Does Capital Expenditure Matter for ESG Disclosure? A UK Perspective
Abstract
:1. Introduction
2. Literature Review, Theoretical Framework, and Hypothesis Development
2.1. Literature Review
2.2. Theoretical Framework and Hypothesis Development
3. Research Methodology
3.1. Research Design and Data Collection
3.2. Sample Selection and Data Sources
3.3. Variables and Measurement
3.3.1. Capex
3.3.2. ESG Disclosure
3.3.3. Corporate Governance
- It permits us to capture the combined impact of multiple Governance mechanisms on capex and ESG disclosure decisions.
- It helps to address issues of multicollinearity and measurement error that may arise from using multiple correlated variables.
- It provides a comprehensive and reliable measure of Governance that can be compared across different companies and industries.
3.3.4. Control Variables
3.4. Empirical Models and Econometric Techniques
3.5. Addressing Endogeneity Concerns
4. Empirical Results
4.1. Descriptive Analysis and Results
4.2. Pairwise Correlations
4.3. Regression Analysis, Findings, and Discussion
4.4. Does Governance Matter?
4.5. Robustness Check
5. Discussion
5.1. Implications of the Study’s Findings for Theory and Practice
- ▪
- The level of capex relative to sales or assets, which indicates the growth strategy or investment intensity of companies.
- ▪
- The level of ESG disclosure relative to peers or benchmarks, which indicates the social and environmental responsibility or performance of companies.
- ▪
- The quality of governance practices, such as board composition, oversight, independence, diversity, and accountability, which indicates the stakeholder engagement and accountability of companies.
- ▪
- The cost of capital, such as cost of equity or debt, which indicates the risk and return expectations of investors and creditors.
- ▪
- Providing incentives or subsidies for companies to invest in capex that supports their social and environmental objectives and impacts, such as tax breaks, grants, or loans.
- ▪
- Setting minimum requirements or guidelines for companies to disclose their ESG information to their stakeholders, such as mandatory reporting, disclosure frameworks, or auditing standards.
- ▪
- Imposing sanctions or penalties for companies that fail to comply with the capex, governance, or ESG disclosure regulations, such as fines, suspensions, or delistings.
- ▪
- Creating platforms or mechanisms for stakeholder dialogue and feedback on capex, governance, and ESG disclosure practices, such as forums, surveys, or ratings.
5.2. Implications for the Future of ESG Disclosure
5.3. Limitations of the Research and Potential Biases
- Data limitations: This study uses secondary data from Bloomberg, which may have limitations in coverage, accuracy, and consistency. For instance, Bloomberg may not cover all the companies or industries that are relevant for the study or may have missing or incomplete data for some variables or years. Bloomberg may also have errors or inconsistencies in its data collection or processing methods, which may affect the quality of the data. Future research can use different data sources or methods to obtain more comprehensive, accurate, and consistent data for the study.
- Sample selection bias: This study focuses on non-financial companies in the FTSE All Share index in the UK, which may limit the generalizability and introduce bias. For instance, the FTSE All Share index may not represent the population of all non-financial companies in the UK or may have different characteristics or trends than other indexes or markets. The UK context may also have specific features or factors that may affect the association between capex and ESG disclosure, such as legal, cultural, or institutional aspects. Future research can expand or diversify the sample to include more companies, industries, indexes, or markets or to compare different contexts or regions.
- Endogeneity concerns: This study uses an instrumental variable approach to address endogeneity concerns in the association between capital expenditure and ESG disclosure, using the 2008 SEO deregulation in the UK as an instrumental variable. However, this event may have also influenced ESG disclosure decisions indirectly through its impact on the market conditions, investor expectations, or stakeholder pressures. Therefore, the instrument may not be completely exogenous or relevant for the study period, which spans from 2012 to 2021.
- Measurement issues: This study uses various variables to measure capex, governance, and ESG disclosure, which may have measurement issues that affect the validity and reliability of the results. For instance, capex may not capture all the aspects or dimensions of capital expenditure, such as its quality, efficiency, or effectiveness. Governance may not reflect all the factors or mechanisms that influence corporate governance practices, such as ownership structure, shareholder activism, or executive compensation. ESG disclosure may not represent all the frameworks or standards that companies use to disclose their ESG information, such as GRI, SASB, TCFD, or SDGs. Future research can use different measures or indicators to capture capex, governance, and ESG disclosure more accurately and comprehensively.
5.4. Suggestions for Future Research
6. Conclusions
- Conducting a comprehensive assessment of the social and environmental impacts and risks of different capex options and selecting those that align with the company’s vision, mission, values, and goals.
- Communicating clearly and effectively the rationale and benefits of capex decisions to internal and external stakeholders and soliciting their feedback and input.
- Disclosing relevant and reliable ESG information that reflects the company’s social and environmental performance and impact after investing in capex using appropriate frameworks and standards.
- Monitoring and evaluating the outcomes and impacts of capex decisions on the company’s ESG performance and stakeholder relations and making adjustments or improvements as needed.
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
References
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Variable | Obs | Mean | Std. Dev. | Min | Max |
---|---|---|---|---|---|
ESG Score | 3294 | 50.473 | 19.106 | 0.99 | 94.35 |
ln Capex | 3995 | 10.084 | 2.377 | 3.689 | 15.932 |
Firm Size | 5829 | 13.884 | 1.918 | 3.912 | 22.032 |
Liquidity | 3078 | 1.672 | 1.492 | 0.053 | 29.27 |
ROA | 4307 | 0.06 | 0.096 | −0.853 | 0.345 |
Board Size | 6421 | 7.555 | 2.48 | 3 | 12 |
Board Diversity | 3287 | 23.433 | 12.57 | 0 | 66.67 |
Independent Board | 3296 | 63.085 | 17.353 | 17.65 | 100 |
Audit Committee Non-Executives | 3266 | 98.39 | 5.955 | 20 | 100 |
Variables | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) |
---|---|---|---|---|---|---|---|---|---|
(1) ESG Score | 1.000 | ||||||||
(2) Capex | 0.514 | 1.000 | |||||||
(3) Firm Size | 0.572 | 0.675 | 1.000 | ||||||
(4) Liquidity | −0.108 | −0.114 | −0.068 | 1.000 | |||||
(5) Profitability (ROA) | −0.101 | −0.120 | −0.153 | 0.160 | 1.000 | ||||
(6) Board Size | 0.465 | 0.423 | 0.509 | −0.058 | −0.070 | 1.000 | |||
(7) Board Diversity | 0.277 | 0.081 | 0.134 | −0.069 | 0.036 | −0.035 | 1.000 | ||
(8) Independent Board | 0.021 | 0.209 | 0.123 | −0.088 | 0.009 | −0.209 | 0.337 | 1.000 | |
(9) Audit Committee Non-Executives | 0.089 | 0.063 | 0.084 | 0.030 | 0.021 | 0.032 | 0.042 | 0.085 | 1.000 |
Variables | OLS | Random | Fixed | Tobit |
---|---|---|---|---|
ESG Score | ESG Score | ESG Score | ESG Score | |
Capex | 0.722 *** | 0.722 *** | 0.820 *** | 0.722 *** |
(0.246) | (0.246) | (0.246) | (0.245) | |
Firm Size | 4.511 *** | 4.511 *** | 4.501 *** | 4.511 *** |
(0.341) | (0.341) | (0.340) | (0.340) | |
Liquidity | −0.521 ** | −0.521 ** | −0.584 ** | −0.521 ** |
(0.234) | (0.234) | (0.233) | (0.233) | |
Profitability (ROA) | −0.811 | −0.811 | 2.124 | −0.811 |
(3.575) | (3.575) | (3.645) | (3.566) | |
Board Size | 0.663 *** | 0.663 *** | 0.713 *** | 0.663 *** |
(0.164) | (0.164) | (0.165) | (0.164) | |
Board Diversity | 0.327 *** | 0.327 *** | 0.271 *** | 0.327 *** |
(0.0255) | (0.0255) | (0.0288) | (0.0254) | |
Independent Board | 0.196 *** | 0.196 *** | 0.197 *** | 0.196 *** |
(0.0232) | (0.0232) | (0.0232) | (0.0232) | |
Audit Committee Non-Executives | 0.237 *** | 0.237 *** | 0.256 *** | 0.237 *** |
(0.0426) | (0.0426) | (0.0428) | (0.0425) | |
Constant | −67.12 *** | −67.12 *** | −69.14 *** | −67.12 *** |
(4.877) | (4.877) | (4.884) | (4.865) | |
Observations | 1858 | 1858 | 1858 | 1858 |
R-squared | 0.510 | 0.505 | ||
Number of Year | 10 | 10 |
Variables | OLS | Random | Fixed | Tobit |
---|---|---|---|---|
ESG_Score | ESG_Score | ESG_Score | ESG_Score | |
c.ln_capex#c.total_governance | 0.425 *** | 0.425 *** | 0.375 *** | 0.425 *** |
(0.0293) | (0.0293) | (0.0313) | (0.0292) | |
Firm Size | 6.665 *** | 6.665 *** | 6.753 *** | 6.665 *** |
(0.190) | (0.190) | (0.190) | (0.189) | |
Liquidity | −0.621 *** | −0.621 *** | −0.702 *** | −0.621 *** |
(0.241) | (0.241) | (0.240) | (0.240) | |
Profitability (ROA) | 4.582 | 4.582 | 7.277 * | 4.582 |
(3.668) | (3.668) | (3.721) | (3.663) | |
Constant | −41.57 *** | −41.57 *** | −43.01 *** | −41.57 *** |
(2.854) | (2.854) | (2.864) | (2.850) | |
Observations | 1858 | 1858 | 1858 | 1858 |
R-squared | 0.474 | 0.468 | ||
Number of Year | 10 | 10 |
Variables | OLS | Random | Fixed | Tobit |
---|---|---|---|---|
ESG_Score | ESG_Score | ESG_Score | ESG_Score | |
c.Capex#c.total_governance | 0.404 *** | 0.404 *** | 0.351 *** | 0.404 *** |
(0.0272) | (0.0272) | (0.0291) | (0.0272) | |
Firm Size | 6.889 *** | 6.889 *** | 6.971 *** | 6.889 *** |
(0.178) | (0.178) | (0.177) | (0.177) | |
Liquidity | −0.588 *** | −0.588 *** | −0.629 *** | −0.588 *** |
(0.194) | (0.194) | (0.193) | (0.194) | |
ROE | 8.309 *** | 8.309 *** | 9.979 *** | 8.309 *** |
(2.596) | (2.596) | (2.603) | (2.593) | |
Constant | −45.18 *** | −45.18 *** | −46.49 *** | −45.18 *** |
(2.652) | (2.652) | (2.650) | (2.649) | |
Observations | 2066 | 2066 | 2066 | 2066 |
R-squared | 0.480 | 0.477 | ||
Number of Year | 10 | 10 |
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Moussa, A.S.; Elmarzouky, M. Does Capital Expenditure Matter for ESG Disclosure? A UK Perspective. J. Risk Financial Manag. 2023, 16, 429. https://doi.org/10.3390/jrfm16100429
Moussa AS, Elmarzouky M. Does Capital Expenditure Matter for ESG Disclosure? A UK Perspective. Journal of Risk and Financial Management. 2023; 16(10):429. https://doi.org/10.3390/jrfm16100429
Chicago/Turabian StyleMoussa, Ahmed Saber, and Mahmoud Elmarzouky. 2023. "Does Capital Expenditure Matter for ESG Disclosure? A UK Perspective" Journal of Risk and Financial Management 16, no. 10: 429. https://doi.org/10.3390/jrfm16100429
APA StyleMoussa, A. S., & Elmarzouky, M. (2023). Does Capital Expenditure Matter for ESG Disclosure? A UK Perspective. Journal of Risk and Financial Management, 16(10), 429. https://doi.org/10.3390/jrfm16100429