A Conversation with Kedge
Professor Revelli, head of our Kedge-Candriam “Finance Reconsidered” research chair, answers our questions on their latest study: “ESG Performance at the Firm-Level: The Effects of Economic Conditions and sovereign Capital Flow”.
Professor Revelli, what is the context of this study?
This study was developed between July and December 2021 by Bentley Tang, Research Assistant in our research chair. It was supervised by Luis Reyes-Ortiz, Professor of International Finance and Economics in Kedge BS and Head of our MSc Sustainable Finance, and myself.
This research presents a historical analysis of macroeconomic conditions and specific financial instruments to explain changes in the ESG performance of companies. Using a sample of more than 1000 listed companies in 8 developed, developing and emerging countries (USA, UK, France, Germany, Japan, Mexico, India and Brazil), which represents more than 6500 observations over a 7-year period (2013-2019), the research attempts to investigate the extent to which a country's capital flows and effective use of capital influences its sustainability performance.
What were you seeking?
We were attempting to determine the quantifiable relationship between a nation’s sovereign sustainability, and the sustainability of the companies residing in that nation.
Sovereign sustainability and ESG performance of companies within that nation should be linked through capital. These links can include the accessibility of capital, the efficiency of the use of capital, or the pricing of capital.
We looked for empirical relationships between sovereign sustainability risks and the ESG performance of companies. To test these, we used macroeconomic data for sovereign risks and capital flows such as, GDP growth, inflation, debt-to-GDP leverage, primary government budget balance, current account trade balance, currency reserves to imports, and trade openness. We measured the change in company ESG scores relative to the changes in these sovereign indicators and in the price of financial instruments over time.
We found firstly, that countries are not growing in a sustainable way. However, it’s more complicated than it appears, of course.
What type of relationships did you find?
We found firstly, that countries are not growing in a sustainable way. While this is not a surprise to some, our efforts provide some demonstration that economic growth, economic activity, and leverage in a nation are all negatively associated with the ESG scores of the companies based in those nations.
However, it’s more complicated than it appears, of course. It should be of no surprise that these indicators do not generate simple conclusions. Many country-specific differences can affect firm-level ESG performance.
The study showed a government budget surplus to be a positive indicator, suggesting that greater capital access for corporates promotes spending for operational improvements, such as sustainability. Monetary policy varies as well. If monetary policy is used to address currency instability, the data showed enhanced ESG performance of companies. Monetary policy is used to address high inflation, which was a negative predictor of corporate ESG results
If economic growth can be harmful to sustainability in a broad way, what should we examine next for better understanding?
With the complexity of economies and the numerous country-specific factors in the data, there is a trade-off between using enough factors for a thorough analysis and using too many factors that could generate weaker relationships.
The next step for us, and for others, is to disaggregate the results. For example, we disaggregated data within a small sample of eight nations which were screened to eliminate regional and economic status linkages. It was clear that financing and facilitating ESG and non-ESG activities at the national level significantly influences ESG performance of the companies within that nation.
Is there a message for governments?
ESG factors and analysis have been applied to both bonds and equity in academic literature as the popularity of the use of ESG in investing has soared. ESG factors are also increasingly studied in academics and used by investors as risk measures for sovereigns.
When we combine these two, we discover that despite this increase in attention to climate, greenhouse gas emissions and global temperature stability have worsened.
What is your main conclusion?
It has been demonstrated in the academic literature that macroeconomic policies of sovereigns and their specific regulatory framework could explain the choices made by companies in terms of CSR and sustainability. Our study aims to demonstrate that sustainable performance of companies could be constrained or supported. Whether by their local, institutional, and normative environment, the dynamic of a good allocation of capital flows and well targeted monetary and fiscal policies could act as a lever for sustainable commitments. As we deal with more markets and data, we think that this research could provide new insights for asset managers to identify the indicators to look at for sovereign assessments in terms of ESG practices.