SSRN Id3681226

Assessing Firms’ Environmental, Social and
Governance Performance (ESGP) and its effect

on Financial Performance: Evidence from
Pakistan
Eibad Jamil1
Research Scholar
Karachi University Business School, University of Karachi, Pakistan
threads.eibad@gmail.com
Dr. Danish Ahmed Siddiqui

Associate Professor
Karachi University Business School, University of Karachi, Pakistan
daanish79@hotmail.com
ABSTRACT
In the recent past, the knowledge of Corporate Social Responsibility (CSR) among
practitioners, scholars, and researchers has grown tremendously. Scholars have been trying to
find out whether the tradeoff among Corporate Social Performance and Corporate Financial
Performance is unavoidable or the association remain positive as well as rewarding for the
businesses. This study aims to empirically investigate whether Financial Performance (FINP)
of firms is associated with their Environmental, Social and Governance Performance (ESGP)
scores in Pakistan. The study has used the overall ESG and its three constituents
(Environmental, Social and Governance) disclosure scores for the ESGP measure and to
measure financial performance three accounting ratios were considered, one reflects the market
position of firm (i.e. Tobin‘s Q) and the other two measure the business profitability in relation
to the firm‘s total assets (i.e. Return on Assets) commonly known as ROA and equity (i.e.
Return on Equity) commonly known as ROE. Regression analysis is used to analyze the effects
of ESG Performance on firms’ Financial Performance, using cross-sectional data, the sample
includes listed companies on the PSX100 index for the year 2018 with a sample size of the 95
companies. The data was hand collected by the annual reports and publications of the firms.
Results indicated that ESG have a significant positive effect on ROA, but not on Tobin Q which
remained insignificant for ESG and its dimensions. Among its components, GS and SS also
seems to have a significant and positive effect. Among, the control variables, Debt have a
negative impact, whereas size seems to have a positive effect on ROA. Most of the variables
remained insignificant with regards to Tobin Q Hence, the findings indicate a partial significant
association between ESGP and Financial Performance.
Keywords: Corporate Social Responsibility, Corporate Social Performance, Financial

performance, Environmental and Social Performance, Environmental Score, Social Score,
Governance Score.
1 Corresponding Author
1
Electronic copy available at: https://ssrn.com/abstract=3681226

1. INTRODUCTION
1.1 Research Background
In current Business practices, Corporate Social Responsibility has been among the standards
of the industry. Companies that are committed to these practices are being praised and have
enhanced their overall reputation. Strategic access to CSR is immensely essential to a
company‘s competitiveness. It can lead to many benefits in terms of customer relationship, risk
management, innovation capacity, access to capital, human resource management, etc.
Corporate Social Responsibility is a term that is commonly used in almost every business
setting throughout the world. The term CSR originated from the term Social Responsibility
back in the 1950‘s. One of the references of CSR is seen by Howard Bowmen, an American
economist, Grinnell College President, who is also known as father of CSR, in his book in
1953, he encouraged business ethics and acceptance to societal stakeholders called Social
Responsibilities of the Businessmen. By the Social Responsibility of Businessmen, Bowmen
implied ―Businessmen's responsibilities to implement those strategies, to make those
judgments or to pursue those different actions which are particularly desirable in terms of our
society's goals and values, (DOUG, & CAULKINS, 2013). Bowmen, essentially, linked the
corporations’ responsibility to society. Most studies discovered that the 1970s and 1980s saw
consideration being directed on articulating, with more lucidity, accurately what were the
responsibilities of companies. Most of the companies in the 1990s developed modern strategies
where they began to convey their contributions to the welfare of society.
Many giant companies took initiatives and came forward to make contributions to Corporate
Social Responsibility. Johnson & Johnson was one of the early adopters of CSR where
founder, Robert Wood Johnson, established their credo in 1943. Milton Hershey, the founder
of Hershey Company, built a community and a town with adroitness, civic centers and cultural
institutions for people that extend to prosper today. In the first half of the 20th century, many
initiatives were taken and founders realized that their stakeholders went beyond the board room
and the only way to get successful and prosperous business is to create a healthy and vibrant
environment for their customers and communities.
Companies try to expand their business to earn and maximize profits but corporations are also
responsible for the impact they are creating on people and planet. Here word people includes
the company‘s shareholders, employees, suppliers, distributors, customers, partners,
community and government (Ahmed, et al., 2011) they are all associated through the design of
social circle. Businesses are responsible to create wealth and wellbeing of society. In order to

be more profitable and competitive in the market, a company has to be socially responsible.
Companies nowadays are more concerned about their positive image in the market they operate
in, therefore they pay high attention to create CSR policies. Corporate social responsibility
(CSR) is a self-regulating business model that helps a company be socially accountable to
itself, its stakeholders, and the public. CSR desires commitment with internal and external
participants so, it facilitates enterprises to take advantage of operating conditions and fast-
changing expectations in society. This means that it can also help corporations to avail real
opportunities for growth and development of new markets.
As basis for sustainable business models, corporations can develop and maintain long term
trust among their employees, customers, and citizens. This, in turn, boosts an environment
where a company can bring innovations and growth. CSR creates a positive word of mouth for
the companies. Doing something good for the community, stakeholders, partners, and
customers would not only ensure long-term growth and achievements but also take the business
to a bigger level. It plays a vital role in composing brand famous not only among competitors
but also media, other corporations and people who are direct customers for organizations.
Companies which take initiative of bringing electricity to a village, provide a basic necessity
to poor people, educate poor children, plant trees for a greener environment, and provide
employment opportunities to people and so on develop positive feeling in customers about a
brand. Positive word of mouth ultimately helps to generate more revenues for the company.
CSR also gives employees a feeling of unparalleled happiness and bolster the bond among
employees. It creates an environment where employees work as a single unit and help each
other to accomplish the company goals. It creates a sense of loyalty among employees and they
voluntarily take part in Corporate Social Responsibility activities. Many large businesses are
starting to grasp ESG in favor of CSR. CSR represents a company‘s endeavor to get a positive
impact on its wider community, the environment, consumer and employees. It‘s an
arrangement of self-regulation that is annually reported by large companies. On the other hand,
ESG measures the activities and the company‘s actions. ESG performance becomes another
main concern of companies. Shareholders pay more attention to those firms who actively
contribute to social activities. ESG stands for Environmental, Social and Governance and
specified three key factors in calculating the sustainability and moralistic impact of an
investment in a business.

1.2 Problem Statement
Globally ESG-classified investment has evolved more since 2016. Investors are now becoming
aware of the regulations’ financial impact on businesses and such steps are being taken by
governments around the world. But still, the biggest obstacle is the lack of standardized ESG
guidelines. It is a relatively new phenomenon and to describe its various components there is
no uniform methodology. ESG's understanding and review differs across various financial
groups and territories. Stakeholders need to have exposure to relevant data, which is equivalent
across various corporations and international borders. Not only companies but shareholders
and regulators are affected by the notion that ESGP and Financial Performance are close
together and that former should lead to improvement in the latter. This study aims to test this
theory and examine the associations between Firms’ Environmental, Social and Governance
Performance and Financial Performance to construct a diverse understanding of the
relationship of ESGP and FINP, taking a sample from firms listed on the KSE100 index
considering both Financial and Non-Financial Companies. Furthermore the research aims to
find out the extent of impact (if any) on financial performance because of superior ESG
performance.
The concept of CSR in many developing countries including Pakistan is new and is being
typically assumed synonymous with welfare or public relations. The very spirit of CSR
requires a greater function of big corporations in addressing the problems faced by the societies
they are part of non-financial performance measures, such as Environmental, Social, and
Governance (ESG) measures, are potentially leading indicators of firms’ financial
performance.
CSR activities in the Pakistani market differ depending on the size of the company, business
structure, interest, and beliefs of managers and owners. Large national companies in Pakistan
are more involved in CSR than small and medium-sized enterprises; for example, fertilizers,
cement, refineries, oil and gas, and other industrial companies have well established and
standardized CSR schemes. Furthermore, the frequency of CSR disclosure in annual reports
has been on the upward trend in Pakistan in recent years. However pursuing the SECP
guidelines and the Global Reporting Initiative (GRI), these organizations issue sustainability
reports so one can expect an adequate CSR announcement. In Pakistan, these companies make
significant contributions to social welfare programs such as education and health advancement,
economic development, infrastructure development for local communities, professional and

technical training, orphanages, the advancement of human capital and humanitarian assistance
in natural disasters. (Carron 2006).
1.3 Gap Analysis

Many observed studies have investigated the association among ESGP and FINP (Griffin &
Mahon, 1997; Margolis & Walsh, 2003; Ambec & Lanoie, 2008; Allouche & Laroche, 2005).
Most of the studies expressing a positive link, several show repudiate conclusions i.e.
describing contradictory or non-significant outcomes (Orlitzky et al, 2003; Margolis and Walsh
2003). Such amalgamated findings may be described through distinct variables associated to
ESGP & FINP (Wu, 2006).
Since no agreement has been reached on a unified empirical framework for ESG criteria which
is widely accepted by academicians this area of research still requires more work to be done.
Moreover, many studies typically target the environmental and social aspects of sustainability
while disregarding the corporate governance feature (Galbreath, 2013). Researchers such as
Barnett (2007) and (Soana’ 2011) claimed that results are harder to generalize across industries.
Since we include firms from all sectors and both manufacturing and servicing sectors we hope
to elaborate on the contribution of each component of ESG on FINP of different industries,
sectors and then a more generalized outcome.
Moreover, in this broader scope, to the best of our knowledge, very little literature is available
on an emerging market with the dynamics like that of Pakistan. The aim of this study is to
examine the association and behavior among ESGP & FINP of listed companies in Pakistan.
The analysis will promote the understanding of ESG's relationship with financial performance
in Pakistan's perspective and will be valuable for future researchers and investors.
Lastly, since the 1970s many studies have indicated a positive ESGP and FINP relationship
(Friede et al., 2015). But there is no agreement that the manufacturing sector entails better
ESGP than the non-manufacturing sector. Therefore, this study includes businesses from both
sectors to provide a comprehensive understanding on the sectoral impacts of ESGP.
1.4 Objectives
CSR is much more than just human rights, pollution, community services, and such activities.
Basically, manufacturing, use of raw materials, technology, and relationships with
communities and boards, among others, are all part of the ESG criteria. CSR activities vary
from corporate accounting practices. Shareholders' intuition is dependent on annual reports

released by companies and if corporations publish information about their social and
environmental practices, this might captivate shareholder‘s attention. For the last 20 years, the
demand to release all non-financial information has been raised. Companies are thus required
to list their CSR activities in their documents. Therefore this study examined economic, social
and governance scores to illustrate the ESG performances of businesses by taking into account
various factors and their effect on financial performance
This study aims to empirically investigate whether Financial Performance (FINP) of firms is
associated with their Environmental, Social and Governance Performance (ESGP) scores in
Pakistan. The study has used the overall ESG and its three constituents (Environmental, Social
and Governance) disclosure scores for the ESGP measure and to measure financial
performance three accounting ratios were considered, one reflects the market position of firm
(i.e. Tobin‘s Q) and the other two measure the business profitability in relation to the firm‘s
total assets (i.e. Return on Assets) commonly known as ROA and equity (i.e. Return on Equity)
commonly known as ROE. Regression analysis is used to analyze the effects of ESG
Performance on firms’ Financial Performance, using cross-sectional data, the sample includes
listed companies on the PSX100 index for the year 2018 with a sample size of the 95 companies
1.5 Research Question

2. Which aspects of ESGP have a significant impact on FINP
3. To what extent these factors influence FINP
4. What is the relationship between ESG score and financial performance?
5. What part of the ESG score shows the strongest relation to financial performance?
1.6 Significance
The concept of CSR as quantified by ESGP has been investigated in a variety of studies in
developed as well as emerging economies. Conclusions show mixed results (Schmidt, et al.)
Particularly across regions (Jamali and Kamran 2016, Rodrigo et al., 2016). Such fragmented
results create a research gap, implying the need for further research for a satisfactory
understanding of this relationship.
Furthermore, Pakistan too represents a developing economy, but is different from other such
developing nations; unstable economic and political situation, poor education and health
development, energy crisis, widespread corruption, insufficient infrastructure, etc. are typical
characteristics of the situation in Pakistan. On a wider scale, businesses operate in an

environment represented by low quality manufacturing, human rights violations, inadequate
living conditions, and a low standard of living. A further threat is the growing water and
environmental pollution due to mishandling of waste, therefore a need arises to look into CSR
from a Pakistani perspective to inquire sufficient requirements and awareness of ESGP for both
society and governing bodies.
Secondly, there has been an enormous growth in the awareness of CSR in the general public.
Businesses are expected to address the impact they might have on the environment and society
they operate in (Echave & Bhatti, 2010). CSR has also received quite a bit of attention from
researchers (Soliman, Din & Skr, 2012). This is because stakeholders are now concerned about
how businesses handle ESG concerns (Ponnu & Okoth, 2009). Therefore there is considerable
interest in the disclosure of CSR activities. This study is relevant as it aims to investigate
whether such efforts help businesses in achieving their financial aims.
This research contributes greatly to the empirical studies on the effect of ESGP on FINP. This
research is important for developing countries, as the context of CSR and ESG encompasses
more than economic, social and human rights concerns and CSR also plays a crucial role in
eliminating poverty (Marina, Peter 2006).
1.7 Scope
The study wraps a sample of corporations listed on the KSE100 index for the year of 2018.
Correlation and regression methods were executed to classify the potential interaction between
ESGP and market and accounting-based measures of FINP Tobin‘s Q, Return on Assets [ROA]
and Return on Equity [ROE].
2. LITERATURE REVIEW
2.1 Causal Link of ESG and Financial Performance
Numerous research have shown a significant association between ESG performance and
financial performance. Ahmad, Javeed and Lin Lefen, Jan 2019 determined the drivers that
influence the relationship between CSR and firm performance with respect to CEO power and
Ownership structure. They analyzed the data of firms from eight manufacturing sectors of
Pakistan and that data were collected from PSX, SBP and SECP and the annual reports over
the period 2008-2017. By using the Generalized Method of Moment (GMM) and Fixed Effects
model, they demonstrated a positive association between CSR and firm performance and the

same results have been detected for CEO ownership and ownership structure. According to
the analysis, the ESGP and its components have an impact on financial performance. Velte,
2017 selected a sample of German Prime Standard listed companies over the period of 2012-
2014.He established links between ESGP and FINP by using correlation, regression analysis,
accounting (ROA) and market-based measures (Tobin's Q). The study concludes the positive
impact of ESGP on ROA. Another researcher discusses the same method of measuring the
financial performance of companies (Ibrahim, Rehman & Raoof 2010) the study investigated
the collision of corporate governance on firm performance. The firm performance variables
were calculated by Return on Assets (ROA) & Return on Equity (ROE). Two manufacturing
sectors of Pakistan Chemical and Pharmaceutical were selected to collect the data for
corporate governance over the period of 2005-2009. Multiple regression model was employed
to test the significance and results have shown the significant impact of corporate governance
on chemical sector ROE and insignificant impact on the profitability of the Pharmaceutical
sector and ROA of chemical sector and no significant impact on Tobin‘s Q.
An ESG permeate can adequately construct a universe of stocks with enhanced diversification
and risk-return characteristics. (Verheyden, G. Eccles, Feiner, & Partners 2016) the study
suggests an exploratory ESG screening can be compatible with other investment strategies.
ESG improves the risk-return tradeoff of shares and also the quality of an investment universe
without adversely clashing diversification ability. The fund manager uses ESG in the decision
making process and creates risk-adjusted outrun. (Bajic & Yurtoglu, 2014), the authors
implement authentic evidence on which definite conditions of CSR lift up the market value of
firms. For this study, they selected a sample from 35 countries over 2003-2016 and employed
methods of observational data with panel data and also covered the OLS, Company-fixed
effects, & company-random effects. Authors built the CSR score based on CSR's ESG aspects.
Results have concluded that, social index frequently anticipate greater market price. (Dimson,
Karakas, Xi Li 2015) analyzed comprehensive database of CSR commitment with U.S public
corporations over 1999-2009. Engagements locate ESG concerns suggested that successful
commitments are persuaded by positive aberrant outputs. Firms with lesser governance and
socially attentive institutional investors seem to be engaged. Firms experience better
governance and accounting performance and raised institutional ownership if they
successfully engaged CSR principles and solve environmental/social problems. The author
reviews Indian public companies’ ESG and Financial performances between 2015 and 2017
to establish a link between ESGP & FINP. Regressing using random-effects the study
concludes that Good CSR (ESG) enhances financial performance. Authors (Barnett, 2006
8

&Salomon, 2006), have constructed a curvilinear relationship between financial and social
performance. They find that financial performance diverges with the types of social screens
used. Labor and environmental screening reduce the financial performance but community
relations screening boost up the company's financial performance.
In general, they are referred to as environmental, social, and governance (ESG) issues. There
is, however, a lingering misperception that the body of empirical evidence shows that ESG
considerations adversely affect financial performance. For investment professionals, a key
idea in the discussion of ESG issues is that systematically considering ESG issues will likely
lead to more complete investment analyses and better-informed investment decisions.
2.2 Determinants of CSR–CFP

Researchers have determined the association between CSR and CFP adopting panel data for
228 Chinese mineral listed firms over the period of 2010-2013 by combined least square
regression analysis. (Pan, 2014, Sha, 2014, Zhang, 2014 and WenlanKe, 2014). They
highlighted five sublevel issues of CSR to apprehend the effects of CSR components on CFP.
Those issues were shareholder responsibility, environmental responsibility, employee
responsibility, and public responsibility, and customer, supplier and consumer responsibility.
The results estimated the significant impact of these issues on CFP. Meanwhile, shareholder
responsibility has the most significant positive effect on CFP, Public responsibility has no
significant synergy with CF, and environmental, customer, supplier and consumer
responsibility have a negative effect on CFP as it increases costs.
Whereas (Ortas, 2015, Álvarez b, 2015, Jaussaud c 2015 & Garayar, 2015), determined the
contributions in voluntary CSR of companies by using Neo institutional framework. They
applied the HJ-BIPLOT technique on data collected from Spain, France, and Japanese firms to
uncover their ESGP. The results showed a similar level of social and corporate governance
performance by Spanish and French companies higher than Japanese firms whereas Japanese
firms have seen more devoted to environmental issues more than Spanish and French
companies.
According to (Chapple, 2005 & Moon,2005), investigation corporate social responsibility
(CSR) reporting in seven Asian countries and concludes that multinational companies are more
likely to adopt CSR than those operating solely in their home country but that the profile of
their CSR tends to reflect the profile of the country of operation rather than the country of
origin.

CSR is valued by strategic acquirers in mergers and acquisitions (M&A) and has a positive
impact on bid premiums (Gomez, Marsat 2017). CSR can reduce information asymmetry and
can be used as a lever in M&A deals. (Orlitzky, Schmidt, Rynes) have conducted a meta-
analysis of previous studies to present the generalizable outcomes of CSP & CFP. The Meta
analysis found a significant role of social responsibility and environmental responsibility (but
to a limited extent) on CFP. The correlations suggest a stronger association between CSP
reputation indices and CFP than other constitutes of CSP.
A similar study was carried out using the same approach by (Allouche & Laroche 2005) they
have also conducted a meta-analysis of the disclosed results of CSP on CFP in a vast
international framework. They recorded that CSP is strongly connected to CFP on average.
Findings suggest that the represented methods and measurement of the research generally
moderate the strength of the relationship between CSP and CFP. Similarly (Friede, Busch &
Bassen 2015), considered the Meta-analysis method to identify the association. The search for
a link between ESGP and FINP traced back to the 1970s. Since then considerable research has
been done and published in this area. The study reveals comprehensive descriptions about the
relationship between environmental, social and governance (ESG) criteria and corporate
financial performance (CFP). The authors extracted all the possible primary and secondary data
and merged the findings of about 2200 respective studies. The large majority of reviews
addressed positive results and found nonnegative ESG-CFP relations. They have featured the
positive impact exhibited by ESG on CFP arrives durable over time.
Another study conducted a meta-analytical synthesis of published studies on the CSP-CFP
relationship using meta-regression from 82 studies. (Allouche, and Laroche, 2005), the study
identifies methodology/study design, sampling and measurement of CSP & CFP as potential
moderators. Analysis reveals a positive impact of CSP & CFP and supports the results obtained
by Orlitky, Schmidt, and Rynes (2003). The study further reports on the existence of
publication bias in published research (but to a limited extent with moderate effects). A
considerable impact of the research setting was also found. (Allouche, 2005) also mentions the
shortage of models encompassing the majority of CSP dimensions concluding that all CSP
dimensions do not impact CFP and of which that do, may have varied effects. Correspondingly
(Orlitzky, L. Schmidt, Sara L. Rynes), intended to generalize on the CSP-CFP relationship for
which, according to the authors, the evidence remains too fragmented. Conducting a Meta-
Analysis of about 52 studies and the study concludes that firm social performance is likely to
payoff. The authors, although, disclose that CSP is highly correlated with accounting-based
proxies of CFP rather than market based proxies and that CSP reputation indices are more
10

highly correlated with CFP than other CSP indices. (BARNETT, &SALOMON, 2012).
Studying contrasting literature on the CSP-CFP relationship the study finds a U-shaped
relationship i-e. Lower CSP offers high CFP compared to moderate CSP but also high CSP
results in the highest CFP supporting the argument that stakeholder influence capacity is the
underlying factor that converts social responsibility into realized profits (Barnett, 2007).
Hypothesizing Superior CSR leads to better access to finance, as a result of enhanced
stakeholder engagement and reduced information asymmetry (CHENG, et al., 2011). They find
firms with better CSR have considerably lower capital constraints.
(Griffin, 1997 and Mahon, 1997) selected the chemical industry for their analysis. Second, they
have collected data from multiple sources; the TRI database, KLD index. The findings
indicated that KLD indices and fortune intimately track each other, whereas corporate
philanthropy and TRI didn‘t correlate to the CFP and both comprehend the high and low social
performance. The same technique has been used for examining the results (Shien Lin,
2015&Chang and Dang, 2015). Authors have introduced an integrated model to analyze the
CSR influence on a company‘s financial performance with respect to intellectual capital
(mediator) and industry type (moderator). The study included the 500 largest companies listed
in the America Stick market. KLD and COMPUSTAT databases were used to collect data from
the period of 1998-2008. Observational results demonstrated that intellectual capital mediates
the association among CSR and Financial performance and industry type moderates the direct
influence of CSR on CFP.
(Arevalo & Arvind, 2011) investigated the barriers and drivers of enforcing CSR practices in
the context of India. The study finds that important drivers to invest in CSR in India are profit
and moral motive and they mostly favor the stakeholder approach. The study also indicates
that due to lack of resources and complexity, firms are finding it difficult to implement CSR
and these are grown into obstacles to CSR implementation. (Shien Lin, Chang and Dang 2015),
introduced an integrated model to analyze the CSR influence on a company‘s financial
performance with respect to intellectual capital (mediator) and industry type (moderator).
(HOMBURG, et., 2013) included 500 largest companies listed in the America Stick market.
KLD and COMPUSTAT databases were used to collect data from the period of 1998-2008.
Examining a sample of 200 cross-industry supplier customer dyads the study finds CSR to
foster customer’s trust and loyalty and improve customer-company identification.
(Weisheng Lua 2014), conducted research on the nexus among CSR/CSP and CFP by
considering a data of a decade from 2002 to 2011. They have used statistical analysis, mixed
methods of content analysis and reviewed 84 papers and empirical studies published during the
11

decade. They have found the inconclusive patterns and linkages among CSR and CFP. The
paper also determined the impact of time and space on CSP and CFP nexus in the different
time periods. Researchers concluded that the nexus is not static between two variables it
changes over time. (DOWELL, HART & YEUNG, 2014), The study finds the adoption of
stringent global environmental standard causing a much higher market-based measure of
Financial Performance (Tobin‘s Q-Ratio) than adopting a less stringent local standard. The
study, hence, proposes that countries downplaying their standards to attract FDI may end up
inviting lower quality, less competitive firms. (JEDRZEJ, GEORGE &FRYNAS, 2005), the
study proposes the inability of private firms to achieve broader development via CSR.
Rendering this notion as flawed, the author identifies some constraints on CSR that cause this
problem: failure to involve beneficiaries of CSR, lack of human resources and the failure to
integrate CSR into larger development plans. The author argues that the current CSR agenda
fails to address the macro-level issues caused by MNEs in their host countries, rather, debate
on CSR has shifted the focus from the real solutions of such issues.
The study hypothesizes that there is a societal norm against funding operations of sinful
companies (weapons, gaming, tobacco, alcohol, etc. that investors bear a financial cost by not
investing in such companies (HONG, KACPERCZYK, 2009).The study finds that sins stocks
are held for the lesser duration by norm-constrained institutions such as pension funds, but not
by other neutral institutions like mutual and hedge funds. Authors state that sin stocks have
higher expected returns that non-sin comparable stocks but they also face a higher litigation
risk and lower analyst coverage. The study also finds the effect of societal norms on stock
prices consistent outside the US. (JULIAN, JOSEPH &DANKWA, 2013), the study argues
that institutional differences between developed and developing countries result in varied
implications of CSR. Consistent with their hypothesis, the authors find a negative association
between CSR and Return on Sales, Return on Equity and Net Profits in Ghana.(B. TURBAN
& W. GREENING), Authors find that independent CSP ratings are positively correlated to
firm‘s reputation and attractiveness to potential employees giving the firm a competitive
advantage in securing a superior workforce and consequently a competitive advantage in the
market.(Orlitzky, L. Schmidt, Sara L. Rynes) The study intends to generalize on the CSP-CFP
relationship for which, according to the authors, the evidence remains too fragmented.
Conducting a Meta-Analysis of 52 studies, the study concludes that CSP is likely to payoff.
The authors, although, disclose that CSP is highly correlated with accounting-based measures
of CFP rather than market-based measures and that CSP reputation indices are more highly
correlated with CFP than other CSP indices (CFA INSTITUTE 2015) Issues that are difficult
12

to measure in monetary terms and that do not form part of traditional financial metrics also
affect the risk and return of investments—at times, decisively.
Data were collected from BM & FB Bovespa (Brazil) and from 314 non-financial firms listed
on the São Paulo Stock Exchange. The findings proposed that larger corporations tend to
present more financial and CSR information and they are adopting the best corporate
governance practices. (Danga, Zhichuan, Li & Yang 2017) this study highlights the importance
of one of the fundamental characteristics of firms that is Firm size. Researchers have presented
empirical demonstration for a measurement effect in the size effect. They have employed ratios
i.e. total sales, total assets and market capitalization on 20 prominent areas of firm size in
demonstration of corporate finance (CF) studies. Their finding shows in many areas of CF the
coefficient of firm size are statistically significance and measures prosperous in sign.
Correspondingly (Lee, Faff & Langfield-Smith, 2009) reexamine the relationship by using
more stringent methodology while taking leverage of dominant measures of CSP. On the
contrary to the previous studies, the market-based tests conveyed a negative relationship
between CFP and CSP whilst the accounting tests proposed no association among two
variables. The study suggests larger CSP firms’ trade at a price premium corresponding to the
lagging CSP corporations indicates that financial markets value CSP and are prepared to
recognized lower returns. Likewise (P. BARON, A. HARJOTO, HOJE JO 2009) the authors
estimate a three-equation model relating CSP, CFP and Social Pressure. No relation is found
between CFP and CSP, whereas a negative relationship between CFP and Social Pressure, and
a positive association between CSP and Social Pressure were reported during two political
regimes in the US (the Bush and Clinton administrations). The study also finds good CSP
results in better CFP in consumer industries, the opposite of which was found true for industrial
industries.
(M. MADSEN & J. RODGERS 2014), have analyzed attempts to expand the stakeholder
theory in the context of stakeholder attention to firms‘ CSR. Testing a sample of public
companies that engage in disaster relief the study finds that stakeholder attention legitimacy,
urgency, and enactment of CSR initiatives. Authors also find that stakeholder attention also
partially mediates CSR initiatives i-e stakeholder rewards to CSR accrue to the extent that
stakeholders pay attention to the firm‘s CSR initiatives. (ARAS, et al. 2010), CSR, in recent
times, is becoming adamant in the stakeholder‘s minds. Expectations exist that businesses
should remain aware of at all times. Similarly, good financial performance is also paramount
to the long-term survival of any firm. Linking both these concepts the study finds an association
between CSR and firm size and but insignificant association in CSR and financial performance
13

.In the same way, (Grisales, 2018), investigated whether a firm‘s financial performance is
associated with its superior ESG performance using a sample of multinationals in Latin
America (a total of 104 companies from 5 countries). Results from linear regression revealed
a significant negative relationship between financial performance and ESG Score (Both
combined and individual). The analysis also reveals the moderating effects of international
diversification as well as financial slack (financial slack is unused capacity for debt and is
equivalent to the unutilized cash that a company has on hand).
Identically (Chetty, Naidoo, Seetha ram, 2015), Pondering over the question: if firms are not
bound by law to engage in CSR activities, to what gain do firms commit resources to such
activities? The author investigates the impact of CSR on Financial Performance. Using
regression analysis, over a period of 9 years from 2004 to 2012, the study finds mixed results
from various industries, implying no significant impact of CSR on Financial Performance in
the long term. (Scholtens & Bert, 2008), conducted research to analyze the interaction in social
&FINP. Researchers took 289 US firms from the years 1991-2004 for the sample. They
employed two test methods, Ordinary least Square and Granger Causation; preliminary
evidence showed that connection widely ran from financial to social performance. (Waddock&
Graves, 1998) Authors have reported the empirical connections between social and financial
performance through rigorous studies results. CSP has a significant relationship with the future
financial performance of companies. CSP is similarly initiate to be definitely related to
preceding the FINP. (Lee 2018) proposes that companies with superior CSR are not better (or
worse) from companies with relatively weaker CSR owing to the trade-off between benefit and
cost at the firm level. After testing this proposition using confidence intervals the studies find
neutrality between CSR and CFP implying no penalization over-involvement in CSR activities
at the firm level.
Furthermore (McWilliams, 2000& Siege, 2000), authors have reported the inconsistent
influence of CSR on financial performance. In this paper, they manifested a flaw in existing
econometric studies of the relationship in social &FINP.A significant variable's negligence i.e.
R&D impact on financial performance leads to biased results. To prove this they applied two
models first one was the same requirement as Waddock and Graves and they included R&D
intensity into the second model. Their findings confirmed that CSP and R&D are highly
correlated and after including R&D intensity into the model CSP is shown to have a neutral
effect on financial performance. Gracia, Silva, & Orsato, 2018), considering associations
between financial performance and superior ESG performance of companies in BRICS (Brazil,
Russia, India, China, and South Africa) find a market cap. As the primary predictor of ESG
14

performance. They also report a higher ESG performance from companies in sensitive business
(such as tobacco, chemicals, weapons, etc.) than companies that are part of non-sensitive
businesses. Likewise this study (CAI, HOJE JO & PAN, 2012), investigates the association
between Firm Value and CSR Engagement, using a US-based sample from 1995 to 2007, finds
positive linkages between CSR Engagement and value of firms in sensitive industries (tobacco,
chemicals, weapons, oil, cement etc.) after controlling for various firm-level characteristics,
implying that CSR is considered important even though the product of said industries can be
harmful to humans, society (in general) and/or environment.(Dalal, 2019),With the rise of
concerns for environmental stability and socio-economic development, the concerns over
sustainable investment have also risen. (ARAS, et al. 2010), CSR, in recent times, is becoming
adamant in the stakeholder‘s minds. Expectations exist that businesses should remain aware of
at all times. Similarly, good financial performance is also paramount to the long-term survival
of any firm. Linking both these concepts the study finds an association between CSR and firm
size and but insignificant association in CSR and financial performance.
2.3 Overview of ESG Scores its Disclosure

Added to this study (Baldini, 2014, Maso, 2014, Liberatore, 2014, Mazzi, 2014 & Terzani,
2014), provided the study related to ESG disclosure practices performed by firms on the basis
of institutional theory and legitimacy theory. The evidence showed that the political, labor and
cultural systems put a significant impact on a firm‘s ESG disclosure practices. According to
the results firm basic characteristics relevant to the firm‘s visibility (Analyst coverage, size,
leverage, and cross-listing) demonstrated a homogenous and positive effect on ESG disclosure.
Similarly (Fatemi, Glaum, & Kaiser 2017) study scrutinize the effects of ESG actions and their
exposures on the company‘s value. Findings exhibited that by strengthening the ESG
performance firm‘s value increases and that weaknesses decrease it. The study also suggests
that disclosure plays a critical restraining role by vitiating the positive effect of strength and
reducing the negative effect of weaknesses. ESG scores were examined individually and their
disclosure results exposed that environmental strength advances the firm‘s valuation and that
weakness shrinks it and social and governance strength do not increase the firm value but a
decline in both areas tends to upset the valuation. Likewise, the author (Chen 2015) is using
GRI reports of 75 manufacturing companies, collects evidence on CSR disclosure via
structured content analysis. The results conclude a significant positive link among CSR
disclosure &financial performance consistent over different manufacturing sectors.
15

According to the study investigated the association between corporate financial performance
and ESG score in the multinational business of Latin America. (Grisales, 2019 & Caracuel,
2019), To address the gap, the researcher draw hypothesis and conduct tests by linear
regression method on data that is gathered from 104 multinational companies from Colombia,
Peru, Mexico, Chile, and Brazil and analyze the data panel drawn from Thomson Reuters Eikon
database. According to the results, there is a significant negative association between FP and
ESG scores. Moreover, they further study the impact of ESG separately on multinationals'
financial performance to determine the exact relationship between them; the results expose a
negative relationship. Studying the impact of ESG on CFP in merging countries (Iskandar)
finds the different impacts of each ESG pillar on CFP while the ESG overall had a negative
impact on ROA. The Environmental and Governance scores had a negative impact on ROA &
ROE while Social score displayed a concave relationship. Furthermore, the sectoral analysis
show varied results or each sector.
Another research shows the importance of disclosure M. Fischer, (2013) & A. Sawczyn, (2013)
reported that firms are more interested in investing in CSP activities to satisfy their stakeholder
expectation that improves firm financial results and reputation. This study provides an
empirical study of the large German listed firms CSP disclosures to test the causal relationship
between CSP and CFP. CSP is measured by the Global Reporting Initiative and key
performance indicators of social and environment and CFP are measured by ROA. They
employed correlation and regression analysis to test the hypothesis and their findings support
a positive and significant link between CSP and CFP of Large German listed firms. They also
suggested that firms with strong financial positions tend to invest more to improve their CSP.
Likewise (S. DHALIWAL, ZHEN LI, TSANG, & GEORGE YANG, 2011) investigates the
possible benefit of non-financial disclosure (CSR disclosure) as the reduction in Cost of
Capital. Conclusions find that when firms initiate a CSR disclosure, the find a subsequent
reduction in their cost of equity capital. Furthermore, superior CSR activities attract dedicated
institutional investors and analyst coverage. The study also reports possible exploitation of this
relationship resulting in more capital raised by initiating firms than by non-initiating firms.
This study defines the verification of the association present between a firm‘s characteristics
and their willingness to disclose appropriate corporate information on their websites (Mendes-
Da-Silva & Onusic 2014).
Correspondingly (A. BOTOSAN 1997) examining the association between Disclosure level
(Amount of voluntary disclosure in annual reports) and cost of capital the study reports that
firms with low analyst coverage experience lower cost of capital as a result of higher disclosure,
16

for firms with higher analyst coverage no such association was found (although the author
states: this may be because the disclosure measure is limited to annual report which may not
be a powerful enough proxy to represent overall disclosure when analysts play a vital role in
the communication process). (LI, GONG, ZHANG, & KOH 2018), Using a cross-sectional
dataset of FTSE 350 listen to firms, the study investigates whether ESG disclosure has an
impact on the firm‘s value. The study concludes a positive impact of ESG disclosure on the
Firm‘s value relating to higher transparency and accountability with higher stakeholder trust.
The study also reports firms, with high CEO power, greater ESG disclosure is interpreted as a
greater commitment to ESG by stakeholders, relating CEO power with ESG disclosure.
(ARAS, et al. 2010), CSR, in recent times, is becoming adamant in the stakeholder‘s minds.
Expectations exist that businesses should remain aware of at all times. Similarly, good financial
performance is also paramount to the long-term survival of any firm. Linking both these
concepts the study finds an association between CSR and firm size and but insignificant
association in CSR and financial performance. .In the same way, (Grisales, 2018), investigated
whether a firm‘s financial performance is associated with its superior ESG performance using
a sample of multinationals in Latin America (a total of 104 companies from 5 countries).
Results from linear regression revealed a significant negative relationship between financial
performance and ESG Score (Both combined and individual). The analysis also reveals the
moderating effects of international diversification as well as financial slack (financial slack is
unused capacity for debt and is equivalent to the unutilized cash that a company has on hand).
17

3. Theoretical Framework
Variables Definition Theoretical
Foundations
ESG Performance Measure varying in value from 0 to 1. A comprehensive term used in the Ortas (2015)
capital market and by investors to gauge the company‘s behavior as well Cheng et al
as predict the future financial performance of a company by measuring (2014)
its sustainability. It is based on 3 constituent measure, namely:
Environmental Score, Social Score and Governance Score. Data on ESG
Performance was obtained from companies’ Annual Reports and then
compiled into an ESG index to obtain the ESG Score.
Environmental Measure varying in value from 0 to 1. Measures the consequences of a Ortas (2015)
Performance business on the environment. It reveals the level to which a firm uses Cheng et al
management practices to reduce environmental risks and take advantage (2014)
of environmental opportunities. There are 61 indicators that contribute to
this score. Data on Environmental Performance was obtained from
companies’ Annual Reports and then compiled to obtain the ESG Score.
Social Performance Measure varying in value from 0 to 1. Measures the potential of a Ortas (2015)
company to create loyalty and trust in its stakeholders via best practices. Cheng et al
SS depicts a Company's reputation which is used to evaluate its long- (2014)
term value. There are 63 indicators that contribute to this score.
Governance Measure varying in value from 0 to 1. Evaluates a business’s systems and Ortas (2015)
Performance procedures that ensures its executives and board members act in the best Cheng et al
interests of its long-term shareholders. There are 54 indicators (2014)
contributing to this score.
Systematic Risk Measured through the BETA factor of companies which is calculated as AS Garcia
(BETA) the covariance of the return of a company with the return of the et al (2019)
benchmark index (In this case KSE100) divided by the variance of the
return of the benchmark index over a period of 12 months. Data on the
returns of the index as well as the companies was obtained from financial
publications
Un-systemic Risk Used to gauge the risk due to firm-related factors. Calculated by dividing AS Garcia
(DEBT) total liabilities by total assets. Data obtained from financial reports of et al (2019)
companies.
SIZE Measure used to gauge the size of company. Calculated as the Natural AS Garcia
Logarithm(Ln) of Total Assets et al (2019)
Dhaliwal et
al (2011)
INDUSTRY TYPE A Variable used to identify whether a company whether a business is a Lee and Faff
(IND) manufacturing business or provides services. Has a value of 1 for (2009)
manufacturing and 2 for services. AS Garcia
et al (2019)
ROA Calculated by dividing net income by average total assets. Data Velte (2017)
obtained from financial reports of companies. AS Garcia
et al (2019)
ROE Calculated by dividing net income by shareholder’s equity. Data A Buallay
obtained from financial reports of companies. (2019)
Tobin’s Q Calculated by dividing market value of equity by book value equity. Velte (2017)
Data obtained from financial reports of companies. A Buallay
(2019)
18

3.1 ESGP index
ESGP is a comprehensive term used in the capital market and generally used by investors to
calculate the company‘s behavior as well as predict the future financial performance of a
company by measuring its sustainability. The Environmental, Social and Governance elements
are a subgroup of non-financial indicators that hold sustainable, ethical and corporate
governance issues such as find out that there should be a proper system to ensure the
accountability and managing the company‘s carbon footprints. Observational studies of how
ESG performance of overall firm level is being contributed by CSR standards are limited
though (ORTAS E, ÁLVAREZ I, JAUSSAUD J, GARAYAR, 2015). The three key
considerations for ESG are environmental criteria, which analyze how a business works as a
representative of our natural environment, concentrating on i.e. Erosion of resources, GHG
emissions, carbon emissions, climate change, waste and pollution. Social criteria that discusses
how well the company treats customers and focuses on i.e. Local communities; seeks
specifically to fund projects or organizations that will not only serve poor but also facilitate
underserved populations worldwide, health and safety, working conditions, including child
labor and slavery, employee relations & diversity, conflict. Governance criteria, which
discusses how a company polices itself – how a company is ruled it will concentrates on i.e.
board diversity and structure, executive remuneration, tax strategy, corruption and bribery,
donations and political lobbying.
In order to objectively measure companies ESG Performance on key themes (emissions,
environmental product innovation, human rights, shareholders etc.) certain KPI‘s have been
used to calculate the ESG scores of firms by considering the Thomson Reuters indicators for
the purpose of content analysis. Three pillars were created namely Environmental Score, Social
Score and Governance Score in line with Thomson Reuter’s methodology which together form
the composite ESG Disclosure score.
For the Environmental Pillar, three categories are considered to calculate the contributions of
companies on their environment which are:
1. Resource use (efficient use of resources, waste minimization etc.)
2. Innovation (implement new ideas, improve services and create dynamic products).
3. Emissions (reductions in the emissions of pollutants).
For the Social Pillar the categories included are:
1. Product Responsibility (healthy product, product safety and instructions should be
provided).
19

2. Workforce (promote ethical and responsible behavior).
3. Human rights (A commitment to both business ethics and human rights will be driven
by values such as: dignity, justice, fairness, equality, respect, and responsibility).
4. Community (wellbeing of society, positively benefiting society etc.).
For the Governance Pillar the following categories were inducted:
1. Management (facilitate effective, prudent and entrepreneurial management etc.).
2. Shareholders (growth in dividend policy, voting rights etc.).
3. CSR strategy (Strengthening Transparency, Upholding ethical Market Practices etc.).
The data on these KPI‘s was hand collected from published annual reports of the companies
included in the sample. By calculating all these KPI‘s we measure the ESGP of firms.
Data on ESGP and Financial performance were obtained directly from the annual reports of
the firms for the year 2018. ESG scores were given using the Thompson Reuters ESG Score
metrics. Using the data from annual reports via content analysis ESG pillars and categories
were created using Thompson Reuter's metrics which were then used to score companies
according to the disclosure provided in annual reports.
The ESG (Environmental, Social, and Governance) criteria are a set of standards that investors
can use to screen potential investments according to their concerns about the company‘s
operations. Environmental criteria considers how a company affects the environment around
it, how it uses its resources, carbon footprints, etc. Social criteria examines the company‘s
relationship with its stakeholders (employees, customers, suppliers, etc.). The Governance
criteria deals with the corporate governance aspects. It focuses on the company‘s leadership
(top management), owners (shareholders), controls and overall CSR strategy (if any).
3.3 Hypotheses Development

Hypothesis Hypothesis description Standard
no: tool Variables
Independent/dependent
H1 ESGP has a Significant and Regression ESGP: Independent Variable

positive impact on financial Analysis FINP: Dependent variable
performance.
H2 Environment Score has a Regression Environmental score:
significant and positive impact on Analysis Environmental Score: Independent
FINP. Variable
FINP: Dependent variable
H3 Social Score has a significant and Regression Social score: Independent variable
positive impact on Analysis FINP: Dependent variable
20

FINP.
Governance Score has a significant Regression Governance score:
and positive impact on Analysis Independent variable
H4 FINP. FINP: Dependent variable
Note: ESGP: Environmental, Social and Governance Performance, FINP: Financial
Performance.
H2: ESGP has a significant and positive impact on FINP.

(Lam et al., 2012) noticed that it is also possible to eliminate structural market risk by
increasing investment in companies with good ESG quality. This reduction is because these
businesses are better capitalized on the market on average and have improved ESG results.
Stakeholders now automatically expect businesses to adopt long-term sustainability in their
operations. Good ESGP enhances shareholder confidence and for the company, it is a viable
approach to obtaining financing at lower costs. This depends however on the company‘s ability
to fulfill shareholder expectations, which expect more return per unit of risk undertaken.
When a company performs responsibly it ultimately reduces the risk of boycotts, lawsuits and
other similar penalties, making the company more viable in the eyes of investors. If the
business risk is considered as the failure of a business to meet its objectives, firms that fail to
maintain their ESG performance may even be forced to halt operations resulting in financial
losses.
Great management theorists postulate that the implementation of good management activities
and financial performance has a positive association. (Waddock, S.A.; Graves, 1997). The ESG
quality of businesses as a distinctive asset will produce revenues or reduce costs both are
improving the CFP (Margolis, 2007). (Ruf et al. 2001) revealed that improvements in corporate
ESG quality have been strongly related to increases in corporate sales over the current and
subsequent years. In this way, (Choi and Yu 2014) proposed that insights of CSR practices
have significant impact on their structural engagement and actions of organizational
citizenship, thereby facilitating the relationship between CSR practices and CFP. The
abovementioned hypothesis will be tested based on these premises.
H3: Environment Score has a significant and positive impact on FINP.
Business-related environmental risks have a negative impact on climate, soil, water,
biodiversity and people's health. Environmental practices of the organization called ESG
considerations include controlling capital and pollution control, reducing carbon emissions and
climate change, and monitoring of the environment. Positive environmental impacts include
eliminating or mitigating environmental liability, reducing costs and increasing productivity
21

through the power and other efficiencies, and through administrative, enforcement and
financial risk. Hence the aforementioned hypothesis is proposed.
H4: Social Score has a significant and positive impact on FINP.
Social risks reflect the impact that businesses might have on the community. These are tackled
by corporate social activities such as promoting health and safety, fostering interactions
between labor and management, promoting human rights and concentrating on brand quality.
Socially positive results involve increased efficiency and morale, decreased turnover and
unemployment, and enhanced brand recognition. High social scores revealed the company‘s
involvement in societal issues. Therefore this hypothesis is predicted.
H5: Governance Score has a significant and positive impact on FINP.
Governance risks are related to how companies operate. It covers areas such as corporate brand
autonomy and integration, corporate risk assessment and improper executive compensation
through corporate governance practices such as board diversity and transparency, investor
protection and rights, and monitoring and disclosure of information. Governance positive
outcomes include aligning interests of shareowners and management and avoiding unpleasant
financial surprises. Positive effects in governance include associating shareholder and
management priorities and preventing unexpected financial surprises. The previous hypothesis
will be checked on these grounds.
3.4 ESGP & FINP

3.4.1 ESG and Accounting-Based FINP (ROA)
Some studies find that sustainable portfolios give higher returns and outperform index
(Thompson 2018). One instance of an ESG portfolio would be the World SRI (Socially
Responsible Investment) Index by MSCI, which has performed slightly better than the
corresponding general world index since 2007 (MSCI 2018).
According to a study by Eccles, Ioannou, and Serafeim (2014) using 180 American companies
which they ranked as high or low sustainability companies, the high sustainability companies
significantly outperform their counterparts in the long run, both in accounting and market based
performance. Another study by Friede, Busch, and Bassen (2015) that compiled data from 2200
studies also found a positive link to accounting based performance. Contrary to these findings,
Dahlberg and Wiklund (2018) found no link between ESG score and accounting performance
based performance in their recent study of the Nordic stock market.
22

In a study of the German market, Velte (2017) examines the relationship between ESG score
and financial performance for companies listed on the German Prime Standard during the years
of 2010-2014. The results of his research and regression analysis show that there is a positive
relationship between ESG performance and accounting based financial performance. However,
the study concludes that there is no positive relationship between ESG and market based
financial performance. Velte also investigated which of the factors E, S and G showed the
strongest correlation to accounting based financial performance. The factors where included
separately in the regression model. All factors showed a positive correlation to the accounting
based financial performance, and the governance factor (G) showed the strongest correlation.
3.4.2 ESG and Market-Based FINP (Tobin’s Q)
There are several studies showing that there exists a slightly positive relationship between CSR
activity and market based financial performance. But there are also studies that show no
significant relationship. As earlier mentioned, Velte (2017) found no significant relationship
between ESG performance and market based financial performance. As mentioned above,
Friede, Busch, and Bassen (2015) present a study that concludes empirical results from over
2000 previous studies of ESG factors and their effects on financial performance. The research
contains both portfolio and non-portfolio based studies. The authors conclude that there is, on
average, a positive relationship between market-based financial performance and ESG factors.
The conclusion also includes financial performance of different asset classes and regions.
Another meta-study that has compiled the result of over 200 previous studies shows a similar
result. The authors found that 80 % of the analyzed studies showed a positive correlation
between ESG performance and market based financial performance (Clark, Feiner, and Viehs
2015).
When large American non-financial firms were investigated, a significantly positive

relationship was found between corporate sustainability and market based financial
performance (Lo and Sheu 2007). The authors also found a positive relation between corporate
sustainability and sales growth. Furthermore, there was evidence presented that being
sustainable causes firm value to rise. In a study of the Korean market from 2013, it is found
that a firm’s ESG score measured by MSCI is correlated with both stock returns and Tobin’s q
(J. Kim, Chung, and Park 2013). Another study of the Korean market shows a slightly different
result (Han, H. J. Kim, and Yu 2016). This empirical study of 94 firms listed on the Korean
23

Stock Exchange shows that different ESG factors have different relations to market based
financial performance. The governance factor showed a positive relation while the
environmental factor showed a negative relation towards financial performance. The social
factor turned out to be neutral as it showed no significant relationship. Neither Hartzmark and
Sussman (2018) find any relationship between high Morningstar globe rating (another
sustainability measure, based on data from MSCI) and market based financial performance,
although the study shows that investors prefer funds with the highest sustainability rating
compared to the lowest (Hartzmark and Sussman 2018). This finding indicates that investors
value sustainability even though no relation between high scores and financial performance
was found.
RISK and FINP
A number of studies have assessed the impact of investing in ESGP on firm’s risk. For example,
Lam et al (2012) finds that companies with good ESG Performance generally have lower
systematic market risk, which leads to reduced costs of capital and better market capitalization.
Kim et al (2015) also finds a negative relationship between risk and financial performance
concluding that companies trying to reduce their carbon footprint (i-e reducing their
environmental risk) experience reduced cost of capital hence their value increases. In sum,
when companies perform better on the ESG criteria. They inherently reduce the risk factors,
which attracts investors, consequently making it easier for the company to find funds hence
improving their value.
SIZE and FINP
We control for firm size (natural logarithm of total assets of a firm) as suggested by literature
in this field, AS Garcia et al (2019). Firms with larger size likely have more resources,
competitive power and market share; hence, they have more opportunity to generate profits
Mesut Dogan (2013). Companies that have more resources to spend in ESG responsible
practices are more attractive to investors; also socially responsible portfolios prefer companies
with larger market capitalization, Lam et al (2012). Dhaliwal (2011) also controls for firm size
stating that firms with better financial performance are likely to be larger suggesting a positive
link between firm size and financial performance. Furthermore, size is known to impact heavily
on firm’s market performance and risk, Fama and French (1996).
INDUSTRY TYPE and FINP
24

We also control for Industry Type as suggested by the literature, AS Garcia (2019), Lee, and
Faff (2009). This control is based on the premise that business that belong to the manufacturing
sector naturally have a bigger imprint in terms of the ESG Criteria and hence generally spend
more on such activities whereas service-providers like financial service providers do not have
that large of an impact hence they will have to spend less on ESG to become socially viable
and hence will have more funds to spend elsewhere in the pursuit of generating more profits.
Therefore, getting an edge over manufacturing business in terms of financial performance when
viewed with the canvas of ESGP.
3.5 ESG Index construction methodology content analysis

The content analysis method was used to measure the level of CSP of the sample companies.
Content analysis is a research tool focuses on the actual content. It is used to determine the
presence of certain words, concepts or sentences within a text or texts and to quantify their
presence in an objective manner (Palmquist, 1980). It is a systematic method of categorizing
and analyzing the content text (Bayoud et al; 2012). According to Gamerschlag, et al., (2010)
content analysis is a method of codifying written text into various groups or categories on the
basis of selected criteria. Disclosure themes and items for this study were adopted from
company annual reports. The appropriate score for each year under each items was entered
into the sheet using the following score method.
Level Score
An item is not disclosed 0
An item is disclosed only but no detailed description 1
At the final stage CSP was constructed for each category of disclosure on the basis of the
score.
3.6 Disclosure status

Table 1 presents the number of items of disclosures under each of the disclosure theme
considered for the study and the actual items disclosed by the sample companies together with
percentages.
3.8 ESG Combined Score

Investors have long recognized that environmental, social and governance (ESG) factors are
important measures for company valuation, risk management and even regulatory compliance.
25

Now we are seeing more and more managers incorporating ESG into their asset allocation
process, utilizing a holistic approach, as well as more thematic investment vehicles are
emerging that appeal to investors who have specific investment objectives. The ESGC Scores
provide a rounded and comprehensive evaluation of a company’s ESG performance based on
the reported information in the ESG pillars. Our ESG Score Calculation (as shown in table
below) are based on the Thomson Reuters model. The ESG combined score consists of three
pillars namely Environmental Score, Social Score and Governance Score which are then
further divided into sub-categories.
3.9 Pillar Scores Calculation

Pillar Scores are calculated based on 10 category scores.
Pillar Score Calculation

Cate Categ Sum of Formula:
gory ory Categor Formula: Sum of New New Pillar
Category Scor Weig y Category Category Category Score Formula:
Pillar Score es* hts Weights Weights Weights* Weights s Pillar Scores
Environmental Resource Use 1.00 11% 32.35% (11%/34%)
(11%+12%+11
Environmental Emissions 0.00 12% 34% 35.29% (12%/34%) 0.65 55.013274
%)
Environmental Innovation 1.00 11% 32.35% (11%/34%)
Social Workforce 1.00 16% 45.07% (16%/35.5%)
Human 4.50 (4.5%/35.5%
Social Rights 1.00 % 12.68% )
(16%+4.5%+8%
Social Community 1.00 8% 35.50% 22.54% (8%/35.5%) 1.00 36.22573
+7%)
Product
Responsibilit
Social y 1.00 7% 19.72% (7%/35.5%)
Corporate
Governance Management 1.00 19% 62.30% (19%/30.5%)
Corporate (19%+7%+4.5%
30.50% 1.00 2279.17999
Governance Shareholders 1.00 7% ) 22.95% (7%/30.5%)
Corporate 4.50 (4.5%/30.5%
Governance CSR Strategy 1.00 % 14.75% )
3.9.1 Calculation of Category Scores

Category scores metrics are calculated as Binary questions and the possible answers have pre-
assigned value. If a company reports information on a metric the answer is ‘yes’ which has an
assigned value of 1. If no information is reported, the answer is ‘no’, which has an assigned
value of zero.
26

3.9.2 Category Weights:
Category weights are assigned according to the number indicators that make up each category.
The themes that are more mature in terms disclosure and performance (such as management)
are given higher weights whereas less reported themes (such as CSR Strategy) are given lower
weights.
Pillar Category Indicators Weights

in Rating
Environmental Resource Use 19 11%
Emissions 22 12%
Innovation 20 11%
Social Workforce 29 16%
Human Rights 8 4.50%
Community 14 8%
Product Responsibility 12 7%
Governance Management 34 19%
Shareholders 12 7%
CSR Strategy 8 4.50%
Total 178 100%
3.9.3 Category Definitions

Category Definition
Resource Use Company’s performance and capacity to reduce the use of materials, energy
Score or water, and to find more eco-efficient solutions by improving supply chain
management.
Emissions Company’s commitment and effectiveness towards reducing environmental
Reduction emissions in the production and operational processes.
Score
Innovation Company’s capacity to reduce the environmental costs and burdens for its
Score customers, thereby creating new market opportunities through new
environmental technologies and processes or eco-designed products.
Workforce Company’s effectiveness towards job satisfaction, a healthy and safe
Score workplace, maintaining diversity and equal opportunities and development
opportunities for its workforce.
Human Rights Company’s effectiveness towards respecting the fundamental human rights
Score conventions.
Community Company’s commitment towards being a good citizen, protecting public
Score health and respecting business ethics.
Product Company’s capacity to produce quality goods and services integrating the
Responsibility customer’s health and safety, integrity and data privacy.
Score
Management Company’s commitment and effectiveness towards following best practice
Score corporate governance principles.
27

Shareholders Company’s effectiveness towards equal treatment of shareholders.
Score
CSR Strategy Company’s practices to communicate that it integrates the economic
Score (financial), social and environmental dimensions into its day-to-day
decision-making processes.
3.10 ESG score index and its 3 sub-indices

Mean
Mean Pillar Score Mean ES Mean SS
GS
ABOT 0.88235 0.67 1 1
KEL 0.7636 0.67 0.75 0.67
BOP 0.73226 0.33 0.75 1
MLCF 0.89202 1 0.5 1
PAEL 0 0 0 0
OGDC 1 1 1 1
LOTCHEM 1 1 1 1
DGKC 0.34988 0 0.25 0.67
TRG 0.20765 0 0 0.33
FCCL 0.90857 1 0.75 0.67
UNITY 0.50012 0 0.5 0.67
FFBL 0.90857 1 0.75 0.67
HASCOL 0.8499 0.67 0.75 1
PPL 0.78431 0.33 1 1
AICL 0.57523 0 0.75 0.67
NRL 0.61749 0 1 0.67
PIBTL 0.67633 0.33 0.5 1
HUBC 0.84284 1 0.5 0.67
BYCO 0.9235 1 1 0.67
FATIMA 0.81663 0.67 0.75 1
ABL 0.66653 0.33 0.5 1
AGIL 0.68451 0.67 1 0.67
ARPL 0.34012 0.33 0.75 0.33
AKBL 0.45888 0.33 0.5 0.67
ATRL 0.73226 0.33 0.75 1
BWCL 0.68451 0.67 1 0.67
COLG 0.88124 1 0.75 0.67
DAWH 0.2008 0 0.25 0.67
DCR 0.30864 0.33 0.25 0.67
EFUG 0.8401 0.67 0.75 1
GHGL 0.88235 0.67 1 1
GSKCH 0.73226 0.33 0.75 1
GATM 0.78431 0.33 1 1
HCAR 0.46711 0.33 0.25 0.67
ICI 0.59141 0.33 0.25 1
INDU 0.9235 1 1 0.67
JLICL 0.66667 0 1 1
KOHC 0.3074 0 0.75 0.33
MARI 0.34951 0.33 0.5 0.33
MEBL 0.4071 0.67 0.25 0.67
MTL 0.6747 0.67 1 0.67
NCPL 0.12568 0 0 0.67
NESTLE 0.83317 0.67 1 0.67
ORIXM 0 #DIV/0! #DIV/0! #DIV/0!
PKGS 0.88235 0.67 1 1
PTCL 0.34165 0 0.5 0.67
28

SPWL 0.38376 0.33 0.25 0.67
SML 0.53824 0.67 0.25 0.67
SHEL 0.61735 0.33 0.5 0.67
SYS 0.62275 0.67 0.25 0.67
THALL 0.59959 0.67 0.75 0.67
SHFA 0.93427 1 0.75 1
IGIHL 0.44949 0.33 0.5 0.67
BNWM 0.19141 0 0.25 0.67
GADT 0.92488 1 0.75 1
FABL 0.68451 0.67 1 0.67
FFL 0 0 0 0
KAPCO 0.433 0 0.5 0.33
NATF 0.88235 0.67 1 1
PSMC 0.74012 0.67 0.75 0.67
SRVI 0.5493 0 0.5 1
FCEPL 0.06573 0 0.25 0
PIOC 0.80072 0.67 0.75 0.67
ISL 0.69288 0.33 0.75 0.67
SEARLE 0.40017 0.67 0.5 0.33
UBL 0.59003 0.33 0.5 0.67
INIL 0.68308 0.33 0.75 0.67
ENGRO 0.33195 0 0.25 0.67
POL 0.30185 0 0.5 0.33
FFC 0.90857 1 0.75 0.67
BAHL 0.57523 0 0.75 0.67
AGP 0.46711 0.33 0.25 0.67
EFERT 0.8401 0.67 0.75 1
NBP 0.77437 0.67 0.5 1
SSGC 0.59293 1 0.75 0.33
PSO 0.58202 0.33 0.5 1
BAFL 1 1 1 1
LUCK 0.73226 0.33 0.75 1
GLAXO 0.49036 0.33 1 0.33
MCB 0.5982 0.67 1 0.33
NML 0.60925 1 0.25 0.67
HBL 0.44949 0.33 0.5 0.67
NCL 0.64225 0.67 0.75 0.67
CHCC 0.73226 0.33 0.75 1
EPCL 0.55595 0.67 0.75 0.33
KTML 0.7404 1 0.25 0.67
APL 0.73226 0.33 0.75 1
SNGP 0.65575 0.33 0.75 0.67
OLPL 0.48357 0 0.25 1
MUREEB 0 0 0 0
FHAM 0 0 0 0
4. RESEARCH METHODOLOGY
4.1 Sample Selection and Data Collection
For this analysis, companies listed on the KSE100 index of Pakistan Stock Exchange (PSX)
for the year 2018 have been selected since KSE100 acts as a representative of market position.
During sample collection, the firms that did not address CSR operations in their annual reports,
29

entities whereby data was not available and/or the firms declared default by the Pakistan Stock
Exchange (PSX) were excluded. For the firms that made it into the final sample data was
collected from annual reports.
4.2 Regression Specification

This study includes one dependent variable that is financial performance (FINP) which is
measured using Return on Assets (ROA), Return on Equity (ROE) and Tobin‘s Q (Q-Ratio) as
proxies for FINP. In line with current literature, both accounting (ROA) (ROE) and market-
based (Tobin's Q) metrics were included (Choi and Wang, 2009). ROA is FINP's most well-
known accounting indicator, measuring the company's productivity compared to its total assets.
Due to the impact of management decisions on accounting based measures, a market based
measure was also included (Choi and Wang, 2009).
Tobin's Q is the ratio between the market value of a physical assets and its replacement value.
It is now commonplace in the financial as well as accounting literature to calculate the ratio by
comparing the market value of the company's capital and liabilities with their respective
carrying values since the replacement values of a company's assets are difficult to determine.
(Velte, 2017; Choi and Wang, 2009).
This study also includes several control variables that are common to this area of research
(Fischer and Sawczyn, 2013; Choi and Wang, 2009; velte, 2017). This report also includes
Firm Risk with a systematic and unsystematic risk assessment. Beta factor (BETA) is used as
a measure for systematic risk. The indicator of unsystematic risk, the ratio of total debt to total
assets (DEBT) is used (Velte, 2017). Literature notes that the relationship between investors
and FINP is correlated with a firm‘s risk (Waddock and Graves, 1997). Companies with a
higher ESGP score are deemed to be less risky and are associated with lower debt capital
expenditure. (Orlitzky and Benjamin, 2001; Godfrey et al, 2009).Furthermore, we take into
account the size of the firm (SIZE), quantified by the natural log(Ln) of net assets, since large
companies often achieve economies of scale or scope that can be challenging to
emulate(Roberts and Dowling, 2002).
Previous studies have discovered that company size can be impactful in the company's CSR
activities to the interests of stakeholders. The management of the relationship among company
size, CSR performance, and FINP can be both negative and positive and/or neutral. Finally, we
incorporate the industry division as a dummy factor since among industries the level and
quality of CSR and its disclosure can differ simply because different natures of businesses have
30

different kinds of impacts. The factor (IND) differentiates between services and manufacturing
sectors giving 1 for manufacturing and 2 for services.
4.3 Regression Model

In spite of the relevance of literature on the causal relationship between ESGP and FINP our
study mainly concentrates on the associations between ESGP and FINP of listed companies on
the Pakistan Stock Exchange 100 index (KSE100) covering the year 2018. By way of
regression statistics (to determine the strength of relationship) proposed a simple model to be
tested:
FINP = α + BN(X) + ε
Where FINP serve as a Financial Performance proxies, BN is the coefficient of determinants
and ε is the error term. X is a vector(s) of determinants that are categorized in this study ESGP,
BETA, DEBT, SIZE, IND. So the above equation can be expanded as:
FINP (ROA, TOBIN’S Q) = α + β1ESGP + β2BETA + β3SIZE + β4IND + β5DEBT + ε

FINP (ROA, TOBIN’S Q) = α + β1ES + β2BETA + β3SIZE + β4IND + β5DEBT + ε
FINP (ROA, TOBIN’S Q) = α + β1GS + β2BETA + β3SIZE + β4IND + β5DEBT + ε
FINP (ROA, TOBIN’S Q) = α + β1SS + β2BETA + β3SIZE + β4IND + β5DEBT + ε
Where,
➢ ESGP represents Environmental, Social and Governance performance in total measure
by the mean of ESGP score.
➢ ES represents the Environmental Performance measured by the Environmental score.
➢ SS represents the Social Performance measured by the Social score.
➢ GS represents the Governance score measured by the Governance score.
5. Results
5.1 Descriptive statistics
Table 1.2 provides an overview of the descriptive statistics for the ESGP measures (panel A),
the FINP variables (panel B) and the control variables (panel C).
The ESGP scores in ‘Panel A’ range from 0 to 1. The mean (median) scores in our sample are
0.59 (0.62) for total ESGP, 0.45 (0.33) for ES, 0.68 (0.67) for GS and 0.60 (0.75) for SS
respectively.
31

Furthermore, The Financial Performance measures in ‘Panel B’ indicate a mean (median) of
0.08 (0.06) for ROA and 0.57 (0.13) for ROE and 2.35 (0.94) for Tobin’s Q-Ratio respectively.
Descriptive statistics for our control variables are presented in panel C with a mean (median)
of 0.33 (0.35) for BETA, 0.54 (0.56) for DEBT, 17.16 (17.83) for SIZE and 1.30 (1.00) for
IND respectively.
Table 1.1
Descriptive
Statistics
Variables SS SIZE ROA Q_RATIO IND GS ESG ES DEBT BETA
Mean 0.60 17.16 0.08 2.35 1.30 0.68 0.59 0.45 0.54 0.33
Minimum 0.00 0.00 -0.22 0.00 1.00 0.00 0.00 0.00 -0.64 -1.39
Maximum 1.00 22.80 0.30 73.03 2.00 1.00 1.00 1.00 0.96 1.93
Std. Dev. 0.32 4.39 0.08 7.70 0.46 0.30 0.27 0.35 0.31 0.64
Skewness -0.40 -3.13 -0.06 8.51 0.87 -0.81 -0.67 0.17 -0.75 -0.25
Kurtosis 2.08 12.88 4.08 77.99 1.75 3.07 2.67 1.81 3.79 3.45
Probability 0.06 0.00 0.10 0.00 0.00 0.01 0.03 0.05 0.00 0.42
Sum 55.50 1595.45 7.04 218.72 121.00 63.00 54.58 41.67 50.34 30.64
Sum Sq.
9.25 1776.34 0.60 5458.71 19.57 8.10 6.77 11.44 8.95 37.59
Dev.
Observations 93.00 93.00 93.00 93.00 93.00 93.00 93.00 93.00 93.00 93.00
Descriptive
Statistics
COMPANY ESG ES SS GS ROA ROE Q_RATIO DEBT SIZE IND BETA
ABL 0.67 0.33 0.50 1.00 1.00% 13.08% 0.92 0.92 21.03 2 0.05
ABOT 0.88 0.67 1.00 1.00 13.65% 4.36% 4.67 0.35 16.83 1 -1.24
AGIL 0.68 0.67 1.00 0.67 21.07% 27.53% 0.71 -0.02 15.49 1 -0.51
AGP 0.47 0.33 0.25 0.67 13.80% 5.71% 3.32 0.29 16.01 1 -0.21
AICL 0.58 0.00 0.75 0.67 1.65% 12.28% 0.53 0.75 18.21 2 0.50
AKBL 0.46 0.33 0.50 0.67 0.65% 20.18% 0.65 0.95 20.38 2 0.66
APL 0.73 0.33 0.75 1.00 13.39% 19.46% 1.58 0.60 17.65 1 -0.09
ARPL 0.34 0.33 0.75 0.33 14.42% 8.50% 3.66 0.56 16.21 1 0.50
ATRL 0.73 0.33 0.75 1.00 0.60% 6.76% 0.22 0.61 18.43 1 1.14
BAFL 1.00 1.00 1.00 1.00 1.06% 13.82% 1.01 0.92 20.73 2 0.59
BAHL 0.58 0.00 0.75 0.67 0.85% 11.16% 1.52 0.95 20.77 2 1.93
BNWM 0.19 0.00 0.25 0.67 1.56% 17.21% 0.11 0.20 15.02 1 0.12
32

BOP 0.73 0.33 0.75 1.00 1.11% 30.38% 0.66 0.95 20.39 2 -0.51
BWCL 0.68 0.67 1.00 0.67 14.89% 25.96% 0.95 0.44 18.37 1 -0.44
BYCO 0.92 1.00 1.00 0.67 4.19% 15.04% 1.10 0.77 18.68 1 0.01
CHCC 0.73 0.33 0.75 1.00 8.64% 36.01% 0.53 0.63 17.23 1 0.47
COLG 0.88 1.00 0.75 0.67 20.55% 2.83% 8.65 0.21 16.63 1 -0.31
DAWH 0.20 0.00 0.25 0.67 8.74% 53.09% 0.31 0.52 19.86 2 -1.31
DCR 0.31 0.33 0.25 0.67 11.84% 20.59% 0.58 0.02 17.58 2 -0.03
DGKC 0.35 0.00 0.25 0.67 7.68% 35.63% 0.32 0.37 18.62 1 0.39
EFERT 0.84 0.67 0.75 1.00 15.17% 18.34% 2.09 0.61 18.58 1 0.83
EFUG 0.84 0.67 0.75 1.00 3.55% 20.15% 0.75 0.85 18.89 2 -0.18
ENGRO 0.33 0.00 0.25 0.67 14.04% 7.78% 1.92 0.08 18.34 1 0.34
EPCL 0.56 0.67 0.75 0.33 16.31% 19.80% 1.48 0.53 17.40 1 -0.12
FABL 0.68 0.67 1.00 0.67 0.48% 1.97% 3.54 0.94 18.59 2 0.20
FATIMA 0.82 0.67 0.75 1.00 16.47% 24.32% 0.88 0.25 18.23 1 -0.18
FCCL 0.91 1.00 0.75 0.67 12.36% 16.61% 1.01 0.29 17.18 1 0.78
FCEPL 0.07 0.00 0.25 0.00 2.25% 1.08% 5.06 0.59 16.94 1 0.06
FFBL 0.91 1.00 0.75 0.67 1.97% 8.54% 1.21 0.83 18.20 1 0.77
FFC 0.91 1.00 0.75 0.67 11.32% 11.79% 3.67 0.77 18.80 1 -0.04
FFL 0.00 0.00 0.00 0.00 -22.38% -47.30% 2.81 0.84 16.42 1 1.93
FHAM 0.00 0.00 0.00 0.00 0.00% 0.00% 0.00 0.00 0.00 2 0.22
GADT 0.92 1.00 0.75 1.00 5.49% 28.44% 0.51 0.65 16.96 1 0.56
GATM 0.78 0.33 1.00 1.00 5.33% 13.15% 1.26 0.70 17.60 1 0.35
GHGL 0.88 0.67 1.00 1.00 17.10% 13.59% 1.63 0.28 16.70 1 0.28
GLAXO 0.49 0.33 1.00 0.33 14.67% 9.47% 2.21 0.30 16.91 1 -0.34
GSKCH 0.73 0.33 0.75 1.00 18.01% 3564.5% 0.01 0.52 22.80 1 -0.60
HASCOL 0.85 0.67 0.75 1.00 0.31% 3.12% 0.53 0.83 18.12 1 0.18
HBL 0.45 0.33 0.50 0.67 0.43% 6.75% 0.94 0.94 21.83 2 0.52
HCAR 0.47 0.33 0.25 0.67 11.78% 35.20% 1.08 0.71 17.89 1 -0.04
HGFA 0.00 0.00 0.00 0.00 0.00% 0.00% 0.00 0.00 0.00 2 -0.26
HUBC 0.84 1.00 0.50 0.67 10.35% 12.14% 2.46 0.68 18.62 1 1.03
ICI 0.59 0.33 0.25 1.00 8.06% 18.87% 0.87 0.55 17.62 1 0.49
IGIHL 0.45 0.33 0.50 0.67 -0.49% -0.43% 16.33 0.93 16.74 2 0.00
INDU 0.92 1.00 1.00 0.67 18.81% 18.77% 1.99 0.55 18.22 1 1.00
INIL 0.68 0.33 0.75 0.67 10.75% 54.73% 0.52 0.67 17.83 1 0.27
ISL 0.69 0.33 0.75 0.67 14.09% 24.50% 1.51 0.67 17.39 1 0.83
JLICL 0.67 0.00 1.00 1.00 1.87% 9.61% 2.45 0.93 18.75 2 0.23
KAPCO 0.43 0.00 0.50 0.33 8.35% 38.18% 0.79 0.75 18.75 1 0.53
KEL 0.76 0.67 0.75 0.67 2.69% 10.25% 0.55 0.53 19.80 1 -0.36
KOHC 0.31 0.00 0.75 0.33 13.70% 27.79% 0.60 0.23 16.96 1 0.71
33

KTML 0.74 1.00 0.25 0.67 25.47% 65.98% 0.22 -0.64 17.00 1 1.31
LOTCHEM 1.00 1.00 1.00 1.00 21.19% 18.14% 1.95 0.41 16.87 1 0.42
LUCK 0.73 0.33 0.75 1.00 10.57% 137.82% 0.11 0.34 18.92 1 0.63
MARI 0.35 0.33 0.50 0.33 12.93% 11.16% 3.43 0.72 18.79 1 1.15
MCB 0.60 0.67 1.00 0.33 0.99% 7.00% 1.29 0.89 21.04 2 1.12
MEBL 0.41 0.67 0.25 0.67 1.05% 8.89% 2.41 0.95 20.66 2 0.59
MLCF 0.89 1.00 0.50 1.00 9.21% 50.14% 0.30 0.49 17.91 1 0.96
MTL 0.67 0.67 1.00 0.67 29.94% 195.11% 3.79 0.96 16.80 1 1.09
MUREB 0.00 0.00 0.00 0.00 0.00% 0.00% 0.00 0.00 0.00 2 0.44
NATF 0.88 0.67 1.00 1.00 10.35% 4.79% 5.49 0.63 16.21 1 0.06
NBP 0.77 0.67 0.50 1.00 0.01% 0.21% 0.33 0.92 21.75 2 -0.65
NCL 0.64 0.67 0.75 0.67 6.39% 25.99% 0.66 0.65 17.49 1 0.68
NCPL 0.13 0.00 0.00 0.67 13.57% 55.83% 0.50 0.54 17.09 1 1.08
NESTLE 0.83 0.67 1.00 0.67 18.47% 4.04% 73.03 0.94 18.01 1 0.03
NML 0.61 1.00 0.25 0.67 3.72% 13.92% 0.39 0.26 18.45 1 0.96
NRL 0.62 0.00 1.00 0.67 2.78% 20.14% 0.20 0.34 18.00 1 1.13
OGDC 1.00 1.00 1.00 1.00 12.17% 14.57% 0.98 0.17 20.32 1 -0.19
OLPL 0.48 0.00 0.25 1.00 4.44% 40.59% 0.49 0.78 17.33 2 0.58
ORIXM 0.00 0.00 0.00 0.00 0.00% 0.00% 0.00 0.00 0.00 2 0.22
PAEL 0.00 0.00 0.00 0.00 3.70% 14.99% 0.30 0.42 17.77 1 0.39
PIBTL 0.68 0.33 0.50 1.00 -9.13% -16.32% 1.31 0.58 17.19 2 0.33
PIOC 0.80 0.67 0.75 0.67 7.02% 32.31% 0.37 0.53 17.19 1 1.40
PKGS 0.88 0.67 1.00 1.00 1.05% 4.44% 0.40 0.40 18.49 1 -0.85
POL 0.30 0.00 0.50 0.33 17.81% 10.88% 3.19 0.53 18.07 1 0.81
PPL 0.78 0.33 1.00 1.00 13.18% 14.92% 1.28 0.35 19.73 1 0.68
PSMC 0.74 0.67 0.75 0.67 2.31% 10.60% 0.42 0.52 17.93 1 0.04
PSO 0.58 0.33 0.50 1.00 3.89% 24.70% 0.57 0.73 19.81 1 -1.39
PSX 0.00 0.00 0.00 0.00 0.00% 0.00% 0.00 0.00 0.00 2 0.84
PTC 0.34 0.00 0.50 0.67 1.86% 20.01% 0.34 0.74 19.58 2 1.41
SEARL 0.40 0.67 0.50 0.33 17.63% 8.11% 2.93 0.34 16.66 1 0.95
SHEL 0.62 0.33 0.50 0.67 -2.90% -7.30% 2.75 0.87 17.71 1 0.24
SHFA 0.93 1.00 0.75 1.00 6.24% 4.00% 2.73 0.50 16.13 2 -0.28
SML 0.54 0.67 0.25 0.67 -0.11% -0.28% 0.57 0.39 16.48 1 -1.01
SNGP 0.66 0.33 0.75 0.67 2.83% 28.09% 2.12 0.96 19.95 1 0.58
SPWL 0.38 0.33 0.25 0.67 14.16% 46.98% 0.54 0.48 16.96 1 0.41
SRVI 0.55 0.00 0.50 1.00 6.05% 11.40% 1.66 0.70 16.72 1 -0.23
SSGC 0.59 1.00 0.75 0.33 0.80% 10.25% 0.93 0.92 19.09 1 0.35
SYS 0.62 0.67 0.25 0.67 22.69% 9.94% 2.56 0.22 15.50 2 0.77
THALL 0.60 0.67 0.75 0.67 12.30% 18.38% 0.72 0.11 17.22 1 1.02
34

TRG 0.21 0.00 0.00 0.33 -1.32% -2.48% 0.59 0.16 16.69 2 0.44
UBL 0.59 0.33 0.50 0.67 0.73% 8.84% 1.04 0.92 21.42 2 0.30
UNITY 0.50 0.00 0.50 0.67 5.32% 2.15% 3.19 0.61 15.33 1 0.18
Table 1.2
Variable Mean Median SD Minimum Maximum
Panel A: ESG Performance
ESGP 0.59 0.62 1.00 0.00 0.27
ES 0.45 0.33 1.00 0.00 0.35
GS 0.68 0.67 1.00 0.00 0.30
SS 0.60 0.75 1.00 0.00 0.32
Panel B: Financial
Performance
ROA 0.08 0.06 0.30 -0.22 0.08
ROE 0.57 0.13 35.64 -0.47 3.69
Tobin's Q 2.35 0.94 73.03 0.00 7.70
Panel C: Control Variables

BETA 0.33 0.35 1.93 -1.39 0.64
DEBT 0.54 0.56 0.96 -0.64 0.31
SIZE 17.16 17.83 22.80 0.00 4.39
IND 1.30 1.00 2.00 1.00 0.46
5.2 Correlation
Table 1.3 presents the Pearson correlation matrix for the dependent, independent and the
control variables. It is not surprising, that GS, ES and SS as components of ESGP are positively
significantly linked to each other. The control variables BETA and DEBT are negatively
correlated with ROA. ROE and Tobin’s Q with only DEBT being positively correlated with
Tobin’s Q.
Table 1.3
Variables BETA DEBT ES ESG GS IND Q_RATIO ROA ROE SIZE SS
BETA 1
DEBT 0.060823 1
ES -0.05912 0.0416 1
ESG -0.12114 0.256708 0.767184 1
GS -0.23615 0.269521 0.368929 0.770187 1
IND -0.01835 0.15721 -0.25915 -0.27699 -0.10334 1
Q_RATIO -0.06608 0.184541 0.091755 0.110023 -0.01007 0.06907 1
35

ROA -0.04583 -0.34583 0.314309 0.298371 0.17223 -0.4422 0.16531 1
ROE -0.14345 -0.0084 -0.0292 0.066015 0.128848 0.08286 -0.03864 0.172198 1
SIZE -0.00256 0.536744 0.289518 0.527303 0.565839 -0.2109 0.040174 0.118465 0.145296 1
SS -0.0961 0.312079 0.498942 0.787631 0.508573 0.27566 0.163221 0.305288 0.061192 0.463113 1
5.3 Regression
The impact of ESGP on FINP was calculated using the Least Squares method. The dependent
variables included are Return on Assets, Return on Equity and Tobin’s Q-Ratio. The
independent variables included is the ESGP Score in Total and divided into its three
components namely Environmental Score, Social Score and Governance Score. The control
variables included are Beta Factor, Debt, Size and Industry Type.
Table 1.4 provides the results of the regression analysis. After analysis we did not find any
significant relationship between Total ESGP (and its components) and FINP proxies of ROA,
ROE and Tobin’s Q*, with the exception of SS showing a significant positive relationship
between with ROA*. Upon Further analysis we find ESGP in total to be significantly and
positively correlated to ROA** whereas either ESGP or any of its constituents were not found
to be significantly related to any of the FINP proxies with the exception of ES being negatively
correlated with ROE**. Insofar, results only partly support our hypotheses.
Table 1.4
Dependent Variables ROA ROE Tobin's Q
Coefficient 0.07482 -0.694288 2.58444
t-Statistic 2.43563 -0.402657 0.72402
ESG Prob. 0.01690 0.6882 0.47100
R² Adj. 0.33704 -0.001876 0.01617
F-Statistic 10.35419 0.965555 1.30240
Coefficient 0.03889 0.228569 -1.69966
t-Statistic 1.29886 0.1391 -0.49927
GS Prob. 0.19740 0.8897 0.61890
R² Adj. 0.30530 -0.003519 0.01307
F-Statistic 9.08635 0.93547 1.24365
Coefficient 0.04379 -1.161918 1.99196
t-Statistic 2.07915 -0.996185 0.82177
ES Prob. 0.04050 0.3219 0.41350
R² Adj. 0.32535 0.007578 0.01786
F-Statistic 9.87354 1.140494 1.33468
Coefficient 0.07868 -0.293914 3.08561
t-Statistic 3.15415 -0.205375 1.04560
SS
Prob. 0.00220 0.8378 0.29860
R² Adj. 0.36450 -0.003256 0.02252
36

F-Statistic 11.55369 0.94028 1.42400
*results significant at 1% level of significance
**results significant at 5% level of significance
Considering the scope and the design adopted for the present research, we are not concerned
about causation. Instead, we focused on associations between the variables studied. As a result,
our study signals empirical associations, rather than causation.
6. Discussions
The primary goal of this study was to examine the affiliation between the ESG performance
and financial performance. To answer the very first question of this study we performed
Regression using Least Squares method to inquire about which aspects of ESGP have a
significant impact on financial performance (Table 1.5 provides the results of the regression
analysis). Examining the results we find no significant relationship among Total ESGP (and
its components) and FINP proxies of ROA, ROE and Tobin’s Q, except for the SS (social
score) that has significant positive association with ROA. Upon Further analysis we find
ESGP in total to be significantly and positively correlated to ROA whereas either ESGP or
any of its constituents were not found to be significantly related to any of the FINP proxies
with the exception of ES being negatively correlated with ROE.
To answer the second question, i.e. what is the relationship between ESG score and financial
performance, we executed multiple regressions. The first regression used return on assets
(ROA) as the dependent variable, the second used Tobin’s Q and for the third regression we
took return on equity (ROE) as the dependent variable to find if there exists a difference in the
effect of ESG score between accounting and market based financial performance. Empirical
results show no significant effect of the total ESG score on any of the three dependent
variables except for the SS that has positive significant affiliation with ROA. Due to lack of
significant relationship, results indicate that no meaningful conclusions can be drawn on
financial performance based on the ESG score used in the analysis. Despite of the conclusions
drew form the empirical results one can find considerably positive relation among total ESG
score and accounting based proxies (i.e. ROA) and there may also be a negative relationship
exist among total ESG score and market based proxies (i.e. ROE and Tobin’s q).
The result is consistent with previous researchers studied in our literature review. (Dahlberg
and Wiklund, 2018) used similar method and did not find any significant association among
37

ESG score and accounting based performance. (Velte, 2017) carried out similar study on
German market and found no significant association among ESG score and market based
FINP. (Ahlklo and Lind, 2019), conducted similar study their findings concluded no
significant relationship between ESG score and financial performance, neither market nor
accounting based. Neither (Sahut nor Descomps, 2015) nor (Hartzmark, and Sussman, 2018)
found any significant connection between ESG and Market based FINP, though they used
different methods for their studies. Also (Rekker, Lee, and Faff, 2013) added to the support
of the “no Linkage theory”
Our results may differ from the previous studies although they used similar methods with same
proxies i.e. (Velte. 2017) and (Ahlklo and Lind, 2019), and (Dahlberg and Wiklund, 2018),
this could be possible because of the different sample sizes, slight variations in methods and
types of ESG scores considered.
Another purpose of this study was to see which of the E, S or G components have a stronger
relationship with FINP. To find out we ran nine different regressions where E, S and G were
separately tested for relationships with ROA, ROE and Tobin’s q as can be observed in Table
1.2 which shows Social Score having strongest relationship with ROA among the components
of ESGP followed close by the combined ESG Score. Moreover other components also
showed significant but weaker relationship with ROA. For ROE and Tobin’s q none of the
components of ESGP showed significant relationship with both of them. Consequently, this
interpretation does not apply for market based financial performance.
(H. J. Kim, and Yu, 2016), (Velte, 2017), (Dahlberg and Wiklund, 2018) and (Ahlklo and
Lind, 2019) have conducted related studies and analyzed each components of ESG separately
but their conclusions vary from ours. (H. J. Kim, and Yu, 2016), found that GS (Governance
Score) had the most impact on FINP. (Dahlberg and Wiklund, 2018), identified that the ES
(Environmental score) had the significant positive association to Tobin’s q. identically
(Ahlklo and Lind, 2019) results showed that Environmental factor is the one that showed
strongest relation with Tobin’s q. (Velte, 2017), presented a result where each of the ESG
variables had positive relationship with ROA.
Different sample sizes could be the reason of variations in the results and aforementioned
studies i.e. (Velte, 2017), and (H. J. Kim, and Yu, 2016) they both used samples conducted
from Germany and South Korea respectively. Unlike our study, this work is truly conducted
38

in Pakistan and data has been collected from the companies listed in KSE 100. (Dahlberg and
Wiklund, 2018) and (Ahlklo and Lind, 2019), they both selected Nordic companies for their
sample but found totally opposite results. (Dahlberg and Wiklund, 2018), in their study found
that ES is positively correlated with Tobin’s q whereas (Ahlklo and Lind, 2019), evaluated
that ES has strongest but negative relationship with Tobin’s q. This difference is possible
because both used different sources of ESG scores which may differ in the methodology and
rating criteria. As discussed above, there is no accurate standard for measuring sustainability
and different categories of ESG can be considered.
7. Conclusion
The study sheds light on empirical relationship between ESGP and Financial Performance
using a sample of the firms listed on KSE100. To our best knowledge it is the first study that
includes financial as well as manufacturing firms in its sample in Pakistan. The study assessed
data from 93 companies spanning over the year 2018, and notes that overall ESGP and its three
constituent elements (environmental, social and governance performance score) have a
significant impact on accounting-based measure(s) FINP (ROA), this partly supports H1 and
H2. The relationship between governance performance and FINP was seen as significant and
positive supporting H5. Analysis also revealed a positive relation between Environmental
performance and ROA which reaffirms H3, but a negative relation with ROE which partly goes
against H3. Similarly Social performance was only found to have a significant impact on ROA
but not the other measures of FINP which does support H4 but only partly. Unusually, ESG
performance had no significant relationship with Tobin’s Q. Overall the results indicate ROA
to be significantly related to ESGP and its individual components whereas the other two
measures of FINP remained largely unaffected. These results indicate the relation between ESG
performance of a business and its financial performance has more dimensions to be studied in
the future, especially in Pakistan. The results also suggest that the companies listed in KSE100
reveal variety of CSR information under different disclosure policies and items. The absence
of a uniform reporting framework indicates the room for improvement. In the coming years we
expect increased research activities for Pakistan’s markets. CSR disclosure should thus be
regarded as a key part to the financial reporting, and should be, eventually, standardized. The
inclusion of all related stakeholders should prove to be beneficial in this regard, promoting
transparency and wide acceptance of the practices that any business adopts to reach its goals,
the Government of Pakistan (GOP) must establish well-defined provisions and actively track
39

firms' operations. The GOP should also promote and incentivize companies that are already
voluntarily running and reporting CSR practices to the general public.
Our findings are particularly significant for academics, regulators and practitioners to reinforce
opportunities to develop and improve the stakeholder management mechanisms in CSR
activities. Such results will assist government, the business sector and the public in designing
future CSR programs. This study will encourage owners, shareholders, and investors to
contribute more in CSR activities. Other industries in Pakistan and around the globe can also
obtain benefits by considering this study.
Policy Implications
Following are the few recommendations based on the findings to improve CSR and ESG
activities in Pakistan.
First, during the CSR development phase firms should recognize the role of top executives as
they provide a long-term vision and dedication. Second, firms must ruminate the needs of the
community where they function their business activities and develop various approaches to
addressing and dealing community issues. Third, the Government of Pakistan (GOP) have to
develop steady regulations and monitor the firms’ activities constantly. Fourth, the GOP should
appreciate those firms that work fairly and reveal all their ESG activities to the public. Fifth
companies should expand ESG activities by involving societies and its workforce. Sixth Civil
society and NGOs can play a vital role in convincing companies to execute better ESG
activities in a better way in Pakistan.
Limitations:
Lack of availability of reliable data and time available to gather such data were basic limitations
that we have faced while conducting this study. The scope of this study could possibly be
extended to include more observations by inducting data from a longer time interval, but due
to limited timespan we only considered time period of one year i.e. 2018 because of which this
study might offer just a small insight. In Pakistan companies are not required by law to disclose
and/or publish and provide their sustainability reports, this has led to companies published their
CSR activities to match their own agenda and even using such activities for marketing purposes
is common. Furthermore as the non-availability of sustainable indices and/or sources of ESGP
scores were apparent for Pakistan, content analysis method was used to extract the data required
to perform the necessary analysis.
40

Findings of this study should be used with caution as it considered CSR activities mentioned
in firms annual reports only. In this study we have investigated 93 firms registered in KSE100.
The restricted sample size limits the possibility of carrying out more detailed statistical
analysis. The evaluation is not free from subjective factors which reduces the quality of our
results. In future this study can be focused on both developing economies and third world
countries as well. Another probable future direction for such study could include various
variables that could affect enhancement of financial performances of companies. Furthermore,
many of listed companies in KSE belongs to non-manufacturing sector. This, in our view,
might have a significant impact on overall results of this study as compared to the traditional
approach of assessing only the manufacturing sector due to their greater impact on the
environment.
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Assessing Firms’ Environmental, Social and

Governance Performance (ESGP) and its effect

Dr. Danish Ahmed Siddiqui

Keywords: Corporate Social Responsibility, Corporate Social Performance, Financial

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1.3 Gap Analysis

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1.5 Research Question

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2.2 Determinants of CSR–CFP

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2.3 Overview of ESG Scores its Disclosure

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3.3 Hypotheses Development

H1 ESGP has a Significant and Regression ESGP: Independent Variable

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H2: ESGP has a significant and positive impact on FINP.

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3.4 ESGP & FINP

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3.4.2 ESG and Market-Based FINP (Tobin’s Q)

When large American non-financial firms were investigated, a significantly positive

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RISK and FINP

SIZE and FINP

INDUSTRY TYPE and FINP

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3.5 ESG Index construction methodology content analysis

3.6 Disclosure status

3.8 ESG Combined Score

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3.9 Pillar Scores Calculation

Pillar Score Calculation

3.9.1 Calculation of Category Scores

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Pillar Category Indicators Weights

3.9.3 Category Definitions

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3.10 ESG score index and its 3 sub-indices

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4.2 Regression Specification

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4.3 Regression Model

FINP (ROA, TOBIN’S Q) = α + β1ESGP + β2BETA + β3SIZE + β4IND + β5DEBT + ε

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