ESG Dimensions and Corporate Value: Insights for Sustainable Investments
Round 1
Reviewer 1 Report
Comments and Suggestions for AuthorsAuthor Response
Dear Reviewer 1
Thank you for taking the time to review our paper. The authors appreciate your feedback and would like to address the concern you raised regarding each point of the message, and we will detail each improvement that we propose to the paper:
Firstly, the matter under discussion in this article is not new, and thus, the article's innovativeness is somewhat lacking.
Thank you for your question and it is a very important aspect and we, as authors, aim to address several innovative aspects that we have introduce in the abstract of the paper.
The multidimensional perspective of ESG Dimensions, since the paper adopts an integrated approach to analyze the environmental, social, and governance (ESG) dimensions and their relationship with corporate value (in two separate hypotheses: financial performance and market value). While previous papers in the literature have researched each aspect of ESG dimensions and this paper stands out by simultaneously considering all three dimensions, providing a holistic and detailed view of their combined impact on corporate value.
Another aspect is contributed to the literature review and best practices dialogue with stakeholders, because the paper significantly contributes to the ongoing debate in the literature and sustainable investments. It is very important to show empirical evidence on the relationship between ESG dimensions and corporate value. So, this paper fills this gap and offers a strong foundation for future research on sustainable practices.
The most important (that has taken us lots of time to collect the data) is the unique database that includes detailed information from 100 companies across different sectors in Brazil. This comprehensiveness research allows to ger a robust generalization of the results and proposed insights that can be applied in a variety of contexts, increasing the relevance and practical applicability of our study.
Secondly, it is recommended that the article should succinctly articulate the research question at the very beginning of the introduction.
Thank you for your question and it is a very important aspect and we, as authors, will introduce in the introduction:
In this research, the authors aim to address the growing demands for sustainable investments which is justified on the literature review for several researchers as Henderson (2023, 207) that argues the “purpose-driven firms demonstrate that acting for the common good increases profitability (and social well- being).” Moreover, the theoretical framework of this paper facilitates an exploration of the relationship between a company's market value, financial performance, and adherence to ESG (Environmental, Social, and Governance) dimensions. This approach is critical given the significant impact sustainability has on investor behavior and decision-making.
The empirical analysis will reveal how sustainability practices influence company valuations and financial outcomes, providing a robust basis for understanding these dynamics. This insight is particularly relevant in the context of the B3 Stock Market, known for its competitive environment and stringent assessment of company strategies. The B3 market’s focus on sustainability allows investors to evaluate companies not only on financial metrics but also on their commitment to ESG principles.
By integrating empirical insights with our theoretical framework, the authors offer a comprehensive assessment of how sustainable practices affect market value and financial performance. This enables investors to make more informed investment decisions that align with sustainability principles, promoting long-term value creation and ethical investing. This research contributes to a particular important understanding of the strategies of corporations on B3 Stock Market and the awareness that investors have of the ESG dimensions they adopt.
In a highly competitive market like B3, where investors seek to optimize their portfolios with sustainable investments, this research provides crucial guidance. It underscores the importance of sustainability in driving financial performance and market valuation, thereby supporting informed and responsible investment choices. Our findings contribute to a deeper understanding of the interplay between market value, financial performance, and ESG adherence, emphasizing the strategic importance of sustainability in the investment landscape.
Thirdly, what is the conceptual distinction between market value and performance? In my view, market value is a subset of performance, and I would appreciate it if the author could provide a clearer delineation of these concepts.
Thank you for your question and it is a very important aspect and we, as authors, will introduce in the methodology section introduction:
Indeed, the market value that represents the current value of a company could be expressed by the value of the stock market (Fama, 1970). This indicator is calculated by multiplying the company's stock price by its total number of outstanding shares express from a specific stock exchange. Thus, the market value reflects the collective perception of investors about the company's prospects and assessed by rentability and the risk management (Damodaran, 2002). The risk mitigation is very important to explain the sustainable strategy of the company, because it reflects investors' expectations and perceptions (positive or negative) and so the external impact on the company and, also, it is influenced by macroeconomic factors and sustainable market tendencies (Penman, 2010).
Also important is the assessment of the results achieved by the company and so the internal impact on the company (Koller et al., 2010). Thus, the process of the company to achieve its commercial objectives, typically, are measured through financial results express from the income statement of the company. There are several indicators that can be used, for example, revenue, expenses and net result. So, if the company develop sustainable practices (Ferrell et al, 2016), financial performance can be assessed through financial measures (Kaplan and Norton, 1996) such as: sales and level of consumer satisfaction (Servaes and Tamayo, 2013) and personal expenses associated with the commitment to the smooth running of the company and level of employee engagement (Edmans, 2012) express from the annual report (Ittner and Larcker, 1998).
Damodaran, A., 2002. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. London: John Wiley & Sons.
Fama, E.F., 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383-417. DOI: 10.2307/2325486
Ittner, C.D., & Larcker, D.F., 1998. Innovations in Performance Measurement: Trends and Research Implications. Journal of Management Accounting Research, 10, 205-238.
Kaplan, R.S., & Norton, D.P., 1996. The Balanced Scorecard: Translating Strategy into Action. Harvard Business Review Press.
Koller, T., Goedhart, M., & Wessels, D., 2010. Valuation: Measuring and Managing the Value of Companies. London: John Wiley & Sons.
Penman, S.H., 2010. Financial Statement Analysis and Security Valuation. London: McGraw-Hill/Irwin.
Servaes, H. and Tamayo, A., 2013. The impact of corporate social responsibility on firm value: The role of customer awareness, Management Science, 59, 1045-1061
Edmans, A., 2012. The link between job satisfaction and firm value, with implications for corporate social responsibility, Academy of Management Perspectives 26, 1-19
Ferrell, A., Liang, H. and Renneboog, L., 2016, Socially responsible firms, Journal of Financial Economics 122, 585-606
Fourthly, performance encompasses a broad range of aspects, and it is not suitable to gauge it using a single financial metric. Furthermore, it is crucial to ascertain whether the author is focusing on performance in general or specifically on financial performance.
Thank you for your question and it is a very fundamental aspect and we, as authors, will introduce in the methodology
This paper presents the financial performance as one of the innovative natures of the paper, because it validates additional explanations, due to the use of an advanced quantitative methodology, combining data analysis techniques with robust econometric methods. Specifically, the research presents several econometric models, such as panel data analysis and Generalized Method of Moments (GMM) estimation techniques, which are less common in the literature review and provide a more accurate and reliable estimates to draw conclusions of the impact on ESG. As this paper defend and, also, Kassinis (2003), Miles and Coving (2000), Sharma and Vredenburg (1998) and Kareiva et al. (2015, 7376) introduce the debate that “a proactive approach to environmental issues enhances consumer loyalty and financial performance”
Kareiva, P.M., McNally, B.W., Steve McCormick, S., Miller, T. and Ruckelshaus, M. (2015). Improving global environmental management with standard corporate reporting. Proceedings of the National Academy of Sciences of the United States of America, 112 (24), 7375-7382
Kassinis, G. and Soteriou, A.C. (2003) Greening the service profit supply chain: The impact of environmental management practices. Production Operation Management, 12(3), 386–403.
Miles, M.P. and Coving, J (2000) Environmental marketing: A source of reputational, competitive, and financial advantage. Journal Business Ethics, 23, 299–311.
Sharma, S. and Vredenburg, H. (1998) Proactive corporate environmental strategy and the development of competitively valuable organizational capabilities. Strategic Management Journal 19, 729–753
I also confirm that an English revision was performed on the manuscript.
thank you very much for your comments
Reviewer 2 Report
Comments and Suggestions for AuthorsDear Authors,
I have two major suggestions: theoretical and empirical.
. on a theoretical basis, I would discuss more thoroughly the Brazilian context and what new for knowledge can emerge from studying this particular reality
. on an empirical basis:
.. you used the ratio of market capitalization to total assets. Maybe a market capitalization to book equity would be preferable because value also considers debt.
.. given the data limitations, why not consider governance as an indicator variable?
.. model equations (p.7) do not seem to respect table 6 or table 7 variables. Why is the control Ebitda_ta in the market value regression? Why do you omit year and industry fixed effects?
.. why do you include two controls for growth opportunities (sales growth and asset growth)? Have you checked for multicollinearity issues?
.. for completeness, a sample of all firms that have value on all esg indicators would be interesting.
.. Table 8 does not need to present the individual industry effects
.. In a five year time period ending in 2021, covid-19 represents 20% of time. How do you control for this disruption?
... Need to present robustness tests.
Author Response
Dear Reviewer, 2
Thank you for taking the time to review our paper. The authors appreciate your feedback and would like to address the concern you raised regarding each point of the message, and we will detail each improvement that we propose to the paper:
I have two major suggestions: theoretical and empirical.
. on a theoretical basis, I would discuss more thoroughly the Brazilian context and what new for knowledge can emerge from studying this particular reality
Thank you for your valuable suggestion on our paper. We appreciate the time and effort that you have taken to review our paper and especially we appreciate your constructive suggestion, and we aim to address them comprehensively in the revised manuscript.
Regarding your suggestion to enhance the theoretical basis by discussing the Brazilian context more thoroughly, we agree that this is an essential aspect that can significantly strengthen the paper. We provide a comprehensive discussion of the unique characteristics of the Brazilian context.
Furthermore, the authors aim to justify that the study of Brazil Stock Market contributes to new insights to the scientific knowledge, and it will improve the research in the sustainability investments. Indeed, the Brazilian context is diverse and dynamic, offers a rich ground for understanding broader theoretical implications, because B3 Stock Market (2024) has more than 450 listed companies in the 2017 and 2018 years; 425 listed companies in the year 2019; 393 listed companies in the year 2020 and 446 listed companies in the year 2021. By examining this specific reality, the paper covers the unique reality that it is not evident in relation with other contexts, like the New York Stock Exchange (2024) with, approximately, 2,400 listed companies in the year 2017; 2,300 listed companies in the year 2018; 2,200 listed companies in the year 2019; 2,363 listed companies in the year 2020 and 2,300 listed companies in the year 2021. These to different realities allows to provide a robust foundation for developing new theoretical perspectives or even refining existing ones, thereby contributing to the global body of knowledge.
We are committed to ensure that the discussion provides a deep understanding of the Brazilian context. This will involve a thorough literature review, incorporating both historical and contemporary sources, and a critical analysis that highlights the implications of the findings for theory and practice.
B3 Stock Market (2018). Annual report 2017 on the Institutional Site Sao Paulo: B3
B3 Stock Market (2019). Annual report 2018 on the Institutional Site Sao Paulo: B3
B3 Stock Market (2020). Annual report 2019 on the Institutional Site Sao Paulo: B3
B3 Stock Market (2021). Annual report 2020 on the Institutional Site Sao Paulo: B3
B3 Stock Market (2022). Annual report 2021 on the Institutional Site Sao Paulo: B3
B3 Stock Market (2024). Annual report on the Institutional Site Sao Paulo: B3
New York Stock Exchange (2018). Annual report 2017 on the Institutional Site. New York: NYSE
New York Stock Exchange (2019). Annual report 2018 on the Institutional Site. New York: NYSE
New York Stock Exchange (2020). Annual report 2019 on the Institutional Site. New York: NYSE
New York Stock Exchange (2021). Annual report 2020 on the Institutional Site. New York: NYSE
New York Stock Exchange (2022). Annual report 2021 on the Institutional Site. New York: NYSE
New York Stock Exchange (2024). Annual report on the Institutional Site. New York: NYSE
. on an empirical basis:
.. you used the ratio of market capitalization to total assets. Maybe a market capitalization to book equity would be preferable because value also considers debt.
Thank you for your valuable suggestion on our paper.
As Lindenberg and Ross (1981, 1) presents the Tobin's q ratio as “the ratio of the market value to the replacement cost of its assets--as a measure of, or bound for, the monopoly rents of that firm”, but in this paper, we did not use this ratio, because dividing by total assets was necessary to create a comparative index for cash generation across companies of varying sizes. This approach normalizes the data, allowing for significant associations and insights into cash generation efficiency irrespective of company hierarchy. By standardizing on total assets, we ensure that our analysis remains relevant and applicable across a diverse range of companies as the sample from the B3 Stock Exchange.
Lindenberg, E.B. and Ross, S.A., 1981. Tobin's q Ratio and Industrial Organization. The Journal of Business, 54 (1), 1-32
.. given the data limitations, why not consider governance as an indicator variable?
Thank you for your detailed feedback on our paper, we would like to thank especially the suggestions that are very important to improve of the paper. Governance has data limitations that are followed in several situations, such as: incomplete data for some corporations and this allows to have good results of the model due to the diversity of behavior of corporations and this also reduces the complexity, and it is easier to interpret the model and to increase the impact on sustainability investments.
.. model equations (p.7) do not seem to respect table 6 or table 7 variables. Why is the control Ebitda_ta in the market value regression? Why do you omit year and industry fixed effects?
Thank you for your detailed feedback on our paper, we would like to thank the suggestions that are very important to improve it, without your help, it will not be possible to get a paper without any discrepancies.
Indeed, to address your concerns, we have incorporated the year and the sector on the fixed effects regression model in order to control the time-specific and the sector-specific unobserved heterogeneity. So, it ensures that the models are robust and enhancing the creditability and validity of the findings.
Another concern it is to include in the model the variable EBITDA_TA in the market value regression based on their relevance as measure of the financial
.. why do you include two controls for growth opportunities (sales growth and asset growth)? Have you checked for multicollinearity issues?
Thank you for your valuable suggestion on our paper.
In the literature review (Guajarati and Porter, 2009; Wooldridge, 2005), the multicollinearity issues are related with Variance Inflation Factor (VIF), that it is a diagnostic tool used to detect multicollinearity in regression models. Multicollinearity occurs when independent variables in a regression model are highly correlated (VIF>5.0), which lead to unreliable estimates of regression coefficients. So, the hypothesis performed the VIF and verify if there is any collinearity on the model. The VIF mean was 2,80, and there is no VIF between variables that presents more than 5. It means that the variables on the model did not present collinearity (Greene, 2018; Hair et al., 2022).
Guajarati, D.B. and Porter, D.C., 2009. Basic Econometrics. Boston: McGraw-Hill.
Wooldridge, J.M., 2005. Econometric analysis of cross section and panel data. London: MIT Press.
Greene, H. 2018. Econometric analysis. Pearson, London.
Hair, J., Black, W., Babin, B. e Anderson, R. 2022. Multivariate Data Analysis. London: Cengage Learning.
.. for completeness, a sample of all firms that have value on all esg indicators would be interesting.
Thank you for your helpful suggestion on our paper that we will introduce in the limitations.
One limitation of the paper could be the absence on the sample of same values, instead of all corporations have values on all ESG indicators, this would show the completeness of the sample, but as Kareiva et al. (2015, 7376) argue: “business is competitive, and it is important to know whether those companies that embrace sustainability fare better than those that neglect sustainability.” For this reason, the authors aim to justify that the differences on the sample showing the diversity of their behavior. It is relevant for companies to be concerned with stock market, because as Doung (2022, 10) defend “ESG investors aim to hold companies to follow accountable to the ESG standards, impact investors actively pursue opportunities that generate positive externalities”. Due to this discussion, the authors published the dataset of this research in order to remain available to future research.
Kareiva, P.M., McNally, B.W., Steve McCormick, S., Miller, T. and Ruckelshaus, M., 2015. Improving global environmental management with standard corporate reporting. Proceedings of the National Academy of Sciences of the United States of America, 112 (24), 7375-7382
Duong, I.W.W., 2022. Redefining Shareholder Value Maximization: Identifying key sustainable investment strategies and their role in rehabilitating corporate purpose. Consilience, 25, 1-28.
.. Table 8 does not need to present the individual industry effects
We included the individual industry effects.
.. In a five year time period ending in 2021, covid-19 represents 20% of time. How do you control for this disruption?
Thank you for your helpful suggestion on our paper that we will introduce in the limitations.
Another limitation could be that in the five-year period of analysis, it ends in 2021, so the “covid-19 pandemic year” represents 20% of this period, but instead of being a disruption, as Kalb (2020, 4) argue, “the pandemic is leading asset allocators to take a hard look at investing more heavily into the “S” factor in their ESG frameworks, in addition to environmental considerations.” This accomplishment brings to the sample and this research a stronger evidence and show the benefits of adopt sustainable strategies.
Kalb, S., 2020. Asset Owners are Adapting ESG Frameworks to Respond to COVID-19. New America, September, 1-9 [available at https://www.jstor.org/stable/resrep26349]
... Need to present robustness tests.
Thank you for your insightful feedback that has been included in the econometric model, in order to justify the final considerations.
In the paper, the authors have conducted robustness tests on the sample to ensure the validity and reliability of the linear regression analysis. These tests are essential in verifying that our results are not only accurate but also consistent under various conditions. By performing robustness checks, the authors identify whether the observed relationships hold true across different models and subsets of the variables.
The robustness tests revealed some variations in the outcomes (table 6, 7, 8 and 9), leading to the identification of significant relationships that were not initially apparent. This highlights the importance of such tests in linear regression, as they help to uncover underlying patterns that may be obscured by specific data characteristics or sample peculiarities.
In presenting these differences, the authors have provided a comprehensive comparison between the initial results and those obtained after the robustness tests. This comparative analysis demonstrates how certain relationships have changed in significance, thereby offering a more nuanced understanding of the data.
The adjustments made through robustness testing have enhanced the credibility of our findings. It has allowed us to refine our interpretations and conclusions, ensuring that they are supported by robust evidence. Ultimately, incorporating robustness tests into our analysis has strengthened the overall rigor and reliability of our research, providing more substantial and trustworthy insights into the relationships examined.
Author Response File: 
Author Response.pdf
Round 2
Reviewer 1 Report
Comments and Suggestions for Authorsmy concerns have been addressed
Reviewer 2 Report
Comments and Suggestions for AuthorsDear authors, you have addressed most of my previous comments. No further questions
