Abstract
This thesis investigates the influence of Environmental, Social, and Governance (ESG) practices on financial performance and sustainability in emerging markets. It comprises of three essays that investigate different dimensions of this relationship. In the first study we assess the risk-adjusted investment performance of green and black portfolios and impact of toxic divestments. For this we employed a comprehensive sample of firms from the BRICS for ten years and sorted them into black and green portfolios using multiple constructs. The comparative assessment of these portfolios shows that green stocks dominate their black counterparts, and the dominance was robust across adjusted Sharpe and Sortino ratios and Jensen's alpha. Our evidence also demonstrates that rebalancing of the portfolios due to changing ecological characteristics results in successful market timing for the green portfolios. Finally, the results suggest that the divestment of fossil fuel stocks, firms with lower environmental scores, high carbon intensity, and low sustainable revenues provide investment benefits. These findings are very encouraging for the evolution of green finance in emerging markets and have important implications for market participants.In the second study, we analyse the relationship between ESG performance of mineral resources firms and its impact on the credit portfolios of the lending banks. Using a sample of banks from twenty- four countries over ten years, our findings indicate that banking spreads are positively related to the proportion of lending to the resource firms and their ESG scores. Similarly, we observe an improvement in asset quality for banks with greater exposure to mineral-related companies having higher ESG and lower emissions. These results imply that financial intermediaries can enhance their performance by concentrating on mineral resource firms that have adequate ESG and emissions ratings. The findings have important implications for promoting sustainable lending across mineral-related businesses.Finally, we investigate the nexus of ESG profile and Firm’s valuation by evaluating the impact of ESG scores and ESG controversies on Tobin’s Q and enterprise value to sales (EV/S). Our assessment is based on a comprehensive sample of non-financial firms across fifteen emerging markets for eleven years. Based on fixed effects panel estimations we demonstrate, in general, a positive relationship between firm value and ESG profiles. The fundamental valuation (Tobin’s Q) is influenced by the lagged ESG score, while for the multiplier (EV/S), we find the current ESG score to be relevant. For the RepRisk index, we observe that ESG controversies negatively impact firm value for both fundamental and multiplier proxies. These results have important implications for emerging markets firms and investors in particular and for the broader financial system in general.