Sustainability disclosure and its impact on firm's value for Energy and Healthcare industry

In the last decade, we have seen an increased awareness of the disclosure of nonfinancial information, in particularly, the presentation of aspects related to sustainability disclosure. The interest in the inclusion of nonfinancial information in corporate reporting has developed as a result of financial crises, international accounting scandals, climate change, investors’ need for transparency, the rapid globalisation of the economy, technology developments, and support of regulatory bodies. As opposed to financial reporting, which is focused on historical and short-term data to enable profit maximisation for shareholders (Anning, 2018; Li et al., 2018), nonfinancial information is focused on the impact that business's activities may have on the environment and society and on assessing the needs of stakeholders at large. The inclusion of nonfinancial aspects in corporate reporting transforms the short-term goals of the company, such as shareholders’ wealth maximisation, into medium- and long-term goals and changes the focus from profit maximisation to value creation (Freeman, 2010).

Sustainability disclosure has the purpose of encouraging companies to adopt a more balanced manner of conducting their activities in order to protect the environment and the society in which the company is active (Qureshi et al., 2019). Although, it may seem unnecessary for companies fixated on profit maximisation to invest funds on aspects related to sustainability disclosure and therefore reduce the profit of the period, the results of such spending may overcome the costs incurred as shown by previous research on the association between sustainability disclosure and firms’ value (Aboud & Diab, 2018; Qureshi et al., 2019; Sadiq et al., 2020; Wong et al., 2020).

As a result of the increased importance of sustainability disclosure that includes aspects related to environmental, social, and corporate governance of the business sector and private investors (Chen & Yang, 2020); the need for transparency; and communication during the trying times of a global pandemic, this paper investigates whether an association between sustainability disclosure and firms’ value exists for European companies in the energy and health care sectors. For a comprehensive interpretation of sustainability disclosure, the research takes into account both the combined and individual pillars of ESG (environment, social, and corporate governance). The environmental pillar is used to provide information regarding the interaction between the organisation, its activity, and environment as represented by the natural resources used by the company in its daily activities. In the context of rapid and irreversible changes in the global climate, investors, climate activists, governments, and regulatory organisations show increased attention to environmental information provided by the company. The environmental factor should consider and describe any negative effects produced by the company's activities on the environment and how the company manages to limit these effects. The social factor refers to the relationship between the organisation and its employees, customers, suppliers, and the communities in which the company is conducting its business activity. Regulations on data protection (Fiaschi et al., 2020, pp. 287–299), antidiscrimination, gender equality, development opportunities for the company's employees, and disadvantaged social categories are social aspects that may be disclosed by the company. The corporate governance factor relates to the company's leadership system, the implemented controls systems, the relationship with the shareholders, and the connection between shareholders and executives.

The scope of this research is to investigate possible associations between sustainability disclosure measured through the combined and individual ESG scores and the value of European companies in the energy and health care industries. The research may enable an enhanced understanding of the specific characteristics of energy and health care industry in terms of sustainability disclosure-related policies. The energy industry has been chosen, as it has a significant impact on sustainability, environmental and social aspects in particular; the global economy and society through employment opportunities (Lorenc & Kustra, 2021); and the increased focus shown by researchers and scientific journals’ editors in previous years (Lungu, Caraiani, & Dascălu, 2019). As for the second sector selected for the research, the health care industry has played an even larger role during the last two years, a role that has been brought forward by the global COVID-19 pandemic. Investors have directed their attention towards this sector in the hope that health care companies will take advantage of the global pandemic, and this will be seen in their stock returns (Mittal & Sharma, 2021). Given the present circumstances and the willingness to invest capital in the health care industry, a study on whether or not the value of the company is influenced by sustainability disclosure presents an opportunity. Regardless of the industry in which a company is active, it has been assessed that ESG performance acts as a financial risk mitigator to investors in the unique situation of a global pandemic more than under common conditions (Broadstock et al., 2020).

Considering recent years, a significant number of studies investigating the relationship between sustainability disclosure and firms’ value have been published. Irrespective of the numerous papers studying this association, the results are mixed and contradictory. Evidence is provided for the existence of a positive relation (Aboud & Diab, 2018; Friede, Busch, & Bassen, 2015; Gillan, Koch, & Starks, 2021; Y. Li et al., 2018; Liu, 2020; Richardson & Welker, 2001; Sadiq et al., 2020; Wong et al., 2020; Yoon, Hwan Lee, & Byun, 2018; Yu, Guo, & Luu, 2018), a negative one (Brammer, Brooks, & Pavelin, 2006; Friede et al., 2015; Horváthová, 2010; Li, Liao, & Albitar, 2019; Liu, 2020; Plumlee, Brown, & Marshall, 2008; Z. Ruan & Liu, 2021; Sadiq et al., 2020) or no significant connection at all (Deswanto & Siregar, 2018; Friede et al., 2015; Lorraine, Collison, & Power, 2004) when various measures are used for sustainability disclosure and firms’ value.

The present investigation is developed on one main hypothesis in determining whether there is an association between sustainability disclosure measured through combined and individual ESG scores and the firms’ value for the European companies acting in the energy and health care industries:

H1: There is an association between sustainability disclosure and the firms’ value for the European companies acting in the energy and health care sectors.

Several secondary assumptions result from the main hypothesis, as follows:

H1.1: There is an association between environmental disclosure and the firms’ value for the European companies acting in the energy and health care sectors.

H1.2: There is an association between social disclosure and the firms’ value for the European companies acting in the energy and health care sectors.

H1.3: There is an association between corporate governance disclosure and the firms’ value for the European companies acting in the energy and health care sectors.

In order to develop a research design to address the hypotheses, ESG scores available on the Refinitiv Eikon platform were used to measure the sustainability disclosure; firms’ value, market value, and Tobin's Q were considered. The initial sampling size consisted of 103 European companies from the energy industry and 130 European companies from the health care industry. The final sample was reduced to 61 companies for the energy sector and 45 for the health care sector with data over a period of five years (2015–2019), due to unavailability of ESG scores and financial information (for example, total revenues from business activity) for the period analysed in the research. Thus, the data sample from both industries have been set into a cross-data panel structure to increase the reliability of the results obtained from a limited number of observations.

The outputs obtained offer additional evidence regarding the existence or nonexistence of an association between sustainability disclosure measured through ESG scores and firms’ value, similar to the ones provided by other studies that have investigated this relationship through distinct or comparable measures (Brammer et al., 2006; Deswanto & Siregar, 2018; Friede et al., 2015; Horváthová, 2010; Liu, 2020; Plumlee et al., 2008; Ruan & Liu, 2021; Sadiq et al., 2020).

The research limitations may be represented by the fact that companies pertaining to only two industries were analysed. Both industries are considered generally as sensitive industries, a fact that might limit the results of the study to other sensitive industries only. Another limitation is that only European companies are included in the database tested; different outputs may be obtained by extending the sample to include international companies. In addition, the total number of observations obtained for both industries may seem rather limited for the validity of the results.

The remainder of this paper is structured as follows: The second section highlights the prior research. The third section presents the research design by describing the sample and data, variables, and research method. The fourth section is dedicated to the presentation of the research results. Conclusions are provided in the fifth section.

A theoretical introduction of sustainability disclosure measured through the combined and individual ESG scores would be highlighting that the origin of ESG as pillars of corporate social responsibility disclosure resides with shareholder and stakeholder theories as described in the study conducted by Qureshi et al. (2019). Milton Friedman introduced shareholder theory in an article published in the New York Times in September 1970. The theory stated that the sole responsibility of any company is only to its shareholders, for whom profit maximisation must be attained. Furthermore, all funds should be allocated to the achievement of this purpose; any deviation of funds towards other purposes such as social activities is trespassing the commitment towards shareholders. As opposed to shareholder theory, stakeholder theory emphasises the responsibility of the company towards all its stakeholders, defined by Freeman (2010) as being all the parties that can have an impact on the company or can be impacted by the company's activity. Among the stakeholders of a company, Freeman (2010) included employees, shareholders, customers and suppliers, governments, and the community at large. The interaction between all these parties achieves not only profit maximisation but also value creation (Freeman, 2010). Value creation is also described in the international integrated reporting framework (IIRC, 2021, p. 16) as a result of the interaction between different capitals available within a company, such as the financial, human, social, and relationship capitals. Following the assessment of both shareholder and stakeholder theory, it can be stated that the latter militates for inclusion of sustainability activities within the focus of the companies (Qureshi et al., 2019).

Disclosures about environmental, social, and corporate governance are representative for sustainability practices and sustainable development; additionally, supporting sustainability disclosure will turn out to be advantageous for the company and its stakeholders (Eccles, Ioannou, & Serafeim, 2012). Elkington (1994) established that companies may be able to adopt a sustainable development by combining the economic, social, and environmental aspects of their business. By focusing on sustainability, companies may improve their financial performance and relations with stakeholders, while also protecting the environment (Elkington, 1994). Eccles et al. (2012) highlighted that companies that adopted sustainability disclosures as early as 1993 achieved a better accounting performance and stock market evolution in the long term compared with companies that did not adopt sustainability disclosure. Taking into consideration the European context on sustainability, the European Commission has demonstrated its support towards a sustainable development by disclosing the United Nations 2030 Agenda at the Sustainable Development Goals Summit in 2019. Further assessing the influence of sustainability disclosure on stock markets, ESG are considered to have a major role on responsible investing according to the study conducted by Caplan, Griswold, and Jarvis (2013). The role of sustainability (ESG) has been recognised by the US Security and Exchange Commission by publishing guidance on the disclosure of climate risk in 2010, following some pressure exercised by investors that consider sustainability disclosure to be fundamental in decision-making processes (Caplan et al., 2013). Ailman et al. (2017) described, as well, the contribution that ESG information has on investment decisions and the support received from the Sustainability Accounting Standards Board (SASB) on data standardisation, which will facilitate the presentation of sustainability disclosures.

As a consequence of the increased focus on sustainability disclosure shown by stock markets and because the investors start to perceive sustainability disclosure as a means to improve the firms’ financial performance (Zhao et al., 2018) or acting as a financial risk mitigant (Broadstock et al., 2020), further studies on the relationship between sustainability disclosure and a company's value are expected to be generated in the coming years, and the influence exerted by the COVID-19 pandemic should be taken into account. Nonetheless, the current specialised literature offers a variety of studies developed on the relationship between sustainability disclosure and firms’ value, but also on financial performance, to show the immediate effects of sustainability disclosure.

Brooks and Oikonomou (2018) conducted an extensive literature review on 45 years of empirical research on the effects of sustainability (ESG) disclosure and performance on firms’ value. The authors concluded that ESG has a positive influence on the financial performance of companies; in addition, ESG seems to be taken into consideration when conducting significant operations such as mergers or acquisitions.

Friede et al. (2015) aggregated more than 2,200 individual papers to study the relation between ESG and corporate financial performance. Ninety percent of the studies demonstrate a non-negative relation between ESG and corporate financial performance, and the majority of the studies considered show positive outputs related to the association between ESG and corporate financial performance. Li et al. (2018) have investigated whether the sustainability disclosure (ESG) may have an influence on firms’ value and concluded that there is a positive association between ESG and firms’ value. Fatemi, Glaum, and Kaiser (2018) also researched this relationship, studying the connection between ESG and firms’ value. Their conclusions are similar to those obtained by Sadiq et al. (2020) for 122 firms listed on the Malaysia Stock Exchange, namely that ESG strengths increase firms’ value, whereas ESG weaknesses decrease it. Additionally, the research performed by Fatemi et al. (2018) and Sadiq et al. (2020) provided evidence that the sustainability (ESG) disclosure may reduce the negative effects of ESG weaknesses but also downgrade or improve the positive effects of ESG strengths. Other studies supporting the positive association between sustainability (ESG) disclosure and firms’ value are those published by Yu et al. (2018) and Yoon et al. (2018). Yu et al. (2018) disclosed that the adoption of a sustainable disclosure policy will have a positive effect on firms’ value for average listed companies. Yoon et al. (2018) presented in their paper a positive and significant impact of the sustainability disclosure on market value using data from sensitive industries, such as the energy industry, and providing evidence that this impact tends to be less important in the case of sensitive industries as compared with non-sensitive industries.

Wong et al. (2020) demonstrated a positive impact on the relationship between ESG certification and firms’ value for Malaysian-listed companies. Liu (2020) offered evidence supporting an overall positive relationship between environmental and financial performance by performing a multilevel longitudinal analysis. Gillan et al. (2021) performed a literature review concentrated on the research previously conducted on ESG. The results show a positive association between ESG performance and financial performance in particular for studies focused on major companies in developed economies.

Paolone et al. (2021) have conducted research on the impact of ESG scores on marketing performance for the largest European companies in the pharmaceutical sector using innovative research employing a fuzzy set qualitative comparative analysis. The values of the ESG scores and market share used were those published on Thomson Reuters and Statista.com. Their findings show that ESG pillars facilitate improved marketing performance, with the influence of the corporate governance score being stronger than the impact of the other two pillars.

All the studies that present a positive association between sustainability disclosure and firms’ value encourage organisations to adopt a sustainability policy disclosure, which will enable the inclusion of non-financial information in corporate reporting, thus increasing the degree of transparency between the management of the company and its investors and the focus on long-term goals, such as the value creation process (Chen & Yang, 2020; Yu et al., 2018).

An example of research that identified a negative association between sustainability disclosure and market value is the one performed by Brammer et al. (2006). The authors obtained evidence about a negative association, specifically between social performance and stock returns for a sample of UK companies, contrary to the findings obtained by Richardson and Welker (2001), indicating a positive association between social disclosure and the market value represented by the cost of equity capital. Furthermore, the research conducted by Horváthová (2010) shows a negative association between environmental and financial performance, a similar finding to the one obtained by Liu (2020) for sensitive industries, such as utilities. Liu (2020) explained that the negative connection may be the result of a general lack of trust shown by the customers in these sensitive industries. Evidence concerning a negative relationship between social and financial performance is offered by Schuler and Cording (2006). The negative connection is a result of poor management focused on ESG-related activities instead of other activities that could bring more value to the company. If the inappropriate management persists, sustainability (ESG) practices may lead to underperformance for those companies in the future. Ruan & Liu (2021) performed a recent study on the association between ESG activities and company performance focused on Chinese A-Share companies listed on China's Shanghai and Shenzhen stock markets between 2015 and 2019. Their results suggest that ESG activities have a significant negative impact on firms’ performance, especially for private companies that are less sensitive to environmental aspects. Plumlee et al. (2008) studied the association between the quality of voluntary environmental disclosures and firms’ value. Their findings suggest the existence of a negative relationship between cost of capital, representing firms’ value, and the quality of voluntary environmental disclosures for companies acting in environmentally sensitive industries. Z. Li et al. (2019) used a sample of 496 listed Chinese companies to expose the initial negative impact of adopting environment regulations on market value.

The research published by Deswanto and Siregar (2018) offers insight on the association between environmental disclosure, environmental performance, financial performance, and firms’ value. By analysing companies listed on the Indonesia Stock Exchange, the authors identified that environmental disclosures have no effect on firms’ value; moreover, environmental disclosures have no impact on the relationship between environmental performance or financial performance and firms’ value. Lorraine et al. (2004) have also highlighted the fact that environmental performance has no effect on the market value of companies. In a study investigating the impact of ESG reporting for European-listed companies in the agri-food sector, Conca et al. (2020) exposed a negative connection between a company's market value and disclosures related to corporate governance practices.

The health care industry appears to be less prone to the influence of sustainability disclosure on firms’ value than the energy industry, as observed in the results section. Nevertheless, both industries are considered to be sensitive sectors of activity in general and even more now during the COVID-19 pandemic, which has had a major and extensive impact on the global economy.

This research investigated the associations between sustainability disclosure as measured through the combined and individual ESG scores and firms’ value for European companies acting in the energy and health care sectors. Previous empirical evidence offers mixed results when unidirectional linear relationships are tested. Based on the findings of this research, disaggregate investigations may be conducted on the three subcategories of industry for both of the two sectors analysed.

The results presented in Table 5 support a negative association between the environmental score (ENV) and firms’ value as measured by market value only for companies in the energy sector. Previous studies (Horváthová, 2010; Z. Li et al., 2019; Liu, 2020; Plumlee et al., 2008) obtained similar results in what concerns the negative influence of environmental disclosure on firms’ value. In Table 6, where the results of the second regression model are presented, a significant and negative relationship between the environmental disclosure and firms’ value was also highlighted for the overall sample of companies in the energy sector. However, in this scenario, the percentage of adjusted R-squared is very low (1%) to be able to explain the variation in the dependent variable.

Concerning the results obtained for the health care industry (Table 7 and Table 8), no significant connection between sustainability disclosure, measured through both the combined and individual ESG scores, and firms’ value, measured by market value, was obtained for the overall sample of companies (Table 7); therefore, none of the hypotheses described in the first part of the paper were validated. The results are similar to those presented by Deswanto and Siregar (2018) and Lorraine et al. (2004). In the second scenario (Tobin's Q used as dependent value), a significant and negative correlation between the corporate governance score (GOV: scenario 2.3) and firms’ value was identified for the overall sample, the correlation being similar to the one obtained by Conca et al. (2020). As in the case with the results obtained for the second regression model applied to companies from the energy industry, the value of adjusted R-squared is insignificant, as it is the variation in firms’ value explained by the independent variables for the health care sector. Contrary to the results obtained for the energy industry, in what concerns the health care sector, the hypotheses defined were not validated by the results of the statistical tests.

The main contribution of this investigation to the literature consists of addressing the association of sustainability disclosure, measured through the combined and individual ESG scores, with firms’ value for companies in the energy and health care sectors — both being considered sensitive industries in general. The present research may encourage other studies to focus on the influence of sustainability disclosure on firms’ value for companies in other sensitive industries or industries affected significantly by the COVID-19 pandemic.

Future research may be extended by including a global sample of companies in the energy and health care industries or determining the type of association between sustainability disclosure and firms’ value for companies in other sensitive industries or even companies from non-sensitive industries. Particularities of the companies from sensitive industries compared to companies from non-sensitive industries may be identified. Also, the need for harmonisation of the different sustainability frameworks used by companies may also be investigated.