4th video

Question 1

ESG Financial Materiality?

Answer 1

ESG Materiality: This concept involves assessing which ESG issues are most likely to impact financial performance. For instance, a company’s carbon footprint could be materially important if failing to manage it leads to regulatory fines or reputational damage that would affect profitability

information is considered materially important if its omission or misstatement could influence the economic decisions of users made on the basis of the financial statements.

Question 2

SASB meaning? Founded as ___ counterpart of___

Answer 2

Sustainability accounting standards. Originally founded as a non-profit organisation to be the counterpart to the financial accounting standard board (FASB). Now part of the IFRS foundation

They made a list of what factor (general issue category), such as: GHG emissions is material to what industry, 77 in total (like health care delivery, is a no, while non-alcoholic beverages is a yes.)

Question 3

There are 3 sets of characteristics that explain ESG performance of a company .70

Answer 3

Country level characteristics (one of the main drivers of ESG firm performance)
Within country characteristics
Firm level characteristics

Question 4

Country level characteristics? .71

Answer 4

Firm characteristics explain relatively little of the variation in firm-level ESG ratings. Country level explains more

Ln(Assets): Larger firms have better ESG ratings. Might have more money to manage ESG related stuff.

Question 5

Firm vs. country level characteristics?

Answer 5

Firm-level ESG ratings reflect how well a company manages environmental, social, and governance issues. These ratings are influenced by firm characteristics like industry, size, and management policies, which determine a firm’s direct impact and ESG initiatives. Meanwhile, country characteristics, including regulatory frameworks, cultural norms, and economic development, provide the broader context within which firms operate, affecting ESG priorities and practices. While a firm’s internal policies and performance can drive its ESG ratings, the external environment shaped by national factors plays a crucial role in defining, motivating, and benchmarking ESG standards, leading to variations in ESG ratings across different firms and countries.

Country characteristics: 1) regulations and policies within country which companies respond to 2) data providers (MSCI) have biases in ranking countries (company in Sweden might be better ranked rather than in Russia, keeping all constant)

Question 6

Lian and Renneboog (2017)?

Common law vs civil law?

Common law vs civil law in finance?

Answer 6

Focus on the countries role of legal origin in explaining firms’

Common law is like a recipe that’s tweaked every time it’s made, with judges adjusting rules based on past cases. It’s mostly used in the UK and the US. Civil law is more like a strict cooking manual with detailed instructions that everyone follows, found in countries like France and Germany. Judges in common law have more freedom to change things, while in civil law, they just apply the rules as written.

Common law (in finance): more shareholder friendly

Civil law (in finance): stakeholder view friendly

That paper also founds that ESG scores tend to be higher in countries where civil law governs. (Scandinavia for example)

Question 7

Within country level characteristics influence? Politics related

Answer 7

Political affiliation at the state-level plays a significant role in firms’ ESG policies in the United States

First score higher when they are headquartered in democratic rather than republican leaning states. Have democratic rather than republican founders, CEOs. and directors

Only for us is the latter information (Paper by Di Giuli and Kostovetsky 2014)

Question 8

According to Benabou and Tirole (2010), firms pursue sustainability policies for one of the following reasons.

Answer 8

• “Doing well by doing good”: sustainability allows management to take a long-term perspective and maximize inter-temporal profits (curb short-termism)
• “Delegated philanthropy”: sustainable businesses act as an efficient channel to express personal values on behalf of their stakeholders
• “Managerially driven philanthropy”: sustainability reflects managerial and board of directors’ own self-serving aspirations to engage in philanthropy that is ultimately value destroying (agency problems)

Question 9

Fact: ESG ratings can be subjective, leading to significant disagreement across different providers

Question 10

How big is ESG rating disagreement? Average pairwise correlations .85

Answer 10

0.447 total rating

E: 0.455
S: 0.330
G: 0.155

Highest in E and lowest in G