The Impact of Sustainability Disclosures on Value of Companies Following Digital Transformation Strategies

Sustainable growth is the key global priority, and environmental, social and governance (ESG) objectives have become the main point of attention in companies’ digital transformation strategies. ESG and digital transformation reinforce each other as they aim to improve efficiency and meet stakeholders inside and outside the company. This is true for telecommunication companies, where disruptive technologies such as artificial intelligence, big data or cloud computing are reshaping the industry. Assessment of the impact of sustainability disclosures on companies’ value is a task of high interest for academics and practitioners from telecommunication companies. ESG disclosure serves as a key channel to inform investors about the efficiency of ESG risk management and control practices of the firm and thus can impact the firm’s financial performance and market value. However, there are numerous controversies in the academic literature on this topic and a lack of research specifically for the telecommunication industry. We closed the research gaps and investigated the impact of ESG disclosure on Tobin-Q of 93 US-listed telecommunication service companies between 2011-2021. We found that aggregated ESG disclosure score positively impacted telecoms’ Tobin-Q. Among individual ESG disclosure pillars, only corporate governance positively influenced Tobin-Q, while the impact of environmental and social pillars was statistically insignificant.  We also found that CEO duality significantly and negatively impacted Tobin-Q. The presence of the corporate social responsibility (CSR) committee, greater gender diversity and a higher percentage of independent directors on the board positively affected the value of the telecoms. The result of the study can be applied in developing ESG rating methodologies for telecommunication companies. They can also assist telecom companies’ managers and stakeholders to identify key value drivers of the ESG agenda.

Corporate governance; ESG disclosure; ICT; Sustainable development; Tobin Q

    In the last decade, the global telecommunication industry has changed significantly and enabled a lot of digital innovations. These changes have been driven by the rapid dissemination of high-speed internet, mobile devices, big data, cloud technologies, over-the-top media services or 5G generation mobile networks (Santoso et al., 2019). The industry has reformatted into the info-communication space (ICT), where telecommunication and IT are intertwined to provide customers with a large variety of services: from “traditional” voice and data transmission to different kinds of digital services and users applications. 
   These new opportunities come with challenges which mute the market value of companies in the industry (Mohammad & Wasiuzzaman, 2021). One of these challenges is the dissemination of environmental, social and governance (ESG) investing. Investors are ready to provide long-term funding only to those companies that follow the principles of sustainable development. Moreover, studies showed that the successful integration of sustainable practices could affect the firms’ value (Schramade, 2016). The GSMA, the mobile operators’ industry association, conducted research which showed that ESG reduced companies’ capital cost and positively influenced stock prices (GCMA, 2020).
    ICTs communicate with stakeholders on ESG issues via ESG disclosure. The latter reduces the informational asymmetry between stakeholders and the management; improves the  firm’s reputation and demonstrates  commitment to sustainability (Porter et al., 2019). Ultimately, the quality of ESG disclosure affects the market value of the firm. (Fatemi et al., 2017; Friede et al., 2020). However, there are numerous controversies in the literature. There is evidence that ESG disclosure had a neutral or even negative impact on a company’s cost of capital or performance (Dhaliwal et. al., 2011; Atan et al., 2018; Buallay et al., 2020). There is a lack of research on this topic in the ICT industry.

2.    Literature review

2.1. Importance of ESG agenda and practices in info-communication industry

3.1. Development of the research hypotheses

   Due to the conflicting results found in the literature, the hypotheses are as follows:

H1: In the telecommunication sector, firm value is positively associated with ESG disclosure

H2: In the telecommunication sector, the value of the company is positively associated with E-component disclosure

H3: In the telecommunication sector, the value of the company is positively associated with S-component disclosure

H4: In the telecommunication sector, the value of the company is positively associated with G-component disclosure

H5: Selected components of E, S or G components of disclosures have a significant impact on the financial performance of telecommunication companies

3.2. The data

We used the annual panel data for telecoms listed on the USA stock exchanges between 2011-2021. The period covers almost the entire history of the development of ESG financing and the availability of ESG disclosure ratings (Ivashkovskaya & Mikhailova, 2020). We chose the US financial market due to its high liquidity and long history of listing of telecoms. The screening of the companies was performed on Capital IQ. We applied the following selection criteria: the firm’s earnings before interest, taxes, depreciation and amortization (EBITDA) are greater than 0; and the total enterprise value (TEV) is greater than 0. The screening resulted in a dataset of 306 companies, from which the top 100 were chosen by their market value. We used Bloomberg ESG disclosure scores (the ESG score and E, S and G components scores) as a proxy for the quality of ESG disclosure. It tracks about 800 different disclosure metrics that cover all aspects of ESG, from emissions to shareholder rights. The companies in the ranking are ranked from 0 to 100, with 100 being the best score. We normalized the Blomberg ESG disclosure score to [0;1].

The dependent variable is the Tobin Q metric (TQ) which represents the sum of market capitalization, total liabilities, preferred equity and minority interest divided by total assets. It is a good proxy for the firm value and allows investors to assess the justification of an investment in a firm: if its market value is higher than the accounting value (that is, q-Tobin > 1), then the investment is justified and vice versa (in the case when q-Tobin < 1). Tobin Q is a good indicator of investors’ expectations. This metric is the most widespread in studies of the impact of sustainable practices on financial results (Nirino et al., 2021). The set of independent variables consists of complex ESG scores, individual E, S and G scores and control variables: (1) debt ratio; (2) tangibility; and (3) return on assets (ROA) (Table 1). ROA was chosen as it is an indicator to assess the quality of the company's management, namely the efficiency of the use of capital. The tangibility ratio measures the importance of non-financial capital in creating value and indicates a firm’s internal competitive advantage. Telecoms with a smaller proportion of tangible assets grow faster (Lei et al., 2018). The debt ratio measures financial leverage. The studies showed that leverage is positively related to a firm’s value as the returns earned

Table 1 Dependent variables and their descriptive statistics.

Source: calculated by authors

For all our analyses, Variance Inflation Factor (VIF) is below 10, signifying no sign of multicollinearity and the correlation between the dependent variables is below 0.4.

3.3. The model

The regression model to test the H1 is as follows:

The regression model to test H2-H4 is as follows:

To regression model to test H5 is as follows:

where: f_it – factors describing some individual components of ESG disclosure score (see Results section); K – the number of explanatory variables. For our panel data, we used three methods based on which it is possible to estimate the relationship between Tobin Q and dependent variables: pooled OLS regression, fixed effect (FE) linear model and random effect (RE) linear model. To select the best model between fixed and random effect specifications, we used Durbin–Wu–Hausman test.

Table 2 shows the results of the estimation of regressions (1) and (2). The constant is not significant for all specifications, and thus, it is not shown in the table. The Durbin–Wu–Hausman test and c Breusch-Pagan LM test confirm that the fixed effect (FE) estimator is the most efficient. Thus, the study focuses on the FE estimators to explain the results. According to the F-statistic value, all models have the predictive capability: p-values are lower than 1%, meaning that the null hypothesis of all regression coefficients being equal to zero is rejected.

Table 2 shows that the ESG disclosure score is significant at 10% confidence level. A positive sign means that ESG disclosure increases the market value of telecommunication firm. Thus, the hypothesis H1 is confirmed. On the one hand, this conclusion agrees with those of (Servaes & Tamayo, 2012) but on the other hand, this outcome contradicts the finding of (Buallay & Marri, 2022; Velte, 2017) who found a negative relationship between Tobin Q and sustainability disclosure. We explain this by the differences in explored markets, sample size and timespan. Additional further research is necessary to explore these contradictions.

Table 2 The results of the estimation of regressions (1) and (2)            

***, **, * indicate the value is significant at 1%, 5% and 10% level

Source: author’s calculation

The individual disclosure pillars: environmental (E) and social (S) are both statistically insignificant in influencing the Tobin’s Q. Therefore, hypotheses H2 and H3 are rejected. Conversely, governance pillar (G) is significant at a 5% confidence level. Hence, hypothesis H4 is confirmed.

These results coincide with that of (Rittenhouse et al., 2011), that the share of corporate performance (G-factors) in the investors' expectations of ICT companies equalled around 60%. This is also confirmed by practical studies, for example (Derue, 2021), which state that unlike investors in other industries with the severe influence of environmental factors (oil and gas or metals and mining) or social factors (e.g. banking or mining) the impact of these factors in telecommunication sector (especially in large established corporates) is marginal. Moreover, the insignificance of these factors may be explained by the fact that these factors have a more significant impact on the value of the firm in markets with weak development of financial institutions (Ge & Liu, 2015), but we studied the US market Conversely, the governance has a first-order impact on telecommunication companies as it increases investors’ confidence, which results in larger firm’s value (Siagian et al., 2013). All control variables are significant at 1%, and signs of the variables coincide with the previous findings and our expectations. The higher the company’s profitability, the higher its market value and the increase in the company’s leverage also positively affect its value. Tangibility has an opposite effect, it negatively and significantly decreases Tobin Q. This agrees with the findings of (Lei et al., 2018). These results indicate that the model is correctly specified.

Let’s now test the H5. G-factor appeared to be the only ESG pillar influencing the Tobin-Q of telecommunication firms. For our research, we selected first-order G-impact factors (Table 3) cited in the literature (Velte, 2017; Malik & Makhdoom, 2016). To get information about individual corporate governance practices we used data from the Refinitive Thomson Reuters terminal.

Table 3 G-factors considered in the research and their descriptive statistics

For all our analysis, Variance Inflation Factor (VIF) is below 10, signifying moderate multicollinearity and the correlation between the dependent variables is below 0.2.

Among the studies that examined the impact of the mentioned individual corporate governance factors on financial indicators, controversial estimates were obtained. The high presence of independent directors on the board usually positively influences Tobin-Q (Malik & Makhdoom, 2016). Impact of Board diversity on firm value can be either positive (Smith et al., 2006) or negative (Adams & Ferreira, 2009). The empirical evidence of the relationship between CEO duality and policy independence is also inconclusive. For example, Harris and Helfat (Harris & Helfat, 1998) in a literature review, showed that out of 13 studies, three indicated negative effects, while ten exhibited either positive or absence of effects.  The results of the estimation of regression (3) are presented in the Table 4.

The Durbin–Wu–Hausman test confirms that the fixed effect (FE) estimator is the most efficient; thus, the study focuses on the FE estimators to explain the results. Moreover, p-values in F-test were lower than 1%, meaning that the null hypothesis of all regression coefficients being equal to zero is rejected.

Table 4 The results of estimation of regressions (1) and (2) for G factor in telecoms firms

***, **, * indicate the value is significant at 1%, 5% and 10% level, standard errors are stated in parenthesis

Source: author’s calculation

Therefore, hypothesis H5 is partially confirmed as factors of corporate governance affect the value of telecommunication companies. CEO duality has a significant (at a 1% level) and negative impact on a company’s value. This result suggests that if these posts are separated, the investment attractiveness of the telecommunication company increases. This result coincides with that of (Rhoades et al., 2001). Consequently, Tobin Q for companies in which CSR committees exist is higher than for those organizations without a committee. Thirdly, greater gender diversity increases the market's assessment of the company's prospects reflected in Tobin Q. This result coincides with (Smith et al., 2006). Lastly, the percentage of independent directors has a significant (but only at a 10% level) but the marginal effect on Tobin Q. This finding agrees with that having a moderate number of independent directors can increase a firm’s value. On the contrary, firms with “supermajority-independent boards can be less profitable than their counterparts. Moreover, independent directors can give little value to telecommunication companies because in this industry director’s technical expertise can be more valuable than their outsider status.

 We closed the research gaps and investigated the impact of ESG disclosure on Tobin-Q of US-listed telecommunication service companies between 2011-2021. We showed that the ESG disclosure score positively affects the value of the company. Among individual ESG disclosure pillars, only corporate governance positively affects Tobin-Q and is statistically significant (at a 5% level). Environmental and social pillars are both statistically insignificant in influencing Tobin Q of the telecoms. We also identified individual corporate governance factors which influence the value of telecoms. We found that CEO duality significantly and negatively impacts a company’s value. On the contrary, the presence of corporate social responsibility (CSR) committee, greater gender diversity on the Board and the percentage of independent directors on the Board positively affect the value of the telecoms. The study’s limitations are the following: (1) it does not address the issue of the U-shaped link between the value of the firm and ESG disclosures; (2) the limited number of years used in modelling. These limitations will be addressed in further studies. Also, further research directions include exploring the impact of ESG disclosures on both companies’ performance and value in various industries in emerging markets.

    The research was partially funded by the Ministry of Science and Higher Education of the Russian Federation under the strategic academic leadership program ‘Priority 2030’ (agreement 075-15-2021-1333, dated 30 September 2021).

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