The Effects of ESG Combined Score on Business Performance of Enterprises in the Transportation Industry

Abstract

A plethora of present studies has the purpose of analyzing the connection related to the effect of environmental, social, and governance (ESG) on business performance. However, it has still not been able to bring out comprehensive results because of using a single metric to measure performance. Due to that, this research will: (i) use the data envelopment analysis (DEA) method to measure transportation firms’ performance and (ii) use OLS regression to explore the relationship between ESG combined score and business performance. In the first stage, we found out that 43 out of 56 firms work inefficiently. The managers of those companies should utilize their resources and refer to the benchmarking as a sample to follow. The environmental and social scores positively affect business performance in the second stage. Thus, managers should consider ESG as an investment, primarily when transportation is categorized as an “environmentally sensitive industry”. Besides, investors should pay more attention to a company that has ESG activities because that firm has the chance to improve its business performance and deal with its commitments.

A Literature Review on ESG Score and Its Impact on Firm Performance

“…As far as specific contexts are concerned, what emerges is looking at previous studies focusing on the relationship between ESG and firm performance, but the results remain inconclusive (Orlitzky et al, 2003). Many studies show a positive relationship (Pham et al, 2022;Kim & Li, 2021;Zhao et al, 2018), while others show a negative (Velte, 2017;Lee et al, 2009) or neutral (Junius et al, 2020;Atan et al, 2018) relationship. The scarce focus on the firm performance tested through accounting-based measures and the lack of alignment of the results is apparent even in more extensive studies covering several years of data.…”

The impact of ESG factors on financial efficiency: An empirical analysis for the selection of sustainable firm portfolios

“…Pham et al (2022) used the DEA in the transportation industry and found that environmental and social score positively impact business performance while governance score negatively affects business performance. Lu et al (2023) investigated Apple Inc.'s value‐chain counterparts by also using DEA and found that ESGs affect firm efficiency, even if the influence is more on eco‐efficiency than on profitability efficiency.…”

“…Generally, the current studies on the association between ESG and CFP relied on measures of corporate performance as financial or market output performance, such as earnings, revenues, Return On Equity (ROE), Return On Investment (ROI), market value, Tobin's Q, and so forth. There are few researches that use alternative measure beyond account-based and market-based measures, such as value-based metrics (La Torre et al, 2021), or measuring firm performance with operating, input performance, highlighting a literature gap (Pham et al, 2022). In our study, we want to cover this gap by measuring the corporate performance with the financial and market efficiency, not using simple financial or market ratios, but instead using two inputs and three outputs to arrive at a throughout value by employing Data Envelopment Analysis (DEA) methodology, consistently with Pham et al (2022).…”

“…There are few researches that use alternative measure beyond account-based and market-based measures, such as value-based metrics (La Torre et al, 2021), or measuring firm performance with operating, input performance, highlighting a literature gap (Pham et al, 2022). In our study, we want to cover this gap by measuring the corporate performance with the financial and market efficiency, not using simple financial or market ratios, but instead using two inputs and three outputs to arrive at a throughout value by employing Data Envelopment Analysis (DEA) methodology, consistently with Pham et al (2022). Furthermore, DEA methodology allows us to overcome the problems that could be caused by a potential reverse causality relationship between ESG and CFP.…”

“…Existing researches on the ESG‐CFP association results are ambiguous, inconclusive, and contradictory (Pham et al, 2022), and a likely explanation of these mixed results could be related to the CPF and ESG performance measures as well as to the methods used. Generally, the current studies on the association between ESG and CFP relied on measures of corporate performance as financial or market output performance, such as earnings, revenues, Return On Equity (ROE), Return On Investment (ROI), market value, Tobin's Q, and so forth.…”