Innovating ESG Integration as Sustainable Strategy: ESG Transparency and Firm Valuation in the Palm Oil Sector

Abstract

Environmental, social, and governance (ESG) integration is an increasingly popular and innovative investing strategy that requires companies to be transparent about their ESG practices to facilitate investors’ decisions. In the palm oil sector, companies are addressing ESG risks by adopting and disclosing ESG efforts to improve access to financing. This study seeks to broaden existing research on ESG transparency and firms’ financial indicators by using firm valuation as a financial indicator and investigating the moderating role of firm size in the palm oil sector. It first investigates whether ESG transparency has a direct positive or negative effect on firm valuation. Transparency is measured using the Zoological Society of London’s (ZSL) Sustainability Policy Transparency Toolkit (SPOTT) 2021 assessment, which provides scores for palm oil companies’ total, environmental, social, and governance disclosures. Firm valuation is measured by the price-to-earnings ratio (P/E), a widely used ratio calculated by dividing the share price by earnings per share. The study also explores the moderating role of firm size, using accounting-based measures such as revenue and assets, in strengthening the relationship between ESG transparency and firm valuation. The results show statistically significant negative relationships between ESG transparency and firm valuation. Companies with stronger ESG transparency are valued at a discount relative to companies with weaker ESG transparency. Additionally, the results find that firm size plays a moderating role such that larger firms strengthen the negative relationships between all transparency measures and firm valuation. These findings encourage constructive action for various stakeholders and provide implications for future research to support mainstreaming sustainable palm oil.

Challenges and Opportunities of ESG Integration in Financial Operations

“…Subsequently, the precision and reliability of the data come under scrutiny. Owing to the absence of standardized measurement and reporting criteria, ESG data seldom accurately mirrors a company's actual performance (Chong & Loh, 2023).…”

Bibliometric analysis into a decade of academic research on innovation, value creation, and sustainability (2013-2023)

“…Companies integrating ESG factors into their business models can create sustainable value and transform towards sustainable business models without compromising growth and profitability (Zhou et al, 2023). Moreover, sustainable practices can lead to improved financial returns, stakeholder trust, and less criticism, ultimately benefiting the company's bottom line (Chong & Loh, 2023).…”

“…The integration of green innovation and social responsibility not only positively impacts firm value but also contributes to sustainable development and environmental outcomes (Chouaibi & Chouaibi, 2021;Moreno-Monsalve et al, 2022;Zhang et al, 2020). Technological progress, particularly in green innovation, is essential for promoting sustainable economic development and enhancing firm value (Chong & Loh, 2023).…”