ESG disclosure score in emerging countries and liquidity : an overview

Details

Supervisors

D'Hondt, Catherine

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

In the past decades, Responsible Investments were and continue to be steadily expanding. To help asset managers with this type of investments, some agencies have created a special score for them. Since 82% of the asset managers use ESG (Environmental, Social and Governance) integration in their selection process and of which 62% of them think it is important for assessing company performance, the scores generally take into consideration ESG factors. To find out if the scores really bring some performance information, as the asset managers think, we investigated the ESG scores. In the first parts of this study, we observed that the general state of the ESG disclosure scores and the level of disclosure is quite similar in different markets and that this level is influenced by different factors. It is affected, among other things, by the culture of the country and the presence of regulation in the emerging market. For India, we confirm that the ESG disclosure score is indeed associated with performing Indian firms. Therefore, we tried to understand why and investigate the liquidity especially as the cost of capital is lower for firms with high ESG score. Considering, thanks to multiple studies, that liquidity can be improved as a result of valuable information for the investors, we review two studies linking a higher ESG disclosure score with a higher liquidity, one in a developed market and one in a broad market. To dig deeper in this relation and have a better understanding of liquidity in this market, the emerging market was considered in the empirical part. To find any correlation between liquidity and the ESG disclosure score, a linear regression was created and two samples were used. The first sample is composed of 921 stocks including Chinese stocks, which represents the investors’ opportunities in this market. The second sample is the same one but narrowed down to 521 stocks, excluding Chinese stocks as they were largely represented. Moreover, three different liquidity proxies were used as they have each their particularities. The findings of the first sample are the opposite from what was found in the two studies. Which means liquidity is negatively correlated with the ESG disclosure score in the emerging market. In the second sample, this result is only significant for one measure and is not significant enough for the others. For this reason, asset managers should be careful when investing in high ESG disclosure score firms in the emerging countries.