Analyzing ESG Impact on Corporate Financial Performance

Introduction

This section will detail the methodology used to analyse and investigate the relationship between ESG and corporate financial performance. It begins with a detailed description of the method approach utilised during the current study. The following section comprehensively discusses the data collection methods. It includes how the data sample was selected and the selection criteria that was implemented, but this will be expanded later on in the chapter. Besides, the regression equations and assumptions for this model will be discussed. The chapter also covers sampling and econometric techniques. It helps in testing the relationships; all the econometrics tools and techniques were applied using Gretl.

Research Paradigm

Research paradigm can be defined as a belief system that focuses on the way in which the research study is carried out (Kumar, 2019). It helps in determining and establishing a set of practices that can be used to effectively carry out the research work and achieve the aim and objectives of the investigation. In any study, the aspect of research paradigm holds critical importance. Bresler & Stake (2017) stated that it could be the differentiating factor in the success or failure of the study. Due to this reason, it is imperative for the researcher to select the most suited and appropriate paradigm. There are two types of research paradigms – epistemology and ontology. While epistemology is a philosophy that concerns with the origin, methods, nature and limits of knowledge; ontology is concerned with the reality of a subject matter.

In the current study, the ontological paradigm is used, wherein the researcher has used positivism. It states that the reality is objective and singular, meaning that even though different authors might have different perceptions about the impact of CSR on financial performance, but there is the only way to see its impact on business operations. On this basis, the researcher is able to conduct the study in such a manner that helps in obtaining a better understanding of CSR and its eventual impact on the financial performance of business organisations.

Methods of Data Collection

The process of data collection is crucial for the success of any research investigation. It helps in formulating a base that enables effective data analysis. McCusker & Sau (2015) stated that if the process of data collection is carried out in a proper manner, then it can help in successfully conducting the research investigation. According to Fletcher (2017), data collection, as the name suggests, is the process through which data pertaining to a research topic is collected. There are multiple sources for data collection, but they can largely be classified into primary and secondary. The primary sources entail collecting a particular set of data or information for the first time. Such data has never been collected before. Herein the researcher has to contact the potential participants and convince them to participate in the research process. On the other hand, secondary data is the data that has been collected and used before. Int this study, the researcher has used secondary sources. The main reason for selecting secondary sources for data collection was to thoroughly examine the performance of companies that gave more attention to their CSR activities. This was helpful in understanding the impact of CSR on the financial performance of business organisations and also in determining the overall usefulness of the CSR activities.

Period of Study

The last six years (2009 -2014) will be the duration of the study. In this period, the impact of CSR will be evident as to whether there was an improvement in financial performance. Firstly, one of the main reason for selecting this time frame is to ensure a balanced data set as prior to 2009. There is scarce data as it pertains to ESG information, which enables our sample to be more representative. In addition, this period is particularly interesting. It follows the financial crisis which provided companies with the belief that ESG performance and long-term value creation are positively correlated. This has been stated in my research proposal; the data analysis will illustrate whether this impacted financial performance.

Sources of Data

ESG and firm data were extracted from the Bloomberg terminal. It is one of the largest databases comprised of companies when compared to the Domini 400 Social Index and Dow Jones Sustainability World Index. The main reason for extracting information from Bloomberg as opposed to other indices is that Bloomberg reports detailed ESG data that incorporates (e.g. board size, board independence, percentage of independent directors, employee turnover percentage etc.) and the ESG data are updated on an annual basis. Bloomberg was the chosen terminal to extract the information it was originally developed and founded by Michael Bloomberg during 1981. This research is based on a final sample of 46 listed companies belonging to the FTSE100. Selection criteria include sort out in descending order the companies with the largest market capitalisation that had the ESG data during the time mentioned above period.

Methods of Data Analysis

Quantitative techniques of data analysis have been used in the current study. Through this method, the researcher was able to closely analyse different aspects of the impact of CSR activities on the financial performance of businesses (Nosek, 2015). It helped in understanding the overall effectiveness as well as the importance of CSR for companies. Herein the researcher analysed the data through Gretl, wherein tests such as descriptive statistics, t-tests and correlation were used. This helped in evaluating the data with great accuracy and also to predict the relationship between CSR and financial performances.

Limitations

The time period selected for this study was of only five years. Thus, the time taken for this research was very limited. This is the biggest limitation of the methods used in the current analysis. It is not representative enough to help in thoroughly understanding the impact of CSR on financial performance. Companies have been practising CSR from a very long time, and thus taking a very limited time period does not provide enough justification.

Conclusion

This section discussed the data collection methods. It included how the data sample was selected and the selection criteria that was implemented. In the current study, the ontological paradigm is used, wherein the researcher has used positivism. In this study, the researcher has used secondary sources. The main reason for selecting secondary sources for data collection was to thoroughly examine the performance of companies that gave more attention to their CSR activities.

REFERENCES

Bresler, L., & Stake, R. (2017). Qualitative research methodology in music education. Critical Essays in Music Education, 113-128.

Fletcher, A. (2017). Applying critical realism in qualitative research: methodology meets method. International Journal of Social Research Methodology, 181-194.

Kumar, R. (2019). Research methodology: A step-by-step guide for beginners. Sage Publications Limited.

McCusker, K., & Sau , G. (2015). Research using qualitative, quantitative or mixed methods and choice based on the research. Perfusion , 537-542.

Nosek, B. (2015). romoting an open research culture. Science , 1422-1425.