Impact of ESG Ratings on Companies’ Financial Performance: Evidence from Asia

Abstract

ESG ratings have emerged as a critical instrument for investors to evaluate the long-term risks and ethical dimensions of companies. These ratings quantify companies' performance in environmental, social, and governance aspects. Nevertheless, variations in ESG ratings persist across nations owing to distinct regulatory regimes and rating agency methodologies.
Despite extensive scholarly attention to the influence of global ESG factors, Asian ratings have been barely scrutinized. The research aims to assess the influence of ESG ratings on the financial performance of companies in Asia, with particular focus on South-West Asia (Turkey, Israel, and Saudi Arabia) and South-East Asia (China, Hong Kong, Singapore, and
Malaysia). The study, which gathered data from 276 firms over a five-year period (2018–2022), employed STATA software to conduct panel data regressions, with return on assets, return on equity, and price-to-book value serving as dependent variables. First, the results of hypothesis testing show that ESG ratings have a positive effect on financial performance in
South-West Asia, but not in South-East Asia where they have a negative effect. Second, in South-West Asia, one of the environmental, social, or governance (ESG) factors has a more notable influence and results in positive financial ratios, while in South-East Asia, there is no influence from the ESG factors. The study found that ESG ratings have varying effects
on financial performance in South-West and South-East Asia, which may be attributed to differences in the historical and cultural development of ESG issues. This study will aid in the development of ESG rating practices for Asian countries.