ESG Ratings and Corporate Value

. ESG as a concept advocates companies to pay more attention to environmental friendliness, social responsibility and corporate governance in their development process. Companies can attract investment and enhance their competitiveness by developing ESG concepts. Based on the data of Chinese listed companies for five years from 2017 to 2021, relevant indicators are constructed, and regression analysis is conducted on them using static panel models to empirically investigate the impact of ESG performance on corporate value. Specifically, this study documents a significant positive relationship between ESG performance and corporate value. The results still largely hold after a robustness checks, including alterative measure of corporate value. This study contributes to the existing literature on the economic consequences of ESG and provides implications for both researchers, investors, and practitioners.


A Subsection Sample
The ESG concept was originally proposed by the United Nations Global Compact in 2004. Its core logic is that, companies that perform well in the three elements of environment (E), society (S) and corporate governance (G), can achieve value enhancement by enjoying policy dividends, entering new product markets or reducing costs. In recent years, ESG investment is becoming increasingly popular. In Manojlovi and Tjessem words (2021), Over the past 20 years, awareness of ESG has increased among "both professional and retail investors". ESG investment is a kind of integrated investment, which refers to the investment process to consider the environmental (E), social (S) and governance (G) factors, and get better than the market rate of investment returns as the main target, so as to avoid serious downside risks and create long-term, sustainable value investment practice. There is no unified and clear ESG standard or disclosure system in China, and the development time is relatively short, and the scale of asset management is also small, which has a certain gap compared with more developed capital markets. However, driven by the double carbon target, the domestic capital market has a considerable demand for ESG investment, and fields related to ecological protection and low carbon transition will usher in certain financing demand and investment opportunities. ESG investment in China originated from green credit, and environmental risk was initially included in credit risk prevention with the release of relevant documents such as "Opinions on Implementing Environmental Protection Policies and Regulations to Prevent Credit Risk" in 2007.
Based on the documents released in 2007, the Green Credit Guidelines released in 2012 incorporated attention to social risks and helped the development of the real economy with the help of credit guidelines. 2013 saw the introduction of the concept of green finance, which was rapidly promoted in 2016. 2020 saw a rapid increase in ESG fever after the "Strategic Objectives of 30.60 Peak Carbon and Carbon Neutrality" were proposed. Therefore, it is important to actively practice ESG concept and expand the social influence of enterprises while enhancing their corporate value to achieve sustainable development in the future. At the international level, many countries have not only built ESG-related laws, policies and market systems, but also developed them in an increasingly professional manner. In March 2022, the US Securities and Exchange Commission issued the Draft Standards for Disclosure of Climate Data for Listed Companies, which clarifies that listed companies are required to disclose carbon emission information of their production and operation activities, suppliers and partners, aiming to improve the transparency of environmental governance data of listed companies in the US. Based on the increasing importance of ESG disclosure in international financial markets, many corporate specific ESG studies exist and have been developed internationally, from basic studies targeting environmental, social, and corporate governance elements to studies on corporate valuation and stock return risk. Different findings have been obtained due to the research methods adopted and the sample data. For example, Landi & Sciarelli (2018) argue that ESG performance has no significant relevance for corporate value as well as financial performance in Italy. While  analyzes from the perspective of information disclosure and based on statistical data municipalities conclude that ESG disclosure reduces market information asymmetry and indirectly affects corporate value in financial markets. Khan (2019) argues that there is a potential corporate investment value of ESG as a non-financial performance indicator. In practical terms, good corporate values are highly aligned with environmental, social and governance concepts, and corporate development strategies tend to meet the medium and long-term development needs of society. This study investigates the effect of ESG performance on corporate value. Using the sample of Chinese listed firms from 2017 to 2021, this study empirically the relationship between ESG performance and corporate value. This study conclusively demonstrates that there is a significant positive relationship between ESG performance and firm value. Moreover, these results still hold to a large extent after robustness checks and altered measures of firm value. and to provide realistic implications for researchers, investors and practitioners. This study contributes to the literature in threefold. Firstly, this paper enriches the literature on the consequences of ESG performance. Since the development of ESG in China is still in its early stage, most of the research on ESG performance is still at the basic level, and there are relatively few empirical studies on the relationship between ESG performance and corporate value. This paper will fill limitation on the relation between ESG and supplier chain, and study the impact of ESG rating on the value of Chinese enterprises in depth. Secondly, this study will provide marginal value to researchers on the impact of ESG ratings on the Chinese market. As ESG concepts are gaining traction in China, this study will provide researchers with practical insights for future researchand more in-depth research on ESG and corporate value. Finally, this study will provide insights of practical significance to investors and practitioners in the financial sector. From the perspective of investors, listed companies with higher ESG disclosure scores have higher corporate value, which helps to improve investment returns, and this effect is more obvious in the long run. At the corporate level: In the long run, ESG disclosure helps to enhance corporate value, so corporate fulfillment of ESG responsibilities and ESG practices in order to get a good rating in ESG ratings will become an important nonfinancial tool for corporate value enhancement and reputation maintenance. The remainder of this paper is organized as follows. Section 2 reviews related literature and develops the research hypotheses. Section 3 describes our data and methods. Section 4 reports results and findings. Section 5 concludes.

Literature Review and Hypothesis Development
In financial markets, the higher the information asymmetry, the higher the cost of debt capital. In the context of this study, ESG ratings are issued to reduce information asymmetry between insiders and outsiders. Siew et al. (2016) studied the influence of ESG disclosure and institutional ownership of 683 companies listed on New York Stock Exchange from 2007 to 2011 on market information asymmetry. According to their research results, there is a significant negative correlation between ESG disclosure and bid-ask spread, and the existence of institutional investors reduces market information asymmetry. As ESG disclosure will have an impact on market information asymmetry, their research directly means that decision makers need to regulate the quality and time of ESG information disclosure by companies to ensure that all stakeholders can obtain a fair competitive environment. However, this article does not intuitively link the disclosure issues posed by ESG to corporate value.
In the context of this study, the decreased information asymmetry and cost of debt brought by ESG are likely to improve corporate value. Moreover, in order to obtain a higher ESG rating, managers have an incentive to improve corporate governance and information transparency. In Thomsen

Sample and data (period country data source)
Our data come from CSMAR, a research-based accurate database in the field of economy and finance that specializes in studying the actual national conditions of China. this paper selects A-share listed companies on the SSE from 2007 to 2021 as the research sample. During the data processing period, many companies' annual reports for 2022 have not yet been disclosed, and there are many missing data, so the data are as of 2021.
The final sample of 4937 firm-year observations is obtained in this paper. All observations are obtained from the Guotaian database (i.e., CSMAR database).

Variables Independent variable. The development of ESG in
China is still in its infancy, and ESG information is mostly qualitative, with no unified disclosure standard or indicator system. To some extent, this makes it difficult for investors to assess the sustainable development of enterprises, and the CSI ESG Rating fills this gap. CSI ESG assessment system takes ESG as the core, refers to the international mainstream ESG rating system, and adjusts accordingly to China's national conditions to build the CSI ESG three-tier index system. Based on the index scores, the CSI ESG index system finally obtains a ninegrade C-AAA rating. In order to facilitate the empirical analysis, the nine C-AAA grades are assigned from high to low in this paper. Dependent variables -Tobin Q. With the previous literature, valuing a company can be achieved through a DCF approach. DCF analysis involves estimating the cash flows associated with the company and then discounting these cash flows using a discount rate commensurate with the level of risk. However, DCF has many drawbacks in practice, such as the free cash flow is too volatile and difficult to estimate; long-term growth rate and even perpetual growth rate forecasts are basically subjective guesses, which are hardly reliable; and the discount rate is difficult to determine. Alford (1992) has proposed the use of the price-toearnings ratio (P/E) to select benchmark companies and assess company value. He studied seven groups of potential comparable companies using criteria such as industry, assets, return on equity and a combination of these factors, as well as a sample of 4,698 companies in 1978, 1982 and 1986. He found that selecting benchmark companies based solely on industry or a combination of return on investment or total assets would yield more accurate valuations. However, the disadvantages of priceto-earnings (P / E) valuation are also obvious. First, earnings do not equal cash and are subject to accounting influence. Second, the method often ignores company risk variables, such as high debt leverage. In addition, P/E ratios cannot take into account forward earnings, making it difficult to value cyclical and loss-making companies. Kaplan and Rubak (1995) valued samples of highly leveraged transactions (HLTs) according to the ratio of market value to EBITDA (profit before interest, tax, depreciation and amortization). A benchmark is the multiple of companies in the same industry, the median of the multiple of companies engaged in similar transactions, or companies in the same industry participating in similar transactions. There are two disadvantages of enterprise value ratio. Firstly, if the working capital continues to increase, EBITDA will overestimate the operating cash flow. Secondly, in valuation theory, the free cash flow of a company is more meaningful than EBITDA.
Combining information from multiple sources in the literature, we finally chose Tobin Q as a quantitative explanatory variable to describe corporate value. Tobin's Q value is the estimated ratio of the stock market to the enterprise's asset value and asset production cost. A high Q value means a high rate of return on industrial investment. When the market value of stocks issued by enterprises is greater than the replacement cost of capital, enterprises will have a strong incentive to enter the capital market to realize profits. The enterprise will choose to hold when the Q value is large, and then turn the financial capital into industrial capital; If the Q value is small, enterprises will turn industrial capital into financial capital, that is, they will continue to hold stocks or choose to hold more stocks. Control variables. Size (logarithm of total assets), ROA (Return on assets), Leverage (total liabilities at the end of the period divided by total company assets at the end of the period), PPE (Property, plant and equipment scaled by total assets), Cfo (net cash flow from operation activity scaled by total assets), Indep (Percentage of independent directors), Board (Board size), HHI (Herfindahl-Hirschman index to measure industrial concentration), Dual (A dummy variable equals one if the chairman and the CEO is the same person, and equals 0 otherwise).  6.440, which is higher than the mean value of the theoretical assignment of 5, indicating that the ESG performance rating of listed companies in the sample is relatively good. The standard deviation of which is 1.108, indicating that there is a large difference between the ESG information disclosure levels of listed companies in China, which is still mainly due to the different development stages of listed companies and the differences in the degree of ESG awareness. In terms of the main control variables, Size has large standard deviations, and the remaining control variables have small differences.  0.289 0.283 0.370 Notes: ***, **, and * represent the statistical significance of two-tailed tests at the 1%, 5%, and 10% levels, respectively. T-values based on robust standard errors clustered by firm are reported. In this section, this paper uses the lead term of Tobin Q as the dependent variable and rerun the regressions. After robustness testing, the results of the multivariate regression between ESG ratings and firm value have changed slightly. It can be seen that the primary term regression coefficients of the main explanatory variable ESG and the explanatory variable TobinQA_Next -TobinQC_Next are still significantly positive (t=5.31, 2.26, 4.35). This indicates that the robustness test still shows that ESG is linearly and positively related to TobinQ (corporate value). When ESG rating is high, there is a tendency for firm value to be enhanced. And the Rsquared value of this model is significantly higher than previous in Table4.

Conclusion
This paper ultimately demonstrates through empirical results that there is indeed a significant positive relationship between ESG performance and firm value, i.e., firm value is influenced by positive feedback from ESG performance. This result is proved by robustness checks. These results hold to a large extent after changes in the measure of corporate value. This finding will provide relevance for researchers, investors and practitioners. The study enriches and expands the literature on the impact of ESG ratings on financial markets in China. Given that ESG development in China is at an early stage and most studies on ESG performance are still at the basic level, an empirical study on the relationship between ESG performance and corporate value will provide support for future research. This paper fills the limitations of the relationship between ESG and supply chain, delves into the impact of ESG ratings on the value of Chinese firms, and provides marginal value to the literature on ESG ratings in the Chinese market. In addition, this study will provide investors and practitioners in the financial sector with insights of practical significance. From an investor's perspective, listed companies with higher ESG disclosure scores have higher corporate value and contribute to higher investment returns, which is more pronounced in the long run. At the corporate level: ESG disclosure helps to enhance corporate value in the long run, so companies fulfilling their ESG responsibilities and ESG practices in order to be rated well in ESG ratings will be an important non-financial tool for corporate value enhancement and reputation maintenance. This paper also brings new thoughts on the market regulation requirements for ESG disclosure in China. Between the previous literature that ESG disclosure will have an impact on market information asymmetry, and the empirical results obtained from THIS PAPER, ESG ratings will have a positive impact on firm value. This implies that policy makers should regulate the quality and timing of ESG information disclosed by companies as a way to ensure a level playing field for all stakeholders. This study may suffer from the external validity problem. In future study, Researchers may consider regression analyses using cross-country samples to draw more generalized conclusions. In addition, researchers can focus on examining which specific ESG disclosures contribute to corporate value enhancement and corporate governance oversight in the Chinese financial market, and carefully delineate which types of ESG information are critical to corporate value enhancement.