Report of the Working Group on ESG Factors in Corporate Valuation (Securities Analysts Association of Japan)

The Working Group believes that market efficiency can be enhanced by encouraging financial analysts to pay attention not only to conventional financial factors but also to non-financial factors such as environmental, social, and governance (ESG) criteria and thereby evaluating true corporate value. Thus, we conducted a statistical analysis of the relationship between corporate social performance (CSP) and corporate financial performance (CFP).

As for CFP, we adopted financial ratios such as ROA, labor productivity, and labor share, which were computed for listed companies using financial data in documents such as corporate annualreports, and also other parameters such as equity return and volatility. As for CSP, we used “overall”, “environmental”,“social”, “governance”, and “social and governance” scores from “The Japan Research Institute’s ESG Score” (“JRI Score”).

The annual level analysis found that higher JRI-score companies’ ROA, labor productivity, and Tobin’s q are lower and their labor share is higher, even considering sampling bias (Exhibit 1). However, the analysis of the CSP effect on the rate of change in CFP indicators found that higher JRI-score companies' volatility is statistically significantly lower. Also, it was found that ROA change rate and equity return are positive although not statistically significant (Exhibit 2). It appears that, the higher the JRI Score is, the higher the corporate profitability is, and investors take it positively, thus equity return is increased.

The Report -Summary in English:

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