The effect of ESG ratings on the financial performance of firms listed on the JSE

Abstract

This study provides new evidence in the SRI stream of literature. Empirically, it investigates the effect of ESG ratings on the financial performance of firms listed on the JSE. While literature has documented differences in the performance of high-rated ESG portfolios over low-rated and conventional portfolios, no studies have been conducted on the effect of ESG ratings on the financial performance of firms in South Africa. This paper attempts to bridge this gap in the literature. Using portfolio analysis as well as regression analysis, the overall picture is that SRI does not lead to any significant financial advantage or disadvantage at a portfolio level. However, the results of the regression analysis indicate that firms with higher corporate governance ratings earn a greater return on investment in total assets than conventional firms. However, this better performance cannot be explained by either the financial slack theory or the good management theory.