Abstract:
With global emergence of environmental issues, where the world is susceptible to extreme natural disasters, it is imperative for the business landscape in Pakistan to evolve. With the climate crisis soaring, firms need to incorporate sustainability strategies into their planning and instill actions that make them more economically and environmentally resilient. This study aims to conduct sector-wise analysis of the Environmental, Social, and Governance (ESG) measures and their effect on the stock performance of 100 firms listed on the Pakistan Stock Exchange (PSX). For this purpose, the study constructs the ESG index, other accounting and market-based measures (return on equity, Tobin’s Q and weighted average cost of capital). This study considers the energy and manufacturing sectors to estimate the measures used to construct environmental, social, and governance scores. The study incorporated GHG emissions, which include carbon dioxide (CO2), nitrous oxide (N2O), and methane (CH4), as a measure for the environmental score. Moreover, in 2015, Pakistan embraced the United Nation’s objective 2030 for sustainable development at “the Sustainable Development Summit,” which requires all the large corporations to report on their ESGs by 2030. Given this backdrop, the data for constructing the variables used in this study are extracted from the firms' annual reports for ten years (2009-19). The study employs the Generalized Methods of Moments (GMM) estimation technique after testing for cross-sectional dependence, unit root and endogeneity to assess the effect of ESG factors on the stock performance of the firms. Considering the profitability, ESG combined and separate scores with a period lag show a negative but weakly significant coefficient. Considering the firm value, both the ESG combined and separate scores with a period lag positively influence Tobin’s q except environmental factors. Considering the weighted average cost of capital
(WACC) and ESG linkages, the ESG combined and separate scores with a period lag influence WACC negatively except for social factors. The study's findings are in line with the previous literature, which supports the catalyst effect of ESG compliance on the performance of the firms.
