Exploring the Link Between Environmental Social and Governance Indicators and Financial Performance Empirical Evidence from the Oil and Gas Industry

In recent decades sustainability disclosure has increasingly become a common factor in corporate reporting, contributing to a growing standardization of companies’ reports. The strong push towards an effective enhancement of the production of non-financial information has led to the creation of a new scenario in the business reporting context where recently it is important to emphasize that data relating to environmental, health and safety of workers and about corporate governance are increasingly disclosed within Annual Reports or Integrated reports (IIRC, 2013) or on web pages instead of being included on the stand alone CR reports (Corporateregister.com, 2013). This trend has sparked both academic and practical in-depth debate about different issues, such as the contribution of accounting towards the enhancement of the disclosure quality of non-financial information (Gray, 2002; Adams, 2004; Parker, 2005; Hopwood et al., 2010; Unerman, 2011; Bebbington et al. 2014, Unerman and Chapman., 2014; Unerman et al., 2014), the impact in terms of managerial and organizational sustainability approach (Eccles et al., 2011; Passetti et al., 2015), the role of the Chief Sustainability Officer (CSO) within companies (Serafeim and Miller, 2014), the development of specific standards (SASB), the materiality of non-financial information (Eccles et al., 2012), the assurance of stand alone reports (GRI, 2014) etc.. Given these premises and the high propensity of companies to enhance the disclosuse on ESG issues (ASSET4 Thomson Reuters) around the world and in particular in the European context (Corporateregister.com 2013), this research is aimed at investigating this theme by analyzing Environmental Social and Governance issues (ESG) communicated in corporate reports of a sample of European listed large-size companies belonging to the Oil & Gas industry. The ESG data refers to various types of non-financial information (such as carbon emissions, waste disposal, supply chain, human rights, community relations, executive compensation, shareholders’ rights, etc.) and may provide a useful support for risk assessment as part of companies’ business activities to support policies related to compliance with the Human Rights and to guide decisions about the structures of corporate governance. The choice of this industry is partially obvious: it operates as a well-known environmental sensitive sector (Guenther et al., 2007; Dong and Burritt, 2010; Raufflet et al., 2014) and there is a call to assess the current state of sustainability reporting in response to a strong need of disclosure from different stakeholders in order to legitimize business activities of the Oil and Gas industry (Due and Vieira, 2012). There is also a strong need to assess the relationship between non-financial information, i.e. Environmental Social and Governance (ESG) items and different features of companies such as image (Michelon et al. 2015), reputation (Bebbington et al., 2006;), and value creation (Eccles and Serafeim, 2013). In order to address these gaps this paper performed an assessment of the trend of ESG data during the period 2010-2014 focused on the European companies belonging to Oil and Gas industry exploring the relationship between specific financial and market variables and ESG data. The findings show a positive relationship between financial performance measured by profitability ratios and stock data, which is consistent with the expected results suggested by the economic disclosure theory, but it is not in line with the predictions proposed by the socio-political theory, (Clarkson et al., 2008). There are several practical/managerial implications arising from the analysis of ESG information with clear benefits for practitioners, investors, financial analysts, corporate executives and policy makers. The association between ESG information and firm financial performance is, in several areas, accepted and shared although most of these studies used different ESG and financial performance indicators (Bauer et al., 2006; Gompers et al., 2003; Poelloe, 2010). However, a common factor is the need to combine and "reconcile" the financial objectives with social and environmental ones that enables companies to use sustainability as a source of competitive advantage and as key drivers of innovation (Porter and Kramer, 2011; Eccles and Serafeim, 2013; Churet and Eccles, 2014). This paper may contribute to the existing literature because most of studies focused the attention only on environmental information (Nilsson et al., 2008; Dong and Burritt, 2010; Pled and Iatridis, 2012; Ayoola and Olasanmi, 2012; Alazzani and Wan-Hussin, 2013); but there is a strong pressure to investigate the relationship between a wide range of non-financial information and firm performance (Rahman et al., 2014)