ESG: The catalyst for sustainable growth and corporate value

By Jonathan OFORI NYAMEDI & Esther LARYEA

In the fast-evolving business world, a quiet revolution is reshaping how companies operate and how they are valued. Global trends in corporate performance assessment signal a shift from a one-sided emphasis on traditional financial metrics to a comprehensive approach that considers non-financial and financial indicators for varied stakeholders.

This shift is not merely a trend; it reflects a growing awareness of the interconnectedness of profit, people, and the planet. This revolution is driven by Environmental, Social, and Governance (ESG) factors, and it is making waves right here in Ghana. Across the world, investors, policymakers, and consumers increasingly demand that companies operate sustainably and responsibly.

This shift towards ESG is gaining traction in Ghana as businesses recognize the importance of sustainable practices. ESG practices have become a common thread of discourse across the corporate business landscape and a hot topic in academic research, yet a fundamental question remains unanswered: Does ESG performance prompt value creation for shareholders?

The Power of Three: Understanding ESG’s Core Components

ESG denotes three key factors reflect a company’s commitment to environmental stewardship, social responsibility and governance practices. It emanated from the Triple Bottom Line concept, or otherwise, encapsulated by Profit, People and Planet (PPP). Companies are required to balance all the dimensions due to their collective significance to a firm’s success and not solely focus on profit.

The environmental criteria focus on companies acting as stewards of environmental challenges including climate change and deforestation. The social covers labor practices, human rights, diversity and inclusion, and community engagement. The governance criteria focus on how the company complies with the regulations.

Ghana’s ESG Awakening: A New Era for Businesses

In the heart of West Africa, Ghana stands at a crossroads and the corporate world is awakening to the new reality: Environmental, Social, and Governance (ESG) practices are no longer just optional add-ons; they are essential to corporate survival and success.

As the sun rises on a new era of business, Ghanaian firms are being called to action, aligning their operations with sustainable practices that resonate with the aspirations of investors and the global community.  However, despite the evident push towards sustainability, the actual impact of ESG on firm value in Ghana has remained largely unexplored—until now.

Ghana’s ESG ecosystem is emerging with notable developments tied to the nation’s dedication to the SDGs and the presence of various frameworks and institutions.

While Ghana previously relied on ad hoc provisions in statutes referencing ESG before consolidated frameworks were developed, the underlying principles of ESG have long been ingrained in the nation’s values, principles, and legal framework. Recently, the Ghana Stock Exchange, recognizing the shift, launched the GSE Guidance Manual for Disclosures on ESG Reporting to guide listed firms in publicly disclosing their ESG activities via an internationally accepted sustainability reporting standard. These milestones signal the burgeoning momentum in adopting ESG practices and setting a precedent for other African markets.

Bridging the Gap: Unveiling ESG’s True Impact on Ghanaian Firms

Despite the growing momentum, a significant knowledge gap persists regarding the relationship between ESG performance and firm value in Ghana. The debate over the impact of ESG activities on firm value is still ongoing, owing to inconclusive empirical testing results, hence it is difficult to advocate for adopting the corporate ESG framework.

Many ESG studies are tilted toward developed economies, with minimal focus on developing economies. According to the United Nations, most of the global populace live in developing countries, characterized by poverty, low living standards, inefficient resource use and other social issues. This implies that a heightened focus on ESG practices should be directed exclusively toward developing countries.

We analyzed data from annual reports and financial databases, using the Global Reporting Initiative (GRI) and the Ghana Stock Exchange (GSE) ESG Disclosures as guides to examine 33 companies listed on the Ghana Stock Exchange from 2018 to 2022. We employed a robust quantitative approach to reveal insights that could reshape the corporate landscape in Ghana.

Diverse ESG Performance: A Closer Look at Ghanaian Firms

We found that most companies performed at average levels in terms of their overall ESG practices, but there are significant variations in ESG performance among different firms, with some achieving excellent ESG performance while others exhibit relatively poor performance. Interestingly, multinational companies demonstrate stronger ESG performances compared to domestic firms which can suggest that internationally-affiliated companies may have more established frameworks and resources dedicated to prioritizing ESG.

The governance pillar stands out as the strongest among Ghanaian firms which can be attributed to strong compliance with the strict existing regulatory governance. The social aspect of ESG also shows relatively good performance, indicating that firms are making efforts to engage with their communities and address social issues.

In contrast, the environmental pillar reveals that companies are facing challenges. The lower performance in this area suggests that there is a need for more effective implementation of environmental policies and practices.

The Golden Ticket: The Market’s Reward for ESG Excellence

The results highlight a compelling truth that there is a positive relationship between ESG performances and Ghana-listed firms’ firm value. It is like having a golden ticket to the market’s favor. Firms with more robust ESG practices are rewarded with higher market valuations.

This win-win scenario proves that sustainability and profitability can go hand in hand. This positive relationship suggests that higher ESG-performing companies achieve superior long-term financial performance.

These firms tend to shield themselves from a kryptonite of scandals and negative publicity and foster stronger relationships with customers, employees, community and other stakeholders.

We also posit that companies that clasp sustainable practices attract a larger pool of investors, leading to the influx of capital at lower cost to boost investment opportunities and facilitate business growth, contributing to higher firm value. Consequently, by prioritizing ESG performances, companies create significant long-term value for stakeholders.

The authors are with  Ashesi University.

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