This is the first part of the “When CSR turns into CER” series, which focuses on how businesses in Egypt can adjust their business activities to curb their negative environmental impact. Trying to outline the shift from corporate social responsibility (CSR) to corporate environmental responsibility (CER), the series relies on a number of research papers from different universities.
Up until recently, the environment has not necessarily played a major role in Egypt’s business activities and decisions, but with a global state of panic spreading regarding the depletion of our planet’s natural resources, the conversation has definitely been intensifying.
Scholars Ahmed Aboud and Ahmed Diab from Beni Suef University examine the combined impact of environmental, social and governance (ESG) ratings on the market and financial performance of Egyptian companies during the period from 2007 to 2016. Their paper “The financial and market consequences of environmental, social and governance ratings: The implications of recent political volatility in Egypt” reveals how the environmental impact of Egyptian businesses is monitored and how environmentally friendly business activities can affect a company.
What is being done to monitor companies’ environmental ratings?
The rehabilitation of the Egyptian Environmental Affairs Agency years ago was meant to monitor the performance of business organizations regarding environmental issues, according to Aboud and Diab.
Their paper further highlights that in 2007, the Egyptian Exchange (EGX) launched the S&P/EGX ESG index, which stands for environmental, social and governance index. Annually, the EGX tracks the performance of its top 100 listed companies to select 30 that are worthy of joining the ESG index.
The environmental aspect of those companies are measured based on “outputs obtained from the mapping of the Global Reporting Initiative, the Global Compact and the Millennium Development Goal,” according to the paper. Each company is given a quantitative score based on transparency and disclosure of corporate governance, environmental practices and social practices. This score is then coupled with a qualitative score measuring the performance of the company based on news stories, independent sources and corporate social responsibility (CSR) filings. Collectively, the composite score of the quantitative and qualitative analysis determines the weight of the company on the ESG index.
Do ESG disclosures have positive market and financial effects?
According to Aboud and Diab, ESG ratings do have positive market and financial effects. “ESG disclosures can enhance the legitimacy of the company in the market,” the scholars explain. “A company with a higher ESG rating is more likely to be accepted in the society in general and in the market in particular.”
Furthermore, this acceptance translates into better economic and market performance, “as observed in the positive stock market reactions to the ESG performance in terms of higher stock liquidity and trading volume.”
In their conclusion, the scholars reveal that the association between the financial performance of a company and its ESG ratings has become more noticeable after the January 25th Revolution.