(ISEBA 2018)
Postgraduate Colloquium
Sarannya Kengkathran
College of Graduate Studies (COGS), Universiti Tenaga Nasional (UNITEN)
Email: [email protected]
Purpose: Due to lack of industry studies, being among the early adopters and also uncertainty in the level of ESG disclosure for ASEAN countries, this paper aims to fill this literature gap by examining the importance of Environmental, Social and Governance (ESG) disclosure and the impact on financial performance of energy companies in Association of Southeast Asian Nations (ASEAN).
Design/methodology/approach: The author proposes a conceptual paper aimed to provide a framework for investigating the disclosure and practices of ESG regulations, enhance the theories and determine the long-term impact of ESG disclosure on financial performance of energy companies in ASEAN.

Findings: It portrays that there are both positive and negative relationships between ESG disclosure and financial performance of energy companies in ASEAN. Thus, the author provides a conceptual paper on the relationship between the Environmental, Social and Governance (ESG) disclosure and financial performance of energy companies in Association of Southeast Asian Nations (ASEAN).

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Originality/value: The author’s perspective on the importance of disclosure and practices of ESG regulations, enhancing the theories and determining the long-term impact of ESG disclosure on financial performance of energy companies in ASEAN is a topic of significant interest for the body of knowledge, practitioners and policy makers.

Keywords: Environmental. Social and governance (ESG), Association of Southeast Asian Nations (ASEAN), Corporate Social Responsibility (CSR), Company financial performance (CFP), ESG disclosure
Introduction According to Jitmaneeroj (2016), in the present years, investors and policy makers have been seeking for the ESG information attentively as they increasingly recognise that the additional non-financial information contributes to the long-term sustainable performance of companies. Despite having many companies conscious of the development of ESG disclosure and striving to provide investors with non-financial information, most companies have an alternative way of reporting because there is no specific disclosure regulation for ESG information.
Frynas (2005) claimed that on the company level, ESG disclosure could be known as a comprehensive occurrence that influences the way a business is managed, and covers hiring as well as environmental factors and community evolution campaigns. There are also many standards, guidelines and conventions that companies are expected to follow in order to gain the essential trust of their key stakeholders (Streimikiene, Simanaviciene, and Kovaliov, 2009). Hughey and Sulkowski (2012) supported that ESG disclosure is possibly the most clearly visible through sustainability reporting in which energy-industry companies being among the early adopters.

Some past studies compared the performance of socially responsible investments and conventional investment. For example, Sauer (1997), Statman, (2000), and Schroder (2007) showed that there is no significant outperformance or underperformance of sustainability indices over the market indices while Cheung, Jiang, Limpaphayom and Lu (2010) argued that ESG disclosure is positively correlated with company value. Barnett and Salomon (2006) showed that the community relations screen yielded higher financial performance while the environmental and labour screens reduced financial performance. This shows that different aspects of company social performance have different financial implications for companies and investors.
Literature Review
The Importance of ESG Disclosure
Bassen and Kovacs (2008) claimed that ESG index are created to show additional aspects of companies’ performance, which are not reflected in accounting information. Arvidsson (2010) supported that ESG disclosure has eventually been included in most companies’ non-financial communication. Galbreath (2013) also claimed that the ESG indicator is not only the key indicator for the companies’ non-financial performance, but it is also commonly used to assess competencies of companies’ management as well as to support risk management.

Although there is some existing literature on companies’ financial performance in relation to socially responsible perspective (Margolis and Walsh, 2003) but some researchers claim that there is a lack of studies focusing on one specific industry (Barnett, 2007; Soana, 2011). Past researchers also claim that companies have different strategies to cater for ESG and the impact of ESG disclosure on companies’ financial performance differs too (Bauer, Frijns, Otten and Tourani-Rad, 2008; Padgett and Galan, 2010).
According to Galbreath (2013), there are also limited studies taking into account all the dimension of ESG in which it does not portray a broad picture of the overall ESG score’s impact. There are many research emphasizing only on ESG perspective (including social and environmental perspective), and usually abandon the governance aspect. Besides that, a lot of previous research is done in the form of event-studies. For example, events such as ESG, clipping of newspaper, and environmental performance awards are explored. The market response to such events is examined by studying stock market interpretation, but these studies do not bother the impact on company performance in the long term (Arya and Zhang, 2009; Flammer, 2013).

According to the global reporting for sustainability disclosure in the Association of Southeast Asian Nations (ASEAN) (2016), each ASEAN countries have a different ESG and sustainability landscape, with some having established policies and practices while others are developing their approach. It is clear that expectations exist throughout the majority of ASEAN countries, where more than half are showing mandatory disclosures either already in force to some stage or on the regulatory perspective illustrated in Table 1:
Table 1: Summary of the current landscape
Due to lack of industry studies, being among the early adopters and also uncertainty in the level of ESG disclosure for ASEAN countries, there is a gap found in which this research specifically decide to focus on the energy-related companies which is of particular interest looking at current ESG issues surrounding the industry, e.g. social issues with child labour, environmental issues with product life-cycle problems, and even corporate governance scandals with polemic around CEO remuneration and the non-respect of shareholders rights (MacLeans, 2013). Hence, by evaluating the level and type of ESG information disclosed in the companies’ annual report, the research provides a contribution to investigate the relationship of ESG disclosure on the energy-related companies’ financial performance in ASEAN.

Environmental, Social and Governance (ESG) and Company Financial Performance (CFP)
There are many ways of defining environmental, social and governance (ESG). According to Jamali and Mirshak (2007), ESG has created remarkable discussion in academic and business world. Thus, the discussion mentioned by Jamali and Mirshak (2007) above recognises the significance of ESG in the first-world, but rise queries concerning the level to which companies operating in developing countries have ESG agreement. Aust (2013) suggested that despite there is some difference, in most cases ESG has similar understanding as corporate social responsibility (CSR).
Besides that, Vintila and Duca (2013) claimed that ESG is a commercial ideology acquiring popularity in this current century. The definition of ESG is not obscure. Vintila and Duca (2013) also supports that ESG is the proceeding dedication by commerce to act ethically and contribute to economic growth while improving the standard of life of the employees and their families as well as the people around them. ESG activities may include humanitarian affairs to the local people, environment and worldwide company such as fundraising, contribution in money and contribution in kind. In addition to that, ESG is also defined as the discretionary activities handled by a company to manage in an economic, social and environmentally sustainability way (Vintila and Duca, 2013).

According to the report done by ESG Asia in 2011, the global issues such as the disturbing amount of scandals concerning corruption and the growing rate of poverty have placed ASEAN countries in the sustainability spotlight. The governments and policy makers of the various countries are also increasingly concerned with the activities of businesses that could affect the society as a whole. For example, in developed ASEAN countries like Singapore, governments created programs and incentives for companies who are involved in sustainable development. CSR Digest (2009) claimed that Singapore has over 30 government programs including a wide range of energy and water efficiency, transportation and other environmental innovation projects.

In recent years, companies in the ASEAN region are more aware of the ESG disclosure frameworks such as Global Reporting Initiative (GRI), United Nations Global Compact (UNGC) and International Organisation for Standardisation (ISO) 26000. These frameworks intend to institutionalize ESG on a global level through the creations of norms, rules and procedures for ESG. However, since sustainability disclosure is still a voluntary practice in ASEAN today, transnational regulatory bodies such as ASEAN face many challenges in promoting ESG disclosure due to the lack of direct power to penetrate national law (Brammer, Jackson and Matten, 2012; Aguilera, Rupp, Williams and Ganapathi, 2007).

According to Frynas (2005), challenges of handling and enforcing ESG in the energy sector are many and various which includes the overall value, a lack of fact and awareness, inadequate human sources, susceptible co-operation with stakeholders, failure to contain the beneficiaries and to combine ESG activities into larger improvement plans, and an excessive focus on technical and managerial answers. Furthermore, the excessive fee of energy on the subject of low common earnings reduces the willingness to pay an even better rate for green energy is also considered part of the challenges. According to Barnet (2007), ESG activities have been conducted by companies to improve their relationship with their stakeholders. Stakeholder theory actually prevails the moral and ethical values in management of a company. It is considered a significant theory which will help users to understand the nature of ESG.
There is a big selection of research focusing on ESG within the context of the energy sector but research examining the ESG-CFP hyperlink among energy companies is scarce, and there are best two which are Patari, Jantunen, Kylaheiko and Sandstrom (2012) who analysed 210 energy companies worldwide and determined proof of a positive relationship among sustainable improvement and the companies’ financial overall performance, particularly while performance being measured as the marketplace-capitalization value whereas contrarily Ekatah, Samy, Bampton and Halabi (2011) used a case study perspective and their outcomes also indicated that socially responsible company performance can be related to profitability.

Measuring CFP is not simple because of the many debates concerning which measurement should be applied. There are opinions as regards the market measures being the right ones (Alexander and Buchholz, 1978) while other researchers’ considered the accounting measures are the good ones (Cochran and Wood, 1984; Waddock and Graves, 1997) and some underlined that the use of both of these measures is appropriate for CFP (McGuire, Sundgren and Schneeweis, 1988). Market and accounting measures are debated in literature because each evaluate CFP differently and have also different theoretical meaning (Hillman and Keim, 2001) being each subject to a particular biases (Mcguire, Schneeweis and Hill, 1986). According to Masa’deh, Tayeh, Al-Jarrah and Tarhini (2015), in the recent past the accounting measures helped the analyst to project its future profitability, and the expected return from investing in the company’s equity securities whereas the market measure can be used to compare the company’s market value or share price to the company’s fundamentals of profitability and growth. Thus, the present study considered three accounting measures, such as Return on Assets (ROA), Return on Equity (ROE) and Net Profit Margin (NPM).

According Prastowo (2002), Return on Assets (ROA) is used to measure the effectiveness of the business enterprise in producing income by way of exploiting its property. This ratio may provide an indication of exact or horrific neighbour management in implementing price manage or control of his assets. Return on Equity (ROE) indicates the quantity to which companies manage their personal capital (net well worth) successfully, measure the profitability of the investment that has been made proprietors in their own capital or shareholders of the business enterprise. Ang (2001) which claimed that the higher the ratio Return on Equity (ROE) will hike the income growth. According to Harahap (2007), the greater the ratio of net profit margin, the better for being role in the company’s ability to profit quite high. The higher Net Profit Margin (NPM) showed that increasing the company achieved net profit to net sales.

Research Strategy
The research strategy consists of two main phases: the first phase and the second phase, which were created to address the central research questions and achieve the research objectives. The research strategy is illustrated in Figure 1. In the first phase, ESG measurement concepts were identified from four main sources: the literature on ESG, ESG reporting and disclosure practices, ESG components or elements and ESG measurement methodologies. The second phase involves further modification of the model using content analysis of ESG disclosure from energy companies in ASEAN.

Figure 1: Research StrategyDiscussions and Conclusion
Prastowo (2002) claimed that there is a positive relationship between ESG score and Return on Assets (ROA). Besides that, according to Brigham and Houston (2005), there is a positive effect of the ESG score on the company financial performance. On the contrary, he also supported that the ESG score affects the Return on Assets (ROA) of energy related companies in ASEAN. Ang (2001) claimed that the higher the involvement of energy companies in ESG activities, the higher the Return on Equity (ROE). According to Alexander and Nobes (2001), ROE indicates the management’s success or failure at maximizing the return to stockholders based on their investment in the company. According to Harahap (2007), there is a significant relationship between ESG score and Net Profit Margin (NPM). Irawan (2011) declared that the higher the ESG score of the energy companies, the greater the Net Profit Margin (NPM).
In conclusion, this research contributes to the body of knowledge by providing evidence regarding the importance of ESG disclosure that are affecting the energy-related companies’ financial performance because companies today are more concerned on their financial goals. The findings will influence the fundamentals of energy-related companies’ consideration in decision making to invest on ESG activities and to disclose it in their financial annual report. For instance, the advantage of having more independent directors in a company may result in high willingness of the company to invest on ESG activities. This may also provide a guideline for other companies besides the energy-related companies. As for practitioners, this scenario will perhaps become a challenge for them to carry out more ESG activities and to disclose it in their financial annual report. The research will provide essential verification on the necessity of reviewing the existing standards and regulations. For instance, the government should revise their regulations in terms of providing more incentives to encourage companies in carrying out ESG activities.

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