The Role of Environment, Social, and Governance Performance in Shaping Corporate Current and Future Value: The Case of Global Tech Leaders

Abstract

Corporations that prioritize Environment, Social, and Governance (ESG) considerations tend to have a more sustainable approach to business operations with a lower impact on the environment and society. Extant literature is available on the impact of ESG on firm performance, risk-taking, profitability, the cost of capital, cash flows, and default risk. However, very little is known about the role of ESG performance in shaping the current and future value of a corporation. Similarly, hi-tech firms, being a part of the rapidly growing sector of the world, are facing greater scrutiny from investors, regulators, and consumers to demonstrate their commitment to sustainability and social responsibility. This paper investigates the effect of ESG performance on the corporate present and future value of top global tech leaders for a period of eight years (2010 to 2017). Panel data techniques such as the fixed effects model and random effects model based on the Hausman test were used to observe this relationship. Earnings per share (EPS) and the price-to-earnings ratio (PE ratio) were used as a measure of firm current and future value, respectively. The results revealed that ESG has a significantly positive association with both proxies of corporate value of the top global tech companies. However, as compared to EPS, it had a more pronounced impact on the PE ratio of the sampled firms. Unlike many earlier studies that claimed that the ESG score impacts firm performance in the corresponding period, the present research is novel, as it asserts that investors are not only benefiting from firms’ higher investment in ESG through an increase in EPS but are also highly optimistic about the future performance of the firm and thus are paying more for each dollar of earnings. These finding contribute to the existing body of literature on the ESG and firm value nexus and are supported by the stakeholder theory of corporate social responsibility. Thus, policymakers for the tech sector should pay keen attention to firms’ ESG performance to earn the long-term trust of shareholders.