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    Journal of Cleaner Production 150 (2017) 135e147

    Contents lists avai

    Journal of Cleaner Production

    journal homepage: www.elsevier .com/locate/ jc lepro

    Sensitive industries produce better ESG performance: Evidence from emerging markets

    Alexandre Sanches Garcia a, *, Wesley Mendes-Da-Silva b, Renato J. Orsato c

    a S~ao Paulo School of Management (EAESP), Department of Production and Operations Management (POI), Getulio Vargas Foundation (FGV), S~ao Paulo, Brazil b S~ao Paulo School of Management (EAESP), Department of Finance and Accounting, Getulio Vargas Foundation (FGV), S~ao Paulo, Brazil c S~ao Paulo School of Management (EAESP), Department of Production and Operations Management (POI), Getulio Vargas Foundation (FGV), S~ao Paulo, Brazil

    a r t i c l e i n f o

    Article history: Received 28 June 2016 Received in revised form 21 February 2017 Accepted 24 February 2017 Available online 3 March 2017

    Keywords: Corporate social responsibility (CSR) Environmental, Social and governance (ESG) performance Sustainability index

    * Corresponding author. E-mail address: (A.S. G 0959-6526/© 2017 Elsevier Ltd. All rights reserved.

    a b s t r a c t

    Given the rising interest in corporate social responsibility (CSR) globally, this paper investigates whether the financial profile of a firm is associated with superior environmental, social and governance (ESG) performance, considering firms from Brazil, Russia, India, China and South Africa (the so-called BRICS countries) with the aim of addressing a gap in relevant research. The study entails an analysis of ESG performance in sensitive industries (i.e., those subject to systematic social taboos, moral debates, and political pressures and those that are more likely to cause social and environmental damage). To test our hypotheses, we applied linear regressions with a data panel using the Thomson Reuters Eikon™ database to analyze data from 365 listed companies selected from BRICS between 2010 and 2012. The results suggest that companies in sensitive industries present superior environmental performance, even when controlling for the firm’s size and country. Our study contributes to research on both the impact of ESG disclosure and the relationship between financial and ESG performance, as well to the practice of sus- tainability management in firms in developing countries.

    © 2017 Elsevier Ltd. All rights reserved.

    1. Motivation

    A central reason companies seek recourse in capital markets is the possibility of raising money at low costs. This is conditional, however, on the skill of firms to remunerate investors adequately because investors prioritize companies that provide a better return per unit of risk. In this regard, the quality of institutional commu- nication with the market via reports containing accurate, extensive and reliable information is central for firms (Mendes-Da-Silva and Onusic, 2014; Mendes-Da-Silva et al., 2014). Moreover, in the last decade, the governance practices and social and environmental performance of firms have become increasingly important not only for policy makers and the general public but also for investors. Hence, the search for growing returns is likely to coexist with better governance social and environmental practices (Cheng et al., 2014).

    Previous studies found that the commitment of a company to sustainability and Corporate Social Responsibility (CSR) reduces


    uncertainty, business risk and, by extension, the cost of capital for the firm (Bassen et al., 2006; Orlitzky and Benjamin, 2001). Assuming business risk as the probability that the companywill not meet its objectives, companies that pollute or have unfair employee relations may suffer penalties, fines or even be forced to halt op- erations, leading to financial losses. In the view of Bassen et al. (2006), a major risk of irresponsible corporate behavior is reputa- tional loss.

    Incidents caused by irresponsible behavior can reduce the trust and loyalty that stakeholders place in a company. The Deepwater Horizon oil spill of BP in the Gulf of Mexico in 2010 is an exemplary case (Roberto, 2011). Likewise, bad CSR performance may motivate consumers to boycott the products of a firm, as occurred with Shell in the Brent Spar incident in 1995 (Dickson andMcCulloch, 1996). If a company operates responsibly, however, the risk of consumer boycotts or other penalties is lower, rendering it more interesting for investors.

    However, the question of whether firms in controversial in- dustry sectors can become socially responsible largely remains unanswered. Sensitive industry sectors, which are typically char- acterized by social taboos, moral debates, and political pressure,

  • A.S. Garcia et al. / Journal of Cleaner Production 150 (2017) 135e147136

    include sinful industries, such as tobacco, gambling, alcohol, and adult entertainment (Cai et al., 2012). In this study, we identify companies as being sensitive (major socio-environmental impact: energy, including oil and gas; chemicals; paper and pulp; mining; and steel making) according to Richardson and Welker (2001) and Lee and Faff (2009).

    The literature on Environmental, Social and Governance (ESG) performance, with CSR issues being renamed in the finance- oriented literature, has evolved slower than the practice. Wood (2010) suggested that studying CSR and the Corporate Financial Performance-CFP relationship is of no value to the CSR and Corporate Social Performance-CSP literature. Rahdari (2016) argued that these suggestions might be of some veracity for well- developed markets but in regard to developing countries, with few studies conducted on the subject and a lower level of under- standing of the strengths and weaknesses, examining such a rela- tionshipmight be of a great value to the CSR literature. Roman et al., (1999) had a similar concern.

    When markets with a less mature economy - also called emerging markets - are considered, the ESG literature is even scarcer (Orsato et al., 2015). For this reason, this paper analyzes the relationship between the financial performance of companies listed in emerging markets belonging to the group of BRICS (Brazil, Russia, China, India and South Africa) and their ESG performance. In such contexts, ESG practices are expected to be in greater demand than in mature markets (Dobers and Halme, 2009; Baughn et al., 2007) due the deprived social and environmental demands in BRICS countries. In this respect, our study contributes to better understanding ESG performance in countries where it matters most. In addition to this research gap, we investigate the ESG performance of companies in these countries operating in sensitive sectors.

    While acknowledging the different terms that many practi- tioners and academic researchers have coined, in this paper, we use the terms corporate social responsibility and ESG somewhat interchangeably. A consultancy firm named Goldman Sachs origi- nally popularized the term “ESG performance”.

    This study is relevant and contributory for three reasons. First, according to Friede et al. (2015), the knowledge regarding the as- sociations between financial performance and ESG aspects remains fragmented. Some studies have also analyzed potential differences in the ESG and Corporate Financial Performance (CFP) across different regions. In particular, some found strong correlation be- tween ESG and CFP in the Emerging Market group, significantly higher than in the developed markets. Second, part of the literature ascertains that lower ratings for ESG imply lower disclosure and/or lower adherence to ESG standards, which can induce riskier and more unstable environment for investments.

    Yet, countries with higher economic growth, like the BRICS, may enable companies to invest more in ESG practices, to limit ESG related costs’ impact in the long term (Peir�o-Signes and Segarra- O~na, 2013). Third, since the 1970s most studies have pointed to a positive ESG-CFP correlation (Friede et al., 2015), but there is no agreement that sensitive industries always entail low ESG perfor- mance (Statman and Glushnov, 2009; Hong and Kacperczyk, 2009). Therefore, our study is relevant because it addresses these three issues, as well as the scarcity of empirical evidence from emerging countries, the BRICS in particular.

    The paper is structured as follows. The next section provides the background that supports the arguments put forward in this research. The third section presents the hypotheses. In the fourth section, we describe the empirical model, the data, the sample and the working method employed. The empirical results are discussed in the fifth section, including a section dedicated to robustness tests. The final section presents the conclusion.

    2. Theoretical background

    2.1. Environmental, social and governance (ESG), risk and financial performance

    In one of the initial studies on Corporate Social Responsibility (CSR), Carrol (1979) proposed a model for testing CSR investments in organizations based on the economic, legal and ethical domains (Environmental issues were embedded in the economic and legal domain). Since then, expressions such as sustainability, corporate responsibility, corporate governance, socio-environmental gover- nance, and environmental,