reflective,
we measure the factor loadings of the constructs for building the
latent variables. The factor loadings (Hair, Sarstedt, Ringle, & Mena,
2012) were observed to be better (> 0.7) for all the latent variables
except for two factors, environmental innovation scores (0.628) and
shareholders scores (0.435). The Cronbach's alpha (Santos, 1999) for
the constructs shows an acceptable level, except for the latent
variable, governance (0.466). Spearman's rank correlation coefficient
(rho-A; Zar, 1972) values show acceptable measures, except for gov-
ernance (.535). The composite reliability (Bacon, Sauer, & Young,
1995) measures for the constructs lie well above the acceptable mea-
sures (0.7) for all the constructs, and the average variance extracted
(AVE; Fornell & Larcker, 1981) lie well in the acceptable measures,
except for governance (0.484).
The discriminant validity (Henseler, Ringle, & Sarstedt, 2015)
measures of the latent variables fall in the acceptable levels, showing
the diagonal elemental values are higher (Fornell-Larcker criteria). The
variance inflation (inner and outer) of factors (VIFs; Craney & Surles,
2002) has been studied and showed an acceptable level for the model.
The path coefficients (Wright, 1934) of the model are also studied,
showing that the constructed latent variable on ESG score has equal
influence of all the three building latent variables, environmental
(0.382), social (0.322), and governance (0.396). The R2 measures
(Cameron & Windmeijer, 1997) and the adjusted R2 measures for the
ESG combined score (.664, .663) and the sustainability score (.865,
.865) shows acceptable measures (>.5) for the model. The detailed
analysis of the measures of validity and reliability measures of the
measurement model is elaborated as follows.
4.2.1 | Reliability
We calculate and check for the reliability of the measurement items
using measures of composite reliability and Cronbach's alpha. The
measurement model is checked for a recommended threshold (0.6)
and for a satisfactory threshold (0.7), for the values of composite
reliability and Cronbach's alpha. From the analysis, the model is con-
firmed to be reliable. Spearman's rank correlation coefficient (rho-A) is
a nonparametric measure of rank correlation to prove the statistical
dependence between the rankings of two variables. The rho-A values
for the model lie in the acceptable limits.
4.2.2 | Convergent validity
The degree of convergence of the items of a construct can be mea-
sured using convergent validity. Convergent validity is high, if all the
item loadings are significant and converge to its designated latent
variable. We observe the convergent validity using three indicators,
factor loadings, composite reliability, and the average variance
extracted (AVE). AVE is regarded as a strict measure of convergent
7
validity. It is seen for the measurement model that factor loadings are
high and AVE values lie within either of the recommended threshold
(0.5), or a satisfactory threshold (0.6) or an appreciable threshold (0.7).
4.2.3 | Discriminant validity
Discriminant validity refers to the degree at which the latent variables
are uniquely distinct from each other. According to Fornell and
Larcker (1981), discriminant validity is established, when the correla-
tions among the constructs are lower than the square root of the AVE
for each constructs. We establish the discriminant validity matrix and
check that the diagonal elements (√AVE values) are higher than the
off-diagonal elements (correlations of all constructs). From the results,
it is meant that the model satisfies discriminant validity measures.
4.2.4 | Multicollinearity
In a MR model, if any two or more predictor variables are highly corre-
lated, that is, one can be predicted from the other with significant
degree of other, causing multicollinearity. We check for
multicollinearity using the measures of VIF measures. The VIF
measures are studied for the inner and outer model, and we ensure
that the VIF values lie in the acceptable threshold (<10) for all the
constructs (Grewal, Cote, & Baumgartner, 2004). This indicates that
multicollinearity is not found to be problematic for our study.
4.2.5 | Percentage variance explained
We estimate the percentage of variance explained by the predictors
in the model and found to be satisfactory (>50%). We also estimate
the R2 values (>.5) and the adjusted R2 values (>.5) for this and are
found to be in the agreeable limits. Hence, the measurement model is
found to agreeably account for the dispersion of the data.
4.2.6 | Common method bias
Although the data for latent variables in the study were collected from
the same source, common method bias did not find to be problematic
for the study. The test for common method bias was conducted to
measure the variance commonly shared among the constructs. We
conduct a Harman's single factor test (Harman, 1976) to check for any
common method bias, and the results agree that the total variance
explained by a single factor is 26%; this lies well below the acceptable
measure of <50%. This indicates the absence of common method bias
for our study.
The path coefficients of the model on PLS analysis are shown in
Table 1. The construct reliability and validity measures are shown in
Table 2. The measures of discriminant validity (Fornell-Larcker Crite-
rion) are presented in Table 3. The measures of VIF are shown in
8 RAJESH

TABLE 1 Partial Least Square analysis (Outer loadings)

Factors ESG controversies ESG combined score Environmental Governance Social Sustainability score
CSR_strategy_score 0.801
Comm_score 0.720
ESG_comb_score 1.000
ESG_contro_score 1.000
ESG_score 1.000
Emis_score 0.903
Env_inn_score 0.628
Hum_rights_score 0.812
Mangt_score 0.789
Prod_resp_score 0.744
Res_use_score 0.912
Shareholders_score 0.435
Work_frce_score 0.824

Abbreviations: CSR, corporate social responsibility; ESG, Environmental, Social, and Governance.

TABLE 2 Construct reliability and validity

Scores Cronbach's alpha rho-A Composite reliability Average variance extracted

ESG controversies 1.000 1.000 1.000 1.000
ESG combined score 1.000 1.000 1.000 1.000
Environmental 0.756 0.815 0.861 0.680
Governance 0.466 0.535 0.726 0.484
Social 0.780 0.794 0.858 0.602
Sustainability score 1.000 1.000 1.000 1.000

Abbreviation: ESG, Environmental, Social, and Governance.

TABLE 3 Discriminant validity (Fornell-Larcker Criterion)

Scores ESG controversies ESG combined score Environmental Governance Social Sustainability score
ESG controversies 1.000
ESG combined score 0.037 1.000
Environmental −0.361 0.737 0.825
Governance −0.281 0.672 0.562 0.696
Social −0.418 0.711 0.750 0.584 0.776
Sustainability score −0.385 0.832 0.855 0.769 0.868 1.000

Abbreviation: ESG, Environmental, Social, and Governance.

Table 4. The path coefficients, t-statistics, and the p-values showing
the significance of the relations obtained on bootstrapping is pres-
ented in Tables 5 and 6.
4.3 | Structural model evaluation
The measurement model was converted into structural model for path
analysis, and the path coefficients were determined (Wetzels,
Odekerken-Schröder, & Van Oppen, 2009). We test the initial model
of constructs and latent variables contributing to the overall sustain-
ability performance score of firms based on their ESG performances.
It is seen that the path coefficients are significant with p-values less
than .05 and t-statistics greater than 1.96. We observe the standard-
ized regression weights and analyze the relationships among latent
variables. Also, the factor loadings were observed to be good (except
for the shareholder's score, which is loading 0.435). And on boo-
tstrapping, all the relations are found to be significant with p-values
consistently low and close to zero with very high t-statistics (lowest
value of 11.79), which are highly significant. It is observed from the
RAJESH 9

TABLE 4 Variance Inflation of Factors (Outer) Considering the total sustainability scores on firms, the ESG com-

Factors VIF bined scores and the ESG controversies score show the path coeffi-
cients of 0.847 and −0.417, respectively. From the path analysis, it is
CSR_strategy_score 1.140
observed that the performance on ESG factors have a positive and
Comm_score 1.446
significant effect in the determination of ESG scores of firms, and the
ESG_comb_score 1.000
ESG combined score is a strong indicator of the sustainability score of
ESG_contro_score 1.000
firms. Also, it is noticed that the ESG controversies score of firm has a
ESG_score 1.000
significant, but negative influence over the total sustainability score of
Emis_score 2.465 firms. The results of the path analysis showing the path coefficients
Env_inn_score 1.195 (standardized regression weights) and the factor loadings are shown in
Hum_rights_score 1.769 Figure 5a. We conduct a basic bootstrapping with bias-corrected and
Mangt_score 1.174 accelerated confidence interval determination method. Basic boo-
Prod_resp_score 1.422 tstrapping is faster and determines the basic set of results including
Res_use_score 2.511 the path coefficients, indirect effects, total effects, outer loadings, and

Shareholders_score 1.048 outer weights. We observe the t-statistics and all relations (paths) in
the model are found to be highly significant. The results of PLS boo-
Work_frce_score 1.633
tstrapping are presented in Figure 5b.
Abbreviations: CSR, corporate social responsibility; ESG, Environmental,
Social, and Governance; VIF, Variance Inflation of Factors.

5 | MODERATION ANALYSIS
path coefficients that the performances of firms on ESG factors have
equally likely to have contributed to the ESG scores, with path coeffi- We check for multiple effects of moderation of any predictor latent
cients, 0.382, 0.322, and 0.396, respectively. variables, to achieving any predicted latent variables (Brown et al.,

TABLE 5 Path coefficients (inner) and significance (on bootstrapping)

Original sample Sample mean Standard deviation T-Statistics (|

Paths (O) (M) (STDEV) O/STDEV|) P-values
ESG controversies!sustainability −0.417 −0.417 0.015 27.376 .000
score
ESG combined score!sustainability 0.847 0.847 0.010 86.571 .000
score
Environmental ESG!combined score 0.374 0.372 0.019 19.822 .000
Governance ESG!combined score 0.319 0.319 0.016 19.604 .000
Social ESG!combined score 0.244 0.246 0.020 12.413 .000

Abbreviation: ESG, Environmental, Social, and Governance.

TABLE 6 Path coefficients (outer) and significance (on bootstrapping)

Original sample Sample mean Standard deviation T-statistics (|

Paths (O) (M) (STDEV) O/STDEV|) P-values
CSR_strategy_score governance 0.801 0.801 0.011 76.302 .000
Comm_score social 0.720 0.719 0.013 54.046 .000
Emis_score environmental 0.903 0.903 0.004 209.341 .000
Env_inn_score environmental 0.628 0.628 0.019 32.835 .000
Hum_rights_score social 0.812 0.811 0.009 92.514 .000
Mangt_score governance 0.789 0.788 0.012 64.790 .000
Prod_resp_score social 0.744 0.744 0.012 61.519 .000
Res_use_score environmental 0.912 0.912 0.004 216.600 .000
Shareholders_score governance 0.435 0.434 0.033 13.116 .000
Work_frce_score social 0.824 0.824 0.007 110.964 .000

Abbreviations: CSR, corporate social responsibility; ESG, Environmental, Social, and Governance.
10
2013; Edwards & Lambert, 2007). Moderation analysis distinguishes
the roles of the two variables involved in the interaction. The modera-
tion analysis is done at three levels. First, we check for the effect of
moderation of environmental performance on social and governance
scores. Second, we check for the effect of moderation of social perfor-
mance on environmental and governance scores. And third, the effect
RAJESH
F I G U R E 5 (a) Path coefficients and
the factor loadings from Partial Least
Square analysis. (b) t-statistics obtained
on Partial Least Square bootstrapping.
CSR, corporate social responsibility; ESG,
Environmental, Social, and Governance
of moderation of governance performance on environmental and
social scores is analyzed. Here, we use the standard moderation analy-
sis using Smart PLS 3.0. We use a standardized product term genera-
tion method with automatic weighing mode to conduct the
moderation analysis. We employ a two-stage calculation approach
that uses the latent variable scores of the latent predictor and latent
RAJESH 11

moderator variable from the main effects model (without the interac-
tion term). The generated latent variable scores are used to calculate
the product indicator for the second stage analysis, which involves the
interaction term in addition to the predictor and moderator variable.
The detailed results of the moderation analysis are as shown below;
5.1 | Moderating effect of environmental
performance on social and governance scores
The moderation analysis is conducted to study the moderating effect
on interaction of environmental performance on social and gover-
nance scores for predicting the ESG scores. Also, standard boo-
tstrapping is used to find the p-value and the t-statistic to check the
level of significance of moderating effect. The path coefficients of the
moderating effect and the t-statistics are shown in Figures 6a–d. We
observe a negative interaction coefficient; it means that the effect of
the combined action of the predictor latent variables is less than the
sum of their individual effects.
In alternative terms, the association between one of the latent
variable and the predictor variable decreases if the moderating latent
variable increases. Here, the effect of environmental performance is
significant (t-statistics = 8.138) and negative (path coeffi-
cient = −0.137) in moderating the relation of governance to the ESG
score of firms. This means that when the environmental performance
of firms' increases, the effect of governance scores on determination of
ESG performances decreases; but this interaction effect is less signifi-
cant compared with the sum of the individual effects of environmental
and governance performances to ESG scores. Also it is seen that
the moderating effect of environmental performance is significant
(t-statistics = 10.525) and negative (path coefficient = −0.173) over
governance, for predicting the ESG score of firms. From the results,
it is interpreted that when the environmental performance of firms'
increases, the effect of social scores on determination of ESG perfor-

F I G U R E 6 (a) Moderating effect: Environmental performance on Governance. (b) Moderating effect: Environmental performance on
Governance (bootstrapping). (c) Moderating effect: Environmental performance on Social. (d) Moderating effect: Environmental performance on
Social (bootstrapping). CSR, corporate social responsibility; ESG, Environmental, Social, and Governance
12
mances decreases; but this interaction effect is less significant compared
with the sum of the individual effects of environmental and social per-
formances to ESG scores.
5.2 | Moderating effect of social performance on
environmental and governance scores
We conduct the second phase moderation analysis to study the
moderating effect of social performance on environmental and gov-
ernance scores for determining the ESG scores. As indicated earlier,
a standard bootstrapping method is used to find the p-value and
the t-statistic to check the level of significance of moderating
effect. The results show that the social performance has a signifi-
cant (t-statistics = 8.975) and negative (path coefficient = −0.146)
moderating role over governance for determining the ESG score of
firms. This can be interpreted as, when the social performance of
firms' increases; the effect of governance scores on determination of
ESG performances decreases, but this interaction effect is less signifi-
cant compared with the sum of the individual effects of social and gov-
ernance performances to ESG scores. Similarly, it is seen that the
moderating role of social performance on the relation between
environmental scores and ESG performances is significant (t-statis-
tics = 10.553) and negative (path coefficient = −0.173). This can be
interpreted as, when the social performance of firms' increases, the
effect of environmental scores on determining the ESG performances
decreases; but this interaction effect is less significant compared with
the sum of the individual effects of social and environmental perfor-
mances to ESG scores.
5.3 | Moderating effect of governance
performance on environmental and social scores
We perform a third phase moderation analysis to observe any moder-
ating effect of governance performance on environmental and social
scores to estimating the ESG scores. We conduct a standard boo-
tstrapping method to estimating the p-value and the t-statistics, so as
to check the level of significance of moderating effect. On analysis of
the results, it is seen that the governance performance has a signifi-
cant (t-statistics = 8.005) and negative (path coefficient = −0.137)
moderating role over environmental scores for determining the ESG
score of firms. This can be interpreted as, when the governance perfor-
mance of firms' increases; the effect of environmental scores to determin-
ing the ESG performances decreases; but this interaction effect is less
significant compared with the sum of the individual effects of governance
and environmental performances to ESG scores. Also, it is worthy to
note that the moderating role of governance performance on the
relation between social scores and ESG performances is significant
(t-statistics = 9.136) and negative (path coefficient = −0.146). An
explanation to the same is when the governance performance of firms'
increases, the effect of social scores on determination of ESG perfor-
mances decreases; but this interaction effect is less significant compared
RAJESH
with the sum of the individual effects of governance and social perfor-
mances to ESG scores.
6 | R E S U L T S A N D D I S C U S S I O NS
Measuring the sustainability performance of firms has become
increasingly important, considering the present business environments
under globalization and vertical integrations. It has been observed in
the recent past that the issues of sustainability have been gaining high
importance amongst the minds of various investors and stakeholders.
This upsurges the need of a standard measuring scheme to evaluate
the sustainability performances of firms. Amongst the various rating
schemes for sustainable performances, the evaluation by Thomson
Reuters emerges to be a widely acceptable measure. Thomson
Reuters considers the ESG measures spread over 10 various schemes
and over 400 different indicators for evaluation. These scores are
named as the ESG scores that indicate the overall performance score
of the company on various ESG measures.
We have evaluated the relations binding ESG scores and the sus-
tainability performances of firms based on 5-year ESG data of 2,578
firms evaluated from 2014 to 2018. This forms the initial data for
analysis. We have manually sorted the data, and any missing values in
the data are carefully removed. After sorting, the final data for evalua-
tion contain the periodic data of 1,820 firms, and the average of the
5-year data values scaled on 1–7, has been taken as the input for anal-
ysis. We construct a measurement model and a structural model and
formulated five hypotheses for testing. We use PLS analysis and
standard bootstrapping to observe the results and to find evidence if
any supporting the hypothesis. Smart PLS 3.0 software was used for
analyzing and interpreting the data. As we use big data of about 1,820
firms for analysis, the effect of any control parameters on the study
becomes negligibly small.
6.1 | Major findings
The measurement model is subject to various measures for checking
the validity and reliability of the measuring instruments. We have
obtained a considerably good model fit with good factor loadings,
Cronbach's alpha, rho-A values, measures for composite reliability,
and average variance extracted. Also, the measures for discriminant
validity, VIF, path coefficients and R square measures show accept-
able levels for the measurement model. It is observed from the model
that the indicators of governance show comparatively lesser loadings
and lower measures of validity and reliability of constructs. Thomson
Reuters has calculated the performance in governance over three
major themes as CSR strategy scores, management scores, and share-
holders' scores. Considering these themes, the shareholders' score as
a construct has a low factor loading (0.435).
To improve the model fit, we have removed the construct and
the results of the PLS analysis were observed again. Remarkably, the
model fit has not improved, and for the model, the variance explained
RAJESH
for the model was found to be not satisfactory. These apparent differ-
ences in loadings occur as the shareholder's score is external to the
firm, whereas CSR strategy score and management scores are internal
to the firm. It is also noted that there is a consistent increasing trend
for the shareholder's score from 2014 toward 2018. As for the model,
we consider the average scores for periods converted on Scales 1 to
7. This accounts as the reason for the apparently low values of load-
ings, as reported for the measuring construct.
We also observe a significant and negative moderating effect of
environmental performances on governance and social scores, inde-
pendently on their relations to ESG performances. This means that
when the environmental performance increases, the moderating
effect to the relation decreases. Similarly, we observe a significant and
negative moderating effect of social performances over environmental
and governance scores, independently on their relation to ESG perfor-
mances. This implies that when the social performances of the firm
increases, the moderating effect over those corresponding relations
decreases. The same is observed to be true for the governance perfor-
mances too. As when the governance performance increases, the
moderating effect of social and environmental performances on the
relation to ESG scores decreases. This happens as the moderating
effect is observed to be significant and negative. Because all the
moderating effects are significant and negative, the final model rep-
resenting all the moderation effects is the same as in Figure 4.
6.2 | Effects of mediation
We have also observed if there are any the effects of mediation in
determining the overall ESG scores of firms. Contingency theory
focuses on identifying the special situational factors that can affect
the relation between the independent variable and the dependent
variable. Contingency theory relies on the idea that there is no univer-
sal best way to structure a firm and solve its' problems, but there are
always situational factors guiding them. Because the study relied on
secondary data on ESG of firms, the ratings on 10 major themes of
ESG indicators, the ESG combined scores, the ESG controversies
score, and the overall ESG scores were the measures available for
evaluation. The study can be extended to different firm types, and
hence, it shall be possible identify the effects of any contingency vari-
ables that can affect the relations between ESG scores and individual
ESG scores, separately. This needs primary data collection specific to
any firm type and can be considered as a possible direction to
future work.
Because the indicators of ESG performances are calculated based
on different firm level measures, the effect of mediation of any of
these indicators in explaining the individual relations between Envi-
ronmental, Social or Governance scores to ESG performances need
not be significant. Hence, we have observed for any full or partial
mediating effects of ESG scores on the relation to any of these and
ESG performances. We posit and test (a) whether there are any signif-
icant moderating (full/partial) effect of environmental score on social
or governance scores, connecting ESG performances? (b) Whether
13
there are any significant moderating (full/partial) effect of social score
on environmental or governance scores, connecting ESG perfor-
mances? (c) Whether there are any significant moderating (full/partial)
effect of governance score on social or environmental scores,
connecting ESG performances? The test results (p-values, [a] .12
[b] .21, and [c] .15, respectively) confirm that the moderating effects
are insignificant, and hence, we assume that the null hypothesis of no
mediating effects cannot be rejected for all the cases.
6.3 | Implications to theory and practice
The theoretical implications of this research are in the direction of
identifying the negative moderating effects of environmental perfor-
mances over the social and governance performances. Similarly, we
observe that there are negative moderating effects of social perfor-
mances over environmental and governance performances, as well as
negative moderating effects of governance performances over envi-
ronmental and social performances. These observations are beneficial
for firms and their managers that the focus on any of the indicators of
governance, social, and environmental performances can boost the
focus over the other two, during the initial stages of implementation.
The level of these moderating effects decreases, when the individual
performances of the firms progresses in the dimensions of ESG indica-
tors. Hence, managers can study in detail the moderating effects of
individual ESG performances of firms to observe how far these effects
can improve the overall sustainability performances of firms.
The focus of firms on ESG performances can be guided through
different pressures from stakeholders, customers, competitors, as well
as from governments. Hence, institutional theory can explain the
focus of the firm on various dimensions of sustainable performances.
Coercive pressures due to governmental actions can increase the
focus of organizations towards environmental and social sustainabil-
ity. This can occur in the form of several mandatory rules and regula-
tions. Many government initiatives such as environmental taxes, cap
and trade, or any other mandatory CSR policies can boost the focus of
companies on environmental and social issues. This can in turn
increase the overall sustainability capabilities of the supply chains. Say
for example in a developing countries context, the Government of
India has modified the Companies' Act of India, Section 135 in 2013
to make it mandate that 2% of the average net profit of companies
need to be shared for various CSR initiatives.
Mimetic pressures from the competitors' side can also enhance
the sustainability capabilities of the firm. Hence these pressures can
add a boost to the ESG performances of their supply chains. As
mimetic pressures can enhance the adaptive capabilities of firms, their
supply chains can operate with flexibility. This also helps them to
improve their focus on ESG performances, owing to the pressure from
the competitors. Normative pressures from customers and stake-
holders can also guide the firms to achieve sustainability perfor-
mances across various dimensions. Customers and stakeholders are
more demanding nowadays, and firms are pressurized to consider the
environmental and social side of sustainability with greater priorities.
14
Similarly, when there is an increasing demand for improving the
visibility to stakeholders and customers, the focus of the firm and its'
supply chain to achieving different dimensions of sustainability perfor-
mances increases. Hence, the institutional theory can explain the
focus of organizations on various dimensions of sustainability
performances.
7 | CONCLUSIONS AND FUTURE WORKS
This paper explores empirical evidence for the relationship binding
ESG scores and sustainability performances of firms. We observe
these relations through analyzing secondary data of ESG scores of
1,820 firms measured over 10 themes and over 400 indicators. Initial
data, the Thomson Reuters ESG scores, have been extracted from the
Bloomberg terminal data source. We have conducted PLS analysis
and standard bootstrapping to observe the direct and moderating
relations. The results have wide implications for managers in practice.
Some of the major implications are in the direction of assigning priori-
ties while considering ESG-related themes in the implementation of
any strategies or policies into practice.
We observe that the ESG performances of the firm contribute
more or less equally while formulating ESG performance score for
firms. This implies that the companies shall set their priorities on their
ESG issues equally towards better ESG performances. As pointed in
literature through several studies (Aras, Tezcan, & Kutlu Furtuna,
2018, Odell & Ali, 2016; Whelan & Fink, 2016) the ESG performance
can benefit the firm economically on a long run. Also, many studies
verify that the CSR initiatives can increase the financial status of firm
on the long run through choice of shareholders and investors in sus-
tainable investing (Petry et al., 2011; Siew, 2015; Zhao et al., 2018).
We also observe a significant and negative moderating effect of ESG
performances, independently over the other two measures, on their
relation to ESG performances.
These moderating effects, as observed, have a significant role in
shaping the relationships among the primary latent variables (ESG
performances) and secondary latent variables (ESG performance
scores and total sustainability scores). It is observed that these mod-
erating effects are significant and negative. The implications to this
findings is in the direction that the focus on any of the ESG perfor-
mance parameters, that is, Environmental, Social, or Governance, can
independently act as a catalyst to improving the relations between
the either of the other two and the overall ESG performances. And it
is also observed that the strength of this moderating effect
decreases, as the role of any of these performance measures of ESG
increases. This is an important finding as the focus of the firm on any
of these ESG performance parameters can help to improve the rela-
tions between either of the other two ESG performance parameters,
to achieving sustainability.
The weighting scheme for the 400+ indicators and the model
used to aggregate these indicator ratings are not revealed as per the
Thomson Reuters disclaimer policy. The role of 10 themes, which are
constructed based on these indicator ratings in determining the ESG
RAJESH
ratings are observed in this research. It is observed that the indicators
for ESG performances are assigned to have more or less equal priori-
ties while calculating the combined ESG score of firms. The data have
been taken for firms across the world, and the same can be separated
for developing and developed countries, and a comparative study can
be conducted. This is a scope for future work. The study, if conducted
in the developing country contexts, can attempt to identify the major
themes of ESG performances contributing to the overall sustainability
performances of firms. The research uses ESG ratings of firms for a
5-year span; managers can benefit from this, as the average measures
of evaluation are taken into consideration. As the data used are sec-
ondary data, managers can replicate the results of the study using the
data available from Thomson Reuters and can conduct a trend analysis
using the reports from 2014 to 2018.
The results of the study suggest that the firms can focus on
improving areas of poor and moderate performances in ESG and a bal-
anced improvement in all the three areas, including ESG performance,
can only improve their overall sustainability performances. The
research has certain limitations. The research relies on the secondary
data provided by Thomson Reuters on ESG performances of firms
based on their evaluation of 10 themes of sustainability. There are
other sustainability scores for firms available, such as the Dow Jones
sustainability indices. A comparative study of these relations among
various rating sources can be conducted and is a potential direction
for future work. Also, we use the average scores on ESG perfor-
mances of firms for a period of 5 years from 2014 to 2018. A periodi-
cal analysis of the data was not conducted in the present study. The
study can be extended in this direction to understanding the effect of
these relations for different periods. Managers benefit from this, as
they can conduct a trend analysis to capture the recent developments
in understanding and predicting the relations binding ESG scores and
sustainability performances of firms.
AC KNOWLEDG EME NT S
The authors sincerely thank the editor in chief, Prof Richard Welford
and the two unknown reviewers for their insightful comments to
improving the quality of the manuscript to a greater extent. The first
author thanks the Indian Institute of Technology Madras for the par-
tial financial support for this research.
OR CID
Chandrasekharan Rajendran https://orcid.org/0000-0001-6252-
6217
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Strat Env. 2019;1–21. https://doi.org/10.1002/bse.2429
18 RAJESH

APPENDIX A.

A.1. | Annexure 1: Literature on ESG and sustainability performances.

Abbreviation: ESG, Environmental, Social, and Government.

Author(s) Topic Work done Results Remarks

Ioannou and Sustainability reporting and
Serafeim (2017) firm valuation
Drempetic, Klein, ESG Scores and firm size
and Zwergel
(2019)
Lai, Melloni, and Corporate sustainability
Stacchezzini development and
(2016) integrated reporting (IR)
Park (2018) Internationalization and
corporate sustainability
Braam and Peeters Corporate sustainability
(2018) performance (CSP) and
sustainability reports
Hawn, Chatterji, and Sustainability index and
Mitchell (2018) investors' reactions
Jebe (2019) Sustainability and financial
information
Crifo, Durand, and Socially responsible
Gond (2019) investments and
sustainability transitions
Examined the effect of
sustainability disclosure
regulations on disclosure
practices and valuations
of firms.
Analyzed the influence of
firm size and availability
of ESG data on firm's
performances.
Investigated whether the
decision to adopt an
Integrated Report in
Sustainability Reporting
was guided by the repair
legitimacy threats.
Examined how the
internationalization of
emerging market
multinationals could
affects their corporate
sustainability.
Explored the relationship
between CSP choices
related to sustainability
reports.
Explored the investor
reactions to sustainability
using the Dow Jones
Sustainability Index.
Observed the disconnect
between financial and
ESG information in ESG
reporting
Studied on how the socially
responsible investment
practices have progressed
Pointed that the increase in
sustainability disclosures
are driven by regulations
and are associated with
increase in firm
valuations.
Observed a positive
correlation between firm
size and ESG scores,
which was explained by
organizational legitimacy.
Showed that the Integrated
Report adopters had
significantly higher ESG
disclosure ratings
compared to
nonadopters.
Internationalization
improved corporate
sustainability strengths.
Observed that companies
with a good CSP were
more likely to choose a
broader assurance scope
than companies with a
poor CSP.
Pointed that the investors'
valuation of sustainability
around the world has
evolved over time
considering increasing
benefits.
Pointed the need to merge
sustainability and financial
information by leveraging
the definition of
materiality for financial
reporting.
Observed the importance of
complementary factors of
corporations for transition
Suggested that the efforts
to increase transparency
around organizations'
impact on society could
effectively improve the
disclosure quantity.
ESG score measures of
corporate sustainability
provided advantages to
larger firms with more
resources but did not
provide responsible
investors with the
information needed to
make decisions.
Legitimacy pressures (size,
leverage, profitability, and
industry) did not play a
role in explaining IR
adoption.
Emerging market
multinationals relying on
foreign sales were
motivated to adopt
corporate sustainability as
a global business norm.
Companies with a superior
CSP could make diverse
choices related to
sustainability reports than
companies with an
inferior CSP.
They have observed the
importance of longitudinal
global samples to infer
the financial effects of
social performance.
Suggested that
Sustainability Accounting
Standards Board could
provide ways to
conceptualize materiality
in line with society's
interest.
Stressed on the
fundamental influence of
investors of corporations
(Continues)
RAJESH
Author(s) Topic Work done
from the margins of the
industry.
Risi (2018) Sustainability and socially Focused on mechanisms,
responsible investing (SRI) where time affects the
adoption of sustainability
practices in the context of
SRI practices.
Hussain, Rigoni, and Sustainability disclosure and Explored the linkages
Cavezzali (2018) financial performances between companies'
sustainability
performance (SP),
sustainability disclosure,
and financial performance
(FP).
Rekker, Humphrey, Sustainability ratings and Analyzed different rating
and O'Brien global climate targets schemes used by
(2019) investors for global
climate targets.
Lueg, Krastev, and Sustainability disclosure and Explored the bidirectional
Lueg (2019) risk relationship between
sustainability disclosure
and risk.
Ng and Rezaee SP and cost of equity Examined how different
(2015) dimensions of SP could
affect cost of equity.
Forcadell and Aracil Corporate social Observed the role of
(2019) responsibility (CSR) and institutional change to
sustainable development transform CSR into
sustainable development
in emerging countries.
Tamimi and Transparency and ESG Explored the transparency
Sebastianelli disclosures of S&P 500 companies' by
(2017) analyzing their Bloomberg
ESG disclosure scores.
Velte (2017) ESG scores and financial Explored the ESG
performances performances of firms and
evaluated their impact on
financial performance.
Bodhanwala and Corporate sustainability and Observed whether
Bodhanwala profitability corporate sustainability
(2018) could impact profitability
performance.
Halbritter and Corporate social and Investigated the link
Dorfleitner (2015) financial performances of between the corporate
firms social and financial
Results
toward sustainable
businesses.
Investigated the effects of
mechanisms associated
with different time
horizons on the adoption
of SRI in financial
intermediaries.
Pointed that the
interlinkages between
different SP dimensions
and subdimensions were
weak and somewhat
contradictory.
Observed a lack of
consistency in the climate
change ratings of the
databases used in
academic studies.
ESG scores were used to
assess the effect of
sustainability disclosure
on total, systematic, and
idiosyncratic risk.
Observed that the financial
SPs were negatively
associated with cost of
equity.
Proposed a CSR focused
view of institutional
determinants and
outcomes from a social
and developmental
perspective.
Observed the effects of
industry sector, firm size,
and governance practices
on transparency of firms.
Observed that the
governance performance
had the strongest impact
on financial performance
of firms.
Revealed a significant
positive relationship
between sustainability
and firm performance
measures.
Observed that ESG
portfolios did not show
significant return
difference between
19
Remarks
to manage sustainability
transitions.
Showed that the dimension
of time can shape
interactions between
institutional logics
underlying SRI in business
organizations
Provided implications
toward the development
of SP reporting
framework.
Evidenced that no rating
schemes achieved target
of mapping climate
indicators.
Pointed that how
sustainable practices and
disclosures can improve
the market's assessment
of a company's systematic
risk.
Evidenced that
nonfinancials could
moderate the relation
between financial
sustainability and cost of
equity.
Pointed on how firms could
contribute to their
sustainable development
through their sustainable
development goals.
Indicated that the highest
level of transparency was
found on Governance and
the lowest on
Environmental.
Included both
accounting-based and
market-based financial
performance measures for
study.
Pointed that the firms
practicing remarkable
sustainable development
strategies were reported
to have higher
profitability
Pointed that the investors
should not expect atypical
returns by trading a
difference portfolio of
(Continues)
20 RAJESH

Author(s) Topic Work done Results Remarks

performance based on companies with high and firms with regard to ESG
ESG ratings. low ESG ratings. aspects.
Dorfleitner, Corporate social Compared different rating Observed an evident lack in Showed that different ESG
Halbritter, and performance and ESG approaches of corporate the convergence of ESG ratings neither coincided
Nguyen (2015) ratings social performance using measurement concepts. in distribution nor in risk.
ESG scores of three
important sustainability
rating providers.
Lawal, May, and Corporate social disclosure Examined whether there Studied the potential effects Provided guidance to
Stahl (2017) and financial were real benefits of of corporate social stakeholders on how
performances corporate social disclosure on financial actions in CSR realm
disclosure to the bottom performance, with focus could affect companies'
line of organizations. on employee and performances.
community aspects.
Crifo, Corporate governance and Observed the relations Pointed that corporate Evidenced that corporate
Escrig-Olmedo, corporate sustainability between corporate governance had an impact sustainability was
and Mottis (2018) governance and corporate on corporate positively related to
sustainability by sustainability due to internal forces and
observing their opposing forces: internal, negatively related to
governance structures. external and intermediate external forces.
forces.
RAJESH 21

A.2. | Annexure 2: ESG performance indicator themes (Source: Thomson Reuters)

Abbreviation: CSR, corporate social responsibility; ESG, Environmental, Social, and Government; TR, Thomson Reuters.

Sl. No. Score Definition

1. TR ESG Resource Use Score The Resource Use Score indicates firm's
performance and capacity to reduce the
use of materials, energy or water, and to
catch more eco-efficient solutions by
improving supply chain management.
2. TR ESG Emissions Score The Emission Reduction Score estimates a
company's commitment and
effectiveness in reducing environmental
emissions particularly at the production
and operational processes.
3. TR ESG Innovation Score The Innovation Score reflects a company's
capacity to reduce the environmental
costs and burdens for its customers, thus
creating new market opportunities
through innovative environmental
technologies and processes or
eco-designed products.
4. TR ESG Workforce Score The Workforce Score indicates a company's
effectiveness toward job satisfaction, a
healthy and safe workplace by
maintaining diversity and equal
opportunities, and also considers
development opportunities for their
workforce.
5. TR ESG Human Rights Score The Human Rights Score evaluates a firms'
effectiveness to respecting the
fundamental human rights conventions.
6. TR ESG Community Score The Community Score indicates the
company's commitment in direction of
being a good citizen by protecting public
health and respecting business ethics.
7. TR ESG Product Responsibility Score The Product Responsibility Score measures
a company's capacity to produce quality
goods and services by assimilating
practices such as customer's health and
safety, integrity and data privacy.
8. TR ESG Management Score The Management Score indicates a firm's
commitment and effectiveness in the
direction to following best practice
corporate governance principles.
9. TR ESG Shareholders Score The Shareholders Score reflects a
company's efficacy to equal treatment of
shareholders and considering the use of
antitakeover devices.
10. TR ESG CSR Strategy Score The CSR Strategy Score indicates a firm's
practices to communicate, incorporate,
and integrate into its day-to-day
decision-making processes, the economic
(financial), social and environmental
dimensions of sustainability.

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