Sustainable metamorphosis: examining sustainability transformation into value of financial institutions
Abstract
The relevance of sustainable development in the financial institution and its value is significant in today’s financial landscape. This research aims to evaluate the efficiency of converting sustainable development outcomes, quantified through ESG, into a financial institution’s valuation, measured by the P/E ratio. In order to reach the aim, the DEA method was applied. The results reveal that only one financial institution has an efficiency score of 1, signifying a notable efficiency level. Most financial institutions in the dataset possess efficiency scores (represented by theta) below 0.1, indicating a relative inefficiency in converting their E, S, and G scores into P/E ratios. The results reveal that high E, S, and G scores do not result in higher P/E ratios. It might be advisable to diversify investments across different financial institutions with diverse ESG profiles to mitigate risk and optimise returns. These potential research perspectives offer opportunities for a more profound understanding of the connection between ESG factors and the valuation of financial institutions. They allow for an examination of the quality and transparency of ESG reporting, considering the specific internal factors relevant to international financial institutions, as ESG continues to gain recognition as an integral component of a company’s intangible assets.
First published online 04 January 2024
Keyword : ESG, P/E ratio, financial institutions, diversified financial services and capital markets, insurance companies, banks, efficiency, data envelopment analysis (DEA)
How to Cite
Lapinskaitė, I., & Skvarciany, V. (2023). Sustainable metamorphosis: examining sustainability transformation into value of financial institutions. Journal of Business Economics and Management, 24(5), 923–938. https://doi.org/10.3846/jbem.2023.20665
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Larcker, D. F., Tayan, B., & Watts, E. M. (2022). Seven myths of ESG. European Financial Management, 28(4), 869–882. https://doi.org/10.1111/eufm.12378
Lin, Y.-H., & Hong, C.-F. (2020). Efficiency and effectiveness of airline companies in Taiwan and Mainland China. Asia Pacific Management Review, 25(1), 13–22. https://doi.org/10.1016/j.apmrv.2019.04.002
Lo, K. Y., & Kwan, C. L. (2017). The effect of environmental, social, governance and sustainability initiatives on stock value – examining market response to initiatives undertaken by listed companies. Corporate Social Responsibility and Environmental Management, 24(6), 606–619. https://doi.org/10.1002/csr.1431
Lopez-de-Silanes, F., McCahery, J. A., & Pudschedl, P. C. (2020). ESG performance and disclosure: A cross-country analysis. Singapore Journal of Legal Studies, 217–241. https://search.informit.org/doi/10.3316/agispt.20200715033349
Maziotis, A., Villegas, A., Molinos-Senante, M., & Sala-Garrido, R. (2020). Impact of external costs of unplanned supply interruptions on water company efficiency: Evidence from Chile. Utilities Policy, 66, Article 101087. https://doi.org/10.1016/j.jup.2020.101087
Moufty, S., Clark, E., & Al-Najjar, B. (2021). The different dimensions of sustainability and bank performance: Evidence from the EU and the USA. Journal of International Accounting, Auditing and Taxation, 43, Article 100381. https://doi.org/10.1016/j.intaccaudtax.2021.100381
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Rasmussen, J. (2020). The role of structural context in making business sense of investments for sustainability – A case study. Sustainability, 12(17), Article 7006. https://doi.org/10.3390/su12177006
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Schmidt, A. (2019). Sustainable news – A sentiment analysis of the effect of ESG information on stock prices. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3809657
Skica, T., Leśniowska-Gontarz, M., & Miszczyńska, K. (2019). Measuring the efficiency of Polish municipalities – Data envelopment analysis approach. South East European Journal of Economics and Business, 14(2), 54–66. https://doi.org/10.2478/jeb-2019-0013
Sokolova, N. A., & Teymurov, E. S. (2021). Correlation of sustainable development goals and ESG principles. Courier of Kutafin Moscow State Law University (MSAL)), 12, 171–183. https://doi.org/10.17803/2311-5998.2021.88.12.171-183
Sun, Y., & Qiu, Z. (2022). Positive performance feedback and innovation search: New ideas for sustainable business development. Sustainability, 14(4), Article 2086. https://doi.org/10.3390/su14042086
Thaker, K., Charles, V., Pant, A., & Gherman, T. (2022). A DEA and random forest regression approach to studying bank efficiency and corporate governance. Journal of the Operational Research Society, 73(6), 1258–1277. https://doi.org/10.1080/01605682.2021.1907239
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Wang, S., Lei, L., & Xing, L. (2021). Urban circular economy performance evaluation: A novel fully fuzzy data envelopment analysis with large datasets. Journal of Cleaner Production, 324, Article 129214. https://doi.org/10.1016/j.jclepro.2021.129214
Wu, H., Yang, J., Wu, W., & Chen, Y. (2022). Interest rate liberalization and bank efficiency: A DEA analysis of Chinese commercial banks. Central European Journal of Operations Research. https://doi.org/10.1007/s10100-022-00817-1
Zhang, G., Fang, C., Zhang, W., Wang, Q., & Hu, D. (2019). How does the implementation of the new environmental protection law affect the stock price of heavily polluting enterprises? Evidence from China’s capital market. Emerging Markets Finance and Trade, 55(15), 3513–3538. https://doi.org/10.1080/1540496X.2019.1648250
Atkins, J., Doni, F., Gasperini, A., Artuso, S., La Torre, I., & Sorrentino, L. (2023). Exploring the effectiveness of sustainability measurement: Which ESG metrics will survive COVID-19? Journal of Business Ethics, 185(3), 629–646. https://doi.org/10.1007/s10551-022-05183-1
Ball, R. (2020). Examining the relationship between ESG performance and financial performance of firms listed on the JSE. https://open.uct.ac.za/handle/11427/33634
Cappucci, M. (2018). The ESG integration paradox. Journal of Applied Corporate Finance, 30(2), 22–28. https://doi.org/10.1111/jacf.12296
Chaudhary, R., & Arora, H. D. (2022). Efficiency evaluation of public and nationalized Indian banks using data envelopment analysis. International Journal of System Assurance Engineering and Management, 13(1), 469–478. https://doi.org/10.1007/s13198-021-01297-3
Chen, S., Song, Y., & Gao, P. (2023). Environmental, social, and governance (ESG) performance and financial outcomes: Analyzing the impact of ESG on financial performance. Journal of Environmental Management, 345, Article 118829. https://doi.org/10.1016/j.jenvman.2023.118829
Cornell, B. (2021). ESG preferences, risk and return. European Financial Management, 27(1), 12–19. https://doi.org/10.1111/eufm.12295
Dhasmana, S., Ghosh, S., & Kanjilal, K. (2023). Does investor sentiment influence ESG stock performance? Evidence from India. Journal of Behavioral and Experimental Finance, 37, Article 100789. https://doi.org/10.1016/j.jbef.2023.100789
Ding, L., Lei, L., Wang, L., & Zhang, L. (2020). Assessing industrial circular economy performance and its dynamic evolution: An extended Malmquist index based on cooperative game network DEA. Science of The Total Environment, 731, Article 139001. https://doi.org/10.1016/j.scitotenv.2020.139001
Do, N. H., & Pham, N. V. T. (2020). The influence of sustainable earnings on stock price: evidence from publicly listed Vietnamese business enterprises. Asian Academy of Management Journal of Accounting and Finance, 16(2), 101–121. https://doi.org/10.21315/aamjaf2020.16.2.5
Du Toit, E., & Lekoloane, K. (2018). Corporate social responsibility and financial performance: Evidence from the Johannesburg stock exchange, South Africa. South African Journal of Economic and Management Sciences, 21(1), Article 1799. https://doi.org/10.4102/sajems.v21i1.1799
Duque-Grisales, E., & Aguilera-Caracuel, J. (2021). Environmental, social and governance (ESG) scores and financial performance of multilatinas: Moderating effects of geographic international diversification and financial slack. Journal of Business Ethics, 168(2), 315–334. https://doi.org/10.1007/s10551-019-04177-w
Ernst & Young. (2021). The future of sustainability reporting standards. EY. Oxford Analytica. https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/sustainability/ey-the-future-of-sustainability-reporting-standards-june-2021.pdf
Fan, Y., & Fang, C. (2020). Circular economy development in China-current situation, evaluation and policy implications. Environmental Impact Assessment Review, 84, Article 106441. https://doi.org/10.1016/j.eiar.2020.106441
Ferreira, C. (2020). Evaluating European bank efficiency using data envelopment analysis: Evidence in the aftermath of the recent financial crisis. International Advances in Economic Research, 26(4), 391–405. https://doi.org/10.1007/s11294-020-09807-y
Ford, J. M., Gehricke, S. A., & Zhang, J. E. (2022). Option traders are concerned about climate risks: ESG ratings and short-term sentiment. Journal of Behavioral and Experimental Finance, 35, Article 100687. https://doi.org/10.1016/j.jbef.2022.100687
Gary, S. N. (2019). Best interests in the long term: Fiduciary duties and ESG integration. University of Colorado Law Review, 90, 731–801. https://ssrn.com/abstract=3149856
Guo, C., Zhang, R., & Zou, Y. (2023). The efficiency of China’s agricultural circular economy and its influencing factors under the rural revitalization strategy: A DEA–Malmquist–Tobit approach. Agriculture, 13(7), Article 1454. https://doi.org/10.3390/agriculture13071454
Henisz, W., Koller, T., & Nuttall, R. (2019). Five ways that ESG creates value. McKinsey Quarterly.
Horvat, A. M., Milenković, N., Dudić, B., Kalaš, B., Radovanov, B., & Mittelman, A. (2023). Evaluating bank efficiency in the West Balkan countries using data envelopment analysis. Mathematics, 11(1), Article 15. https://doi.org/10.3390/math11010015
Huang, H.-L., Liang, L.-W., Chang, H.-Y., & Hsu, H.-Y. (2021). The influence of earnings management and board characteristics on company efficiency. Sustainability, 13(21), Article 11617. https://doi.org/10.3390/su132111617
Hunt, N. D., Hill, J. D., & Liebman, M. (2017). Reducing freshwater toxicity while maintaining weed control, profits, and productivity: Effects of increased crop rotation diversity and reduced herbicide usage. Environmental Science & Technology, 51(3), 1707–1717. https://doi.org/10.1021/acs.est.6b04086
Isaacs, W. (2015). What is a PE ratio? AllanGrey. https://www.allangray.co.za/latest-insights/investment-insights/what-is-a-pe-ratio/
Junius, D., Adisurjo, A., Rijanto, Y. A., & Adelina, Y. E. (2020). The impact of ESG performance to firm performance and market value. Jurnal Aplikasi Akuntansi, 5(1), 21–41. https://doi.org/10.29303/jaa.v5i1.84
Kriek, J. H, Beekman, E., & Els, G. (2008). Fundamentals of finance: A practical guide to the world of finance (4th ed.). LexisNexis Butterworths.
Landi, G. C., Iandolo, F., Renzi, A., & Rey, A. (2022). Embedding sustainability in risk management: The impact of environmental, social, and governance ratings on corporate financial risk. Corporate Social Responsibility and Environmental Management, 29(4), 1096–1107. https://doi.org/10.1002/csr.2256
Larcker, D. F., Tayan, B., & Watts, E. M. (2022). Seven myths of ESG. European Financial Management, 28(4), 869–882. https://doi.org/10.1111/eufm.12378
Lin, Y.-H., & Hong, C.-F. (2020). Efficiency and effectiveness of airline companies in Taiwan and Mainland China. Asia Pacific Management Review, 25(1), 13–22. https://doi.org/10.1016/j.apmrv.2019.04.002
Lo, K. Y., & Kwan, C. L. (2017). The effect of environmental, social, governance and sustainability initiatives on stock value – examining market response to initiatives undertaken by listed companies. Corporate Social Responsibility and Environmental Management, 24(6), 606–619. https://doi.org/10.1002/csr.1431
Lopez-de-Silanes, F., McCahery, J. A., & Pudschedl, P. C. (2020). ESG performance and disclosure: A cross-country analysis. Singapore Journal of Legal Studies, 217–241. https://search.informit.org/doi/10.3316/agispt.20200715033349
Maziotis, A., Villegas, A., Molinos-Senante, M., & Sala-Garrido, R. (2020). Impact of external costs of unplanned supply interruptions on water company efficiency: Evidence from Chile. Utilities Policy, 66, Article 101087. https://doi.org/10.1016/j.jup.2020.101087
Moufty, S., Clark, E., & Al-Najjar, B. (2021). The different dimensions of sustainability and bank performance: Evidence from the EU and the USA. Journal of International Accounting, Auditing and Taxation, 43, Article 100381. https://doi.org/10.1016/j.intaccaudtax.2021.100381
MSCI ESG Research. (2021). Climate reality bites: Actually, we may not always have Paris. Beyond boom and bust. ESG investment finds its footing. To bee or not to bee: Investors tackle the biodiversity crisis. MSCI.
Rahi, A. F., Akter, R., & Johansson, J. (2022). Do sustainability practices influence financial performance? Evidence from the Nordic financial industry. Accounting Research Journal, 35(2), 292–314. https://doi.org/10.1108/ARJ-12-2020-0373
Rasmussen, J. (2020). The role of structural context in making business sense of investments for sustainability – A case study. Sustainability, 12(17), Article 7006. https://doi.org/10.3390/su12177006
S&P Global. (2022). ESG scores. https://www.spglobal.com/esg/solutions/data-intelligence-esg-scores
Sanchez‐Planelles, J., Segarra‐Oña, M., & Peiro‐Signes, A. (2022). Identifying different sustainable practices to help companies to contribute to the sustainable development: Holistic sustainability, sustainable business and operations models. Corporate Social Responsibility and Environmental Management, 29(4), 904–917. https://doi.org/10.1002/csr.2243
Schmidt, A. (2019). Sustainable news – A sentiment analysis of the effect of ESG information on stock prices. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3809657
Skica, T., Leśniowska-Gontarz, M., & Miszczyńska, K. (2019). Measuring the efficiency of Polish municipalities – Data envelopment analysis approach. South East European Journal of Economics and Business, 14(2), 54–66. https://doi.org/10.2478/jeb-2019-0013
Sokolova, N. A., & Teymurov, E. S. (2021). Correlation of sustainable development goals and ESG principles. Courier of Kutafin Moscow State Law University (MSAL)), 12, 171–183. https://doi.org/10.17803/2311-5998.2021.88.12.171-183
Sun, Y., & Qiu, Z. (2022). Positive performance feedback and innovation search: New ideas for sustainable business development. Sustainability, 14(4), Article 2086. https://doi.org/10.3390/su14042086
Thaker, K., Charles, V., Pant, A., & Gherman, T. (2022). A DEA and random forest regression approach to studying bank efficiency and corporate governance. Journal of the Operational Research Society, 73(6), 1258–1277. https://doi.org/10.1080/01605682.2021.1907239
United Nations Secretary-General’s. (2019). Roadmap for financing the 2030 agenda for sustainable development 2019–2021. United Nations.
Wall Street Journal. (2023). WSJ Markets. https://www.wsj.com/market-data/quotes/FR/XPAR/MF/financials/annual/balance-sheet
Wang, S., Lei, L., & Xing, L. (2021). Urban circular economy performance evaluation: A novel fully fuzzy data envelopment analysis with large datasets. Journal of Cleaner Production, 324, Article 129214. https://doi.org/10.1016/j.jclepro.2021.129214
Wu, H., Yang, J., Wu, W., & Chen, Y. (2022). Interest rate liberalization and bank efficiency: A DEA analysis of Chinese commercial banks. Central European Journal of Operations Research. https://doi.org/10.1007/s10100-022-00817-1
Zhang, G., Fang, C., Zhang, W., Wang, Q., & Hu, D. (2019). How does the implementation of the new environmental protection law affect the stock price of heavily polluting enterprises? Evidence from China’s capital market. Emerging Markets Finance and Trade, 55(15), 3513–3538. https://doi.org/10.1080/1540496X.2019.1648250