Do the ESG factors truly enhance real estate companies' valuation and performance in uncertain times

Abstract

Purpose

This research aims to investigate the relationship between environmental, social and governance (ESG) factors and the performance of real estate companies before and after the COVID-19 pandemic. By conducting a comprehensive case study analysis, we will explore how real estate companies' adoption of ESG practices has influenced their financial performance, market value and resilience during these uncertain times. The findings of this study will contribute to the existing body of knowledge on the relationship between ESG factors and company performance, specifically within the real estate sector. Moreover, the research outcomes will offer practical implications for real estate companies, investors, policymakers and other stakeholders, aiding them in making informed decisions regarding ESG integration and its potential benefits in uncertain times. Overall, this research aims to shed light on whether ESG factors truly enhance the performance of real estate companies, considering the unique challenges posed by the COVID-19 pandemic and sanctions. By examining the case study before and during uncertain times including COVID-19 pandemic and sanctions, we provide valuable insights into the role of ESG practices in shaping the future of the real estate industry.

Design/methodology/approach

The study focuses on the selection process and main model used to investigate the relationship between ESG factors and firm performance. The data is divided into four groups based on ESG quartiles to analyze differences between firms with high and low ESG scores. The Difference-in-Differences (DID) model is employed to assess anomalous returns and stock volatility across different ESG quartiles before and after the COVID-19 pandemic. Panel data models are utilized to study the association between ESG and firm performance, with random effects and fixed effects estimators considered. The study builds a model to analyze the impact of ESG on financial performance indicators, incorporating various factors and control variables. Additionally, the Average Treatment Effect on the Treated (ATET) analysis and DID model are explored to evaluate the causal impact of ESG on firm performance. The study emphasizes the importance of testing for parallel trends to ensure the validity of the ATET analysis and it presents a generalized DID model to examine the relationship between ESG scores and company performance outcomes.

Findings

Our study's main conclusions show that, in a world with some degree of stability, ESG not only does not improve but, in some situations, also hurts firms' success. On the other hand, at times of notable worldwide unrest, like the COVID-19 pandemic, firms with better ESG ratings demonstrate exceptional stock market success and a noteworthy ability to rebound from a crisis. Moreover, we note that investors truly prioritize sustainable investments as a risk mitigation strategy in addition to their environmental and social duties only when companies face sufficiently significant risks. The results will highlight the significance of sustainable and responsible investment for investors and provide management with more knowledge to create effective ESG strategies for their companies.

Practical implications

By incorporating sustainability and responsibility into their operations, businesses may reduce risk, perform better over the long run and benefit society and the environment. As investors come to understand the importance of ESG issues in their decision-making, the global landscape is experiencing a transformation. Therefore, in the era when stakeholders, such as consumers, workers and shareholders, want more responsibility and transparency when it comes to ESG practises, it is crucial that companies should devote their priority to their ESG performance in order to reduce the danger of slipping behind, especially in light of the increasing importance of sustainability issues and changing laws. However, in the case of small-sized firms, investment policies to improve companies’ governance need to be controlled in moderation during the period of stability because it will create financial pressure and leave them without enough resources to cope with negative impacts during uncertain period. In sum, sustainable and ethical investment is not only a fad; rather, it is a vital and unavoidable route for companies looking to prosper in an unpredictable and complicated global environment.

Originality/value

This research study significantly enhances the existing academic discourse surrounding the relationship between ESG factors and firm performance, particularly, in periods of uncertainty. The findings underscore the critical importance for real estate companies to place a greater emphasis on ESG practices in order to not only benefit themselves but also to improve their overall performance and sustainability in the long term. By shedding light on the positive outcomes associated with prioritizing ESG considerations, this study offers valuable insights for real estate firms seeking to enhance their competitive advantage and stakeholder value in today's dynamic business landscape.

Citation

Nguyen, H.H. and Nguyen, H.T. (2024), "Do the ESG factors truly enhance real estate companies' valuation and performance in uncertain times", Journal of Property Investment & Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JPIF-03-2024-0036