“Demystifying the relationship between ESG and SDG performance: Study of emerging economies”

Companies and investors in emerging markets have started paying attention to ESG (Environmental, Social, and Governance) issues. There has been a growing demand for aligning ESG disclosure of companies to UN SDGs (United Nations Sustainable Development Goals), so understanding how the firm-level ESG affects the country-level SDG is very important for evaluating the advances in ESG and SDG implementation in emerging markets. This study examines the linkage between firm-level ESG disclosures and their relationship with country-level SDG scores over ten years for three emerging countries: India, China, and Brazil. The analysis of 1,500 top-listed firms in these countries reveals an increasing trend of firms going for ESG disclosures and increased ESG scores over the years in the three markets. Out of the total sample, almost 75% of firms make ESG disclosures in Brazil, followed by 54% in India and 32% in China. Additionally, companies in all these countries tend to emphasize gover-nance-related disclosures more, with Brazil having higher ESG disclosures than India and China. The correlation and causality tests indicate a significant positive correlation between mean ESG scores and country-specific SDG scores. The Dumitrescu-Hurlin panel causality tests provide stronger linkages between firm-specific Environment scores and SDG scores, indicating that a firm’s environment disclosures translate into higher SDG scores. However, the same is not valid for Social and Governance factors. These findings have important implications given the global attention on the linkages between ESG disclosure and SDG score.


INTRODUCTION
Environmental, Social, and Governance (ESG) is a significant intangible criterion for socially conscious and responsible investors. Investors in recent years have become more proactive, concentrating on their social and environmental issues to find niche investments with development potential. The Global Sustainable Investment Review (GSIR) 2020 report shows that integrating environmental, social, and governance (ESG) considerations in investments has increased by 15% over the past two years, reaching $35.3 trillion in assets. In addition, the United Nations Sustainable Development Framework is recognized as a framework for responsible investment. Many companies have started to use the SDGs as a benchmark to measure their sustainability performance and are aligning their ESG practices with the SDGs (Bose & Khan, 2022).
Taking cues from developed countries, companies and investors in emerging markets have started paying attention to ESG issues, and there has been a growing demand for aligning ESG disclosure of companies to UN SDGs (Plastun et al., 2020). In some emerging markets

LITERATURE REVIEW
Firm-level ESG disclosures have seen a growing trend. This increased attention to ESG is driven by the growing awareness of the significance of environmental, social, and governance issues in shaping companies' and organizations' performance and long-term sustainability. Additionally, the increasing demand from stakeholders, investors, and the general public for greater transparency and accountability on ESG matters has further fueled the interest in this topic.
Academic researchers have also taken note of the growing importance of ESG. They have begun to conduct a wide range of studies to understand the impact of ESG on various other aspects of firm performance. Some have found the impact of ESG on financial performance, risk management, and competitive advantage (Alsayegh et Zhao et al. (2018) found that moderate ESG disclosures positively affect corporate efficiency, with governance information disclosure having the most vital linkage, followed by social and environmental information disclosures. Further, some studies found that ESG information disclosure positively impacts corporate sustainability performance, suggesting that disclosing ESG information is essential when creating competitive advantage through improved sustainability practices within organizations. Raimo et al. (2021) reported an inverse relationship between ESG disclosure scores and the cost of borrowing. Another study by Alsayegh et al. (2020) also found a significant direct association between ESG disclosures and corporate sustainability performance, leading to competitive advantage through improved sustainability practices within organizations.
More specifically, Van Zanten and Van Tulder (2018) study more than 80 European and American enterprises with respect to their SDG practices and found limited integration of firm-level ESG practices towards country-level SDG. Plastun et al. (2019) found statistically significant differences in the level of ESG disclosure between developed and emerging countries, with the former having higher levels of compliance in countries like the USA, Singapore, Germany, Japan, Sweden, Denmark, and the United Kingdom. In a similar study, Plastun et al. (2020) found that developed countries had higher levels of compliance with regulations than emerging countries which translated into better rankings in both ESG and overall economic performance. The authors also suggest incorporating ESG considerations into economic development plans which may help improve the country's overall performance. Bali Swain and Yang-Wallentin (2020) also studied the relationship between SDG and the three pillars of SDGs using structural equation modelling, name-ly, economic, social and environment for both developed and developing countries and found that although all three variables are important for sustainable development. However, emerging markets should focus more on economic growth and social development.
Atan and Razali (2016) found significant differences in the ESG disclosures between Malaysia as an emerging economy and Denmark as a benchmark of a developed economy. Further, the study failed to establish any association between ESG disclosure levels and a firm's financial performance. Similarly, Ullah,2020 in their research finds that social and environmental reporting (SER) in developing countries like India, China, Mexico, Brazil, South Africa, etc., is primarily driven by the forced pressure from international buyers and lenders. He also found that country-level regulations influence firms' ESG disclosures but not necessarily their overall performance. Further, Van Brecht et al. (2018) find that the Thailand stock market responds favorably to ESG disclosures. They report that when companies disclose information about their ESG activities, it positively affects their stock prices. Hieu and Hai (2022) studied the relationship between ESG and SDG achievements in the case of BRICS nations and found a positive relationship between country-level ESG scores and SDG scores. Consolandi et al. (2020) analyze linkages between SDG targets and ESG strategies for the healthcare companies for Russell 1000 companies and highlight the need for e private sector firms to contribute towards SDG impact. Schönherr et al. (2017) studied the association between firm-level CSR and the SDGs. They highlighted the importance of SDGs for planning CSR activities to focus on achieving the utmost important areas for sustainable development.
In the Indian context, Sharma et al. (2020) report that Indian companies have a history of low voluntary corporate social responsibility reporting. However, the same has recently increased with growing stakeholder concerns and demand. Another paper by Mhlanga et al. (2018) found that the world's largest enterprises have not significantly changed their approach to sustainability to align with the SDGs, instead prioritizing their existing sustainability goals. Further, the study reports that in India, companies show awareness and interest in the SDGs. Still, there is a need to align business reporting on sustainability with the national SDG reporting framework.
As discussed above, there has been growing interest in ESG disclosures in developed and emerging countries; however, limited studies have examined the progress of ESG disclosure practices in these three countries. Further, studies examining linkages between ESG disclosures and SDG goals in emerging economies are rare. Only a few studies,  2020), have studied the relationship between firm-specific ESG practices and SDGs attainment in the case of emerging economies. To fill the gap, the purpose of the study is to examine the performance of top listed firms in India, China, and Brazil regarding environmental, social, and governance disclosures over the last ten years. The paper aims to understand the impact of evolving ESG frameworks on firm-level ESG disclosures and how the firms have responded to the reform process in the three countries. Further, it also examines if the firm-level reform impacts country-level SDG scores. The results present the progress among the three countries concerning ESG disclosure practices and the linkage between ESG and SDG scores.

DATA AND METHODOLOGY
This section describes the data, the variables used in the analysis, and the methodology. The research paper examines the ESG performance of 1500 companies from India, China, and Brazil from 2010 to 2019. It uses aggregate ESG and individual scores for the environmental, social, and governance aspects obtained from Bloomberg. Additionally, the study includes the SDG reporting of the three countries using the SDG index developed by the United Nations. The Bloomberg ESG score is a composite score used to assess a company's performance on environmental, social, and governance (ESG) issues. It ranges from 0 to 100 and reflects the company's impact on various ESG factors such as emissions, energy use, labor practices, human rights, governance, etc. The factor which includes in environmental disclosure score includes multiple factors such as Total For the SDG score, the study uses data from the SDG report (formerly the SDG Index & Dashboards) that provides information and analysis on the progress of a country toward achieving sustainable development goals. The report covers various economic, social, and environmental indicators and measures progress against established sustainable development goals and targets. The study assesses the ESG (Environmental, Social, Governance) performance of top listed companies from India, China, and Brazil. The top 500 companies from the three countries based on free-float market capitalization were selected from the total sample. The analysis covers 2010 to 2019, utilizing composite ESG and individual scores for environmental, social, and governance factors.

RESULTS
The importance of ESG disclosures has been well-established in the literature. However, there is still much work to be done in understanding the progress and quality of ESG disclosures in emerging economies. To plug the notable gap, this section presents the trends in ESG disclosures in the three countries, followed by the association between firm-specific ESG disclosures and country-specific SDG scores. Figure 1 presents the percentage of firms having ESG scores on the Bloomberg database. The trends from Figure 1 indicate that there has been a marginal increase in firms reporting ESG scores. Further, despite a slight change in the number of companies disclosing their ESG information, a significant percentage of companies in Brazil disclose their ESG information in their financial statements, followed by companies in India and China.
Furthermore, a more significant proportion of companies in Brazil disclose their ESG compo-   Brazil China India seen in the over 80% disclosure of the former and only 76% of the latter in recent years. In contrast, companies in China have consistently increased disclosure across all three components over the last dec-ade. In India, while Governance disclosure has been a priority, there has been a steady increase in the disclosures of environmental and social components, rising from 23% in 2010 to 54% in 2019. A closer examination of the mean values of ESG scores for three countries reveals that the overall trend of ESG scores by companies in these countries has risen over the past decade. While the average disclosure scores by Brazilian companies have slightly increased, overall disclosure by companies in China and India has grown significantly.
When examining the disclosure scores of individual components of ESG, it becomes apparent that the average disclosure of environmental and social factors by companies in Brazil, China, and India is relatively consistent. However, companies in all these countries tend to place a greater emphasis on governance-related disclosures, indicating that these companies are more active in governance-related activities. This suggests that companies in these countries are increasing the importance of their governance-related disclosures.
In the next step, the paper examines the coefficient of variation (CV) of the ESG scores to understand the variability of the mean values of firm-level ESG scores. Figure 9 illustrates the trend in the CV of ESG scores for Brazil, China, and India. The data suggest that CV was highest for India, followed by Brazil, and lowest for China. Further, in the initial years, a relatively small proportion of companies regularly engaged in ESG activities and disclosed this information in their financial statements. However, as time progressed, there has been an increase in the proportion of companies consistently reporting their ESG practices, leading to a decrease in the overall CV percentage. This trend highlights an increase in consistency among companies adopting and reporting ESG practices.
This trend is attributable to various factors, including the increasing awareness among companies of the importance of ESG issues in shaping the performance and long-term sustainability of companies and organizations. Additionally, the growing demand from stakeholders, investors, and the general public for greater transparency and accountability on ESG matters has further fueled the interest in ESG practices among companies. Furthermore, governments and regulatory bodies in these countries have been encouraging companies to disclose more information about their ESG practices and performance, which has also contributed to the increase in the number of companies reporting their ESG practices. This has led to a more consistent and reliable reporting of ESG practices among companies and has helped improve ESG performance's comparability across different companies and countries. Table 1 presents the correlation results between ESG and the SDG scores for Brazil, China, and India. All the individual coefficients are positive and significant. Further, the paper observes a strong positive correlation between the overall ESG and SDG scores. The correlation coefficient is also highest for the environment score and lowest for the governance score. The results of the correlation analysis provide preliminary evidence of the association between SDG scores and firm-level ESG scores; however, whether a higher SDG score leads to higher ESG scores cannot be determined through correlation analysis. The paper, therefore, tests the causality between the variables by employing the pairwise Dumitrescu-Hurlin Panel Causality Tests. The results from hypothesis 1b. provide evidence of uni-directional causality flowing from country-level SDG scores and firm-level ESG scores. Further, the study documents uni-directional causality from firm-specific environment score to SDG score and hypothesis 2a is rejected. Furthermore, our results fail to reject hypothesis 3, indicating no causality between firm-level social scores and SDG scores. Finally, it rejects hypothesis 4b and finds uni-directional causality from the SDG score to the firm-specific governance score. Overall, the results indicate a stronger uni-directional flow from country-specific SDG attainment score to ESG score. The results imply that countries with higher SDG scores drive firms to improve ESG scores except for firm-specific environment scores. Furthermore, in the case of social and SDG scores, neither SDG scores nor social scores impact each other, indicating the need for aligning the social practices by the firms with SDG goals. Note: *, **, and *** denote 10%, 5% and 1% significance levels, respectively. Note: *, **, and *** denote 10%, 5% and 1% significance levels, respectively. Additionally, the findings from the CV of country-level ESG scores suggest that in the initial years, a relatively small proportion of companies regularly engaged in ESG disclosures, especially in India and China. However, there has been a considerable increase in the proportion of companies consistently reporting their ESG practices, leading to a decrease in the overall CV. The results can be attributed to mandatory disclosure requirements by regulators especially in the last one decade in these three countries.

DISCUSSION
As when ESG disclosures were voluntary, few proactive firms adequately disclosed the same in their annual statements. However, when the same was mandated due to an act of law, more firms complied with the same and overall disclosures increased.
Finally, the paper confirms a high positive correlation between the ESG scores and country-specific SDG scores. Additionally, it suggests stronger linkages between firm-specific environmental scores and SDG scores, indicating that the firm's environment disclosures get translated into higher SDG scores. Similarly, the pairwise Dumitrescu-Hurlin panel causality tests indicate a stronger uni-directional flow from the firm-level environmental score to the country-specific SDG attainment score. The findings can be attributed to the higher weightage of environment-related factors in the SDG score. For instance, five (Water, Agriculture and nutrition, Climate Action, Marine ecosystems, Terrestrial ecosystems) out of 17 indicators used for the calculation of SDG are directly associated with the environment criteria of ESG.
The results highlight the need for shifting focus on environmental and social aspects to improve firm-level ESG scores. Therefore, policymakers should concentrate more on improving the environment and social disclosures in respective countries. Further, with investors and other stakeholders becoming more proactive towards ESG issues, the results point toward increasing awareness of the stakeholders to the next level. Especially for firms in India and China, so that they can catch up with other developed countries and take advantage of investments from institutions which have ESG investment mandates.
Furthermore, the paper reports stronger uni-directional causality SDG and firm-level ESG scores; the firms and policymakers should also focus on aligning governance and social disclosures with relevant SDG, which could help attain country-level SDG. This will benefit not only the companies but also society as a whole. Companies prioritizing ESG practices will likely be more sustainable and perform better over time. Additionally, aligning with the SDGs can help companies contribute to the global effort to achieve sustainable development.