A groundbreaking study by Yuanyuan Hong and Razif Rosli from SEGi University investigates the key factors influencing Environmental, Social, and Governance (ESG) scores of listed firms in mainland China. Published in the Journal of Governance & Regulation (Volume 13, Issue 4), the research sheds light on the complexities and limitations of ESG scores provided by third-party agencies as proxies for ESG performance.
The study highlights the rising importance of ESG performance in investment decision-making while addressing the challenges in accurately assessing such performance due to the wide range of metrics involved. By employing a scoping review methodology, the researchers constructed a comprehensive framework based on Stakeholder Theory, Legitimacy Theory, and Institutional Theory to deconstruct the determinants of ESG scores.
The research reveals critical insights into ESG evaluation:
- Third-party ESG scores may not accurately reflect actual ESG performance, as they are often influenced by non-ESG-related factors.
- These scores fail to capture essential ESG metrics, leading to incomplete or misleading assessments of a firm’s environmental, social, and governance practices.
- The study emphasises the need for a more holistic approach to ESG scoring, one that accounts for stakeholder engagement, organisational legitimacy, and institutional influences.
The findings contribute to the limited body of literature on the determinants of ESG scores, building on prior studies by Crespi and Migliavacca (2020) and Rajesh and Rajendran (2020).
This research provides valuable insights for regulators, investors, and companies aiming to improve the transparency and reliability of ESG assessments. By identifying the gaps in current ESG scoring methodologies, the study highlights the importance of developing comprehensive and standardised frameworks to better evaluate ESG performance.
This initiative aligns with the United Nations Sustainable Development Goals (SDGs), specifically:
- SDG 12: Responsible Consumption and Production
- SDG 13: Climate Action
- SDG 16: Peace, Justice, and Strong Institutions