| dc.description.abstract | Environmental Social Governance (ESG) has become increasingly important to incorporate non-financial information in investment decisions. ESG disclosure requirements are gaining momentum in Europe, reinforced by the Corporate Sustainability Reporting Directive (CSRD). These policies are introduced to promote sustainable development, while simultaneously creating shareholder value. However, most European ESG research solely focuses on the financial performance of firms. This finance literature shows that ESG leads to increased access to capital at lower cost, which results in increased R&D spending. However, the literature fails to examine potential non-financial benefits of ESG. This leads to a lack of understanding of why firms engage in ESG and what benefits this results in. Legitimacy and signalling theory provide opposing explanations for why firms engage in ESG. Legitimacy theory posits that poorly-performing firms with regards to ESG engage with ESG in order to legitimise other practices that misalign with societal values. Whereas, signalling theory posits that well-performing firms use disclosure to highlight their superior ESG performance. Neither of these theories provide conclusive evidence on non-financial benefits of ESG. This paper zooms in on non-financial benefits of ESG through green innovative performance, a component of sustainable performance, and distinguishes between green and non-green innovation in order to examine the incongruence of legitimacy and signalling theory. Concretely, this thesis asks: ”How do changes in firms’ ESG rating affect the green and non-green innovative performance of firms in the European Union and how do these effects relate to each-other”?
To answer this, negative binomial regression analysis and the Seemingly Enrelated Estimation method are applied to patent and ESG rating data, which measure firms’ innovative and ESG performance. The sample consists of large European firms in the period from 2014-2017 and a distinction is made in green and non-green innovation through CPC class Y02. As expected, ESG positively influences both green and non-green innovation, which highlights the presence of the effects of both legitimacy and signalling theory. For green innovation this effect is especially evident for smaller firms. Surprisingly, it is shown that the effect of ESG is stronger on non-green innovation than on green innovation. These findings provide implications for the CSRD. First, CSRD extends the reporting requirement to smaller firms, which show a larger increase in green innovation. Second, larger firms seem to increase their ESG without improving their underlying performance. The audit requirement of the CSRD might reduce this discrepancy between the ESG rating and underlying performance. | |
