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Article

Examining the Causality between Integrated Reporting and Stock Market Capitalization. The Case of the European Renewable Energy Equipment and Services Industry

by
Daniela Nicoleta Sahlian
1,*,
Adriana Florina Popa
1,
Ștefania Amalia Nicoară
2 and
Corina Graziella Bâtcă-Dumitru
1
1
Department of Accounting and Audit, Bucharest University of Economic Studies, 010374 Bucharest, Romania
2
Department of Economic and Technical Sciences, Faculty of Economics, Computer Science and Engineering, “Vasile Goldiș” Western University of Arad, 310045 Arad, Romania
*
Author to whom correspondence should be addressed.
Energies 2023, 16(3), 1398; https://doi.org/10.3390/en16031398
Submission received: 11 December 2022 / Revised: 19 January 2023 / Accepted: 25 January 2023 / Published: 31 January 2023
(This article belongs to the Special Issue Sustainability and Corporate Governance Disclosure in Non-Financial Reporting in Energies Companies)
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Abstract

:
The International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB) of the IFRS Foundation support the integrated reporting of companies’ financial and sustainability performance to stakeholders. This paper aims to investigate whether financial and environmental, social, and corporate governance (ESG) practices have a real impact on the success of the companies in the European renewable energy equipment and services industry. Using the Granger test, the causality between the market capitalization and financial indicators was established, whereas no causality was identified between the market capitalization and ESG performance. The research led to the conclusion that the investment decision is mainly based on the information provided by the financial statements of the companies, the early stages of sustainability reporting regulation, and the need for increasing the quality and availability of corporate social responsibility information for investors.

1. Introduction

The annual financial statements and the financial diagnosis are the most used instruments for the assessment of the financial position and perfomance of companies. In recent years, attempts can be found to redefine the concept of performance by including non-financial aspects related to companies, such as corporate governance, social and environmental responsibility, energy efficiency, waste management, etc. The companies find it useful to publish integrated reports to disclose information regarding financial performance, employee strategy, corporate governance, sustainability and environmental policies, and quality and auditing standards.
Financial reporting is regulated by the International Financial Reporting Standards, in which the most important standard is the IAS 1- Presentation of Financial Statements. The annual financial statements provide information on the income, expenses, assets, and liabilities of the companies, offering all the information regarding the financial position and performance of the companies. The financial information disclosed by companies is used by stakeholders in evaluating the efficiency and financial risks of the companies and assess their value and investment opportunity.
On the other hand, sustainability reporting is barely regulated. International institutions, such as the Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC), United Nations Global Compact, Eco-Management and Audit Scheme (EMAS), and Organization for Economic Cooperation and Development (OECD), only recommended some guidelines for the disclosure of non-financial information. In general, environmental, social, and corporate governance (ESG) indicators are non-financial factors examined by stakeholders to identify the opportunities and risks concerning environmental practices, procedures regarding customers, suppliers, employees, and shareholders, compliance with business ethics rules, and fair competition. Given that the value of any company can be determined by both financial and non-financial factors, integrated reporting has become a necessity for providing correct and complete information to the stakeholders.
In recent years, a socially responsible investment trend can be noted. In addition to the financial performance indicators found in annual financial statements, investors are keen to increase their wealth using the ESG information to evaluate investment options and buy shares in companies that have ethical practices and target financial and sustainability performance. From this perspective, the ESG information disclosure and corporate social responsibility (CSR) reporting could be two important factors in investment decisions. They could also influence the stock prices of the companies, and, as a consequence, the companies’ stock market capitalization.
Several studies focusing on the topic of integrated reporting and its influence on the companies’ performances can be found. However, this paper investigates the case of European companies in the renewable energy equipment and services industry. To the best of our knowledge, there are hardly any studies regarding the topic of integrated reporting in the case of European companies in the renewable energy equipment and services industry. Our purpose is to expand the literature regarding the importance of integrated reporting and assess the influence of financial and sustainability reporting in the renewable energy equipment and services industry. The relevance of investigating this topic is given by the fact that the predicted energy crisis puts more pressure on the research and development of renewable energy technologies. Therefore, the need for investors to have broader information in the decision-making process regarding investment options is identified.
This research aims to establish if the stock market capitalization of European companies in the renewable energy equipment and services industry is indeed influenced by integrated reporting and how the causal relationship manifests in this industry. Our objective is to answer these questions if investment decisions and the stock market capitalization of companies are granted based on the information disclosed by financial reporting or sustainability reporting. The following research hypotheses have been proposed:
H1: 
There is a causality relationship between market capitalization and the financial performance of companies in the renewable energy equipment and services industry in Europe.
H2: 
There is a causality relationship between market capitalization and the ESG score of companies in the renewable energy equipment and services industry in Europe.
H3: 
There is a causality relationship between market capitalization and the CSR/ Health and Safety (H&S)/Sustainability report published by companies in the renewable energy equipment and services industry in Europe.
The current paper is organized as follows: the first part introduces the research topic and the purpose of our study; the second section summarizes the relevant literature regarding the development of integrated reporting and its influence on the companies’ value; and the third section presents the data and research method. The results are presented in the fourth section and conclusions are given in the last section.

2. Literature Review

The annual report is the main method used by all companies to disclose information regarding their activities, business strategies, and financial results to all stakeholders, including shareholders, business partners, employees, investors, government institutions, local authorities, and loan institutions [1]. The report is the most reliable source of financial and non-financial information for a company [2]. Usually, the annual report comprises the financial statements, the directors’ report, and the auditor’s report regarding the financial results. All the information provided by these reports is useful for stakeholders to evaluate the efficiency of the company [3].
According to the IASB, financial information that is relevant to stakeholders must include an accurate description of the financial position and performance of a company [4]. The financial information presented in the financial statements fulfills the need for information in decision-making regarding investment and acquisition of the companies’ shares [5]. Qualitative financial information can reduce the uncertainty regarding the activities carried out by the companies, demonstrating a positive influence on investment decisions that may lead to the growth of the stock price and market value of the company [6,7,8].
Over the past decade, the concepts of ‘market value’ and ‘profitability’ of a company have changed and investment decisions do not rely solely on the information presented in the annual financial statements. The trend of socially responsible investment, which is based on evaluating a company using the environmental, social, and corporate governance (ESG) criteria, can be noted [9,10]. As this approach can increase the attentiveness of stakeholders, the quantity and quality of disclosed information on the ESG activities performed by a company become a part of annual reports.
The International Accounting Standards Board (IASB) and the IFRS Foundation International Sustainability Standards Board (ISSB) promote the integrated reporting of the financial and sustainability performances of the companies. According to these institutions, integrated reporting represents a “clear, concise and credible communication about how the strategy, governance, performance and prospects of an organization, in the context of the external environment, create value for stakeholders in the short, medium and long term” [11]. The corporate social responsibility (CSR) report provides information regarding the quality, standards, and performance of a company regarding environmental, social, and governance issues [12]. According to [13], CSR reports support information transparency and accountability for the stock market [14].
The CSR reports can help create the companies’ value, as ESG practices are an intangible asset usually undervalued by the market, but it can generate long-horizon excess returns [15]. In addition, [16] explained the positive abnormal returns of investment portfolios through the strategic implementation of ESG practices. The CSR reporting can send a positive signal to stakeholders regarding the company’s efforts toward ESG practices to ensure long-term sustainability [17,18,19,20]. Meanwhile, [21] proved that climate activism can affect the investors’ behavior and the market values of companies. Moreover, [22,23] studied the interest of investors in ESG-oriented stocks and [24] found that the ESG is associated with stock liquidity.
Several studies have investigated the influence of ESG activities on companies’ financial results. Some studies reported that the ESG performance can increase the companies’ values [25,26,27]. A positive correlation was found between the ESG disclosure and the profit margin [28]. In addition, [29] observed the negative effect of the ESG performance on the risk of stock price crashing for Chinese companies. Furthermore, it was observed that the influence of the ESG performance on the companies’ reputations supports the organizational legitimacy [30,31,32].
ESG disclosure seems to have a hedging effect on the stakeholder-related risks and offers resilience during volatile market conditions [33,34]. On the other hand, [35] showed that the hedging effect is limited. In addition, [36] found that the ESG practices can reduce the profitability and the economic performance of the companies included in the Euro Stoxx 300 index. Similarly, [37] explored the CSR reporting in emerging markets and revealed a negative effect of the ESG disclosure on the corporate financial performance.
Sustainability reporting mainly represents a voluntary decision of the companies. Therefore, the environmental, social, and corporate governance (ESG) information provided is significantly influenced by the diplomacy and tactfulness of corporate managers [38]. Consequently, there is no unitary approach regarding the influence of ESG practices and CSR reports on the value of a company. The disclosure of ESG information varies across countries [39], as influenced by the environmental sensitivity of companies [40], financial development [41], and capital markets [42]. However, the United Nations encourages the commitment to ESG practices, which could have a real impact on the companies’ financial success [43].
There is an endless need for investors to obtain complete and better information in the decision-making process regarding investment options. Based on the above literature regarding the importance of integrated reporting in investment decisions and market efficiency, [44] observed that investors often consider multiple criteria in selecting investment portfolios. Markets and investing behaviors are changing and the fast growth of renewable energy markets can be noted. Ref. [45] estimated an 11% increase of in solar and wind energy consumption during 2023. In addition to the increasingly larger demand for renewable energy [46,47,48,49], sustainable renewable energy sources are the key to ensuring the continuous development of the energy market. In this light, the research and development of renewable energy technologies have become a strategic industry that promises profitability and sustainability for stakeholders.

3. Data and Research Methodology

The purpose of the paper is to explore the importance of integrated reporting for companies in the industry of renewable energy equipment and services. The research aims to study if there is a causal relationship between stock market capitalization and the financial and sustainability reporting of European trading companies.
Using the Refinitiv financial markets data, a database was retrieved for the Eurozone countries with financial and sustainability indicators of trading companies in 2021. There are 42 companies in this industry, and their financial data are available. Since sustainability reporting is not mandatory, the data regarding CSR sustainability reporting and ESG practices were available only for 12 companies. Therefore, the sample consisted of the following companies: ABO Wind AG (no.1), Centrotherm International AG (no.2), Global PVQ SE (No.3), Grenergy Renovables SA (no.4), Nhoa SA (no.5), PNE AG (no.6), Savosolar Oyj (no.7), SFC Energy AG (no.8), Siemens Energy AG (no.9), Siemens Gamesa Renewable Energy SA (no.10), Sif Holding NV (no.11), and SolarWorld AG (no.12). The headquarters of these companies are located in Deutschland (7 companies), Spain (2 companies), France (1 company), Finland (1 company) and the Netherlands (1 company).
The variables considered in this paper are:
-
Market capitalization (MC): an important indicator that reflects the size of a company and is used by investors to assess a company in the investment decision.
-
Financial performance indicators: the total asset (TA) owned by a company; total equity (TE) defining the residual interest of the shareholders; and total revenue (TR) expressing the selling capacity of the company.
-
Sustainability reporting: evaluated first by publishing a CSR report, human resource report, shareholders report, or a sustainability report; and second, by the ESG score according to the quality of the published environmental, social, and corporate governance information.
The variables are presented in Table 1.
The histogram presenting the distributions of the companies by market capitalization (Figure 1), total assets (Figure 2), total equity (Figure 3), and total revenue (Figure 4), reflect that Siemens Energy AG and Siemens Gamesa Renewable Energy SA are the best-performing companies in the renewable energy equipment and services industry. Most companies have a market capitalization of at most EUR 0.25 billion, a total assets of at most EUR 0.10 billion, a total equity of at most EUR 0.30 billion, and a total revenue of at most EUR 0.50 billion.
The ESG score reflects the management practices of companies in avoiding environmental risks and capitalizing on environmental opportunities. It also represents the ability to generate trust and loyalty among its workforce, customers, society, and the company’s systems and processes, which ensure that its board members and executives can act in the best interests of its long-term shareholders. The average ESG score of the companies in the renewable energy equipment and services industry is 44.45, with Siemens Gamesa Renewable Energy SA, Grenergy Renovables SA, and Siemens Energy AG having the highest scores (Figure 5).
The CSR sustainability reporting suggests that the company publishes a separate extra-financial report or an integrated annual report regarding the environmental and social impact of its operations. In general, 58% of the companies included in this study published a CSR sustainability report in 2021 (Figure 6).
The Granger causality test was used to determine if there is a causal relationship between the financial and sustainability reporting and the stock market capitalization of European trading companies. This statistical test was used to find the direction of the causality relationship between two variables. In this work, the Granger causality test was employed to find the causal relationship between the market capitalization and the financial and sustainability indicators (including the total asset, total equity, total revenue, ESG score, and CSR sustainability reporting). The causality relationship was studied with two variables in each pair, by following the research hypotheses stated. According to the p values of the F-statistics, the causality relationship between the variables will be confirmed or rejected.

4. Results and Discussion

By adopting the Jarque-Bera test, the normal distribution and the leptokurtic kurtosis of market capitalization, total asset, total equity, and total revenue can be obtained from the descriptive analysis of the variables. The ESG score and CSR sustainability reporting showed an abnormal distribution with a platykurtic distribution. For the skewness, the CSR sustainability reporting demonstrates a negative asymmetry, but all the other variables demonstrate positive asymmetry (Table 2).
The stationarity of the variable series was assessed by the unit root test. The Levin–Lin–Chu, Im–Pesaran–Shin W-stat, ADF-Fisher Chi-square, ADF-Choi Z-stat, and PP-Fisher Chi-square tests were found to have p values < 5%, demonstrating the stationarity of the variables with no unit root (Table 3).
The stationarity of the variables allows the application of the Granger causality test. The study of the causality relationship was done in pairs of two variables following the established research hypotheses (Table 4). The null hypothesis states that there is no causal relationship between the two variables examined. The null hypothesis was rejected for p values less than 5%, and there is a causal relationship between the two variables.
The first research hypothesis examines the causality relationship between market capitalization and the financial performance of companies in the industry of renewable energy equipment and services in Europe. The Granger causality test was employed for market capitalization and each financial performance indicator, including the total asset, total equity, and total revenue. Based on the p values of F-statistics, this research hypothesis was confirmed, and the results showed the Granger causality between market capitalization and the total asset, total equity, and total revenue of the European renewable energy equipment and services companies.
The Granger causality test reflects the direction of the causal relationship. The p values of F-statistics show that the total asset, total equity, and total revenue can Granger-cause stock market capitalization in the industry of renewable energy equipment and services in Europe. At the same time, the results reveal that stock market capitalization does not Granger-cause the total asset, total equity, and total revenue in the industry. In other words, the causal relationship can be established from the total assets, total equity and total revenue to stock market capitalization, but not the other way around. These results are in line with those of other studies, confirming that the total asset, equity, and revenue are important factors used by investors to evaluate investment options [50,51].
The second research hypothesis investigates the causality relationship between market capitalization and the ESG score of companies in the industry of renewable energy equipment and services in Europe. The p values of F-statistics reflect that there is no Granger causality between market capitalization and the ESG score. Therefore, this research hypothesis was rejected.
The third research hypothesis explores the causality relationship between market capitalization and the CSR/H&S/Sustainability report published by companies in the industry of renewable energy equipment and services in Europe. The p values of F-statistics also reflect that there is no Granger causality between market capitalization and the CSR sustainability reporting, and this research hypothesis was also rejected.
These results are in line with the previous studies [52,53,54,55,56,57], which reported no association between the CSR reporting and the ESG performance or the companies’ value. On the contrary, [58] found a positive relationship between the ESG discourse and the market performance of companies. Moreover, [59] showed that the ESG score has a greater impact on market capitalization in the energy sector compared with other sectors. Overall, the results of this paper suggest the orientation of the investors for the financial performance of the companies and the early stages of sustainability reporting of companies. Therefore, the ESG investing practices are quite a new concept among investors.

5. Conclusions

Nowadays, the performance of a company is not expressed only by financial indicators (such as profitability, return rate, profit margin, solvency, or liquidity) but also by the ability to support sustainable development and ensure business resilience. The ESG practices have become an integral part of the companies’ policies regarding their operational activity and business strategies. Following this trend, the annual report often comprises both financial performance and CSR information.
The integrated reporting of the company’s financial and sustainability performance provides transparency and more qualitative information regarding the environmental, social, and governance risks and the strategies for mitigating these risks. Integrated reporting was found relevant for all stakeholders, with a positive influence on the company’s reputation and performance. However, the empirical studies regarding the ESG performance and the CSR reporting influence on the companies’ results were heterogeneous and did not provide a unified view.
This paper aimed to investigate the importance of integrated reporting in the case of the renewable energy equipment and services industry in Europe. With a total asset of at most EUR 0.10 billion, a total equity of at most EUR 0.30 billion, and a total revenue of at most EUR 0.50 billion, the renewable energy equipment and services industry in Europe is of increasingly greater interest, due to the need for research and development of specific technologies in the predicted energy crisis.
The research objective is to establish if investment decisions and stock market capitalization of companies in the renewable energy equipment and services industry are influenced by financial and sustainability reporting. In total, 58% of the companies examined in this study have published an integrated report in 2021 and the average ESG score of the renewable energy equipment and services industry is 44.45. From the Granger causality test, the results showed that the investment decision is mainly based on the financial statements of the companies. At the same time, the results pointed out the early stages of sustainability reporting of companies and the need for increasing the quality and availability of CSR information for investors.
The ESG performance and CSR reporting are quite new concepts among companies and investors that certainly will develop in the future. The shortage identified at this point is the discretionary CSR reporting and ESG disclosure. In our opinion, integrated reporting that includes both financial and sustainability reporting is essential to ensuring transparency and accountability for companies and institutions. Therefore, the need for regulations and standards regarding CSR reporting and ESG disclosure and a clearly structured form to present the sustainability information was identified. The challenge here is for the regulatory bodies to find a way to standardize the financial and sustainability discourse and to ensure comparability and information efficiency between economic sectors.
This research contributes to a better appreciation of the established relationship between stock market capitalization and integrated reporting in the case of the renewable energy equipment and services industry in Europe. The results can provide some insights into the financial and sustainability reporting in the investors’ decision-making regarding investment portfolios. The current work is limited to the renewable energy equipment and services industry in Europe and only a few elements of the financial and sustainability reporting were considered. Therefore, we believe that future research should extend the sample size and include other industries from more countries. In addition, other financial and sustainability indicators could also be considered. At the same time, this paper only established the causality between integrated reporting and stock market capitalization in the renewable energy equipment and services industry in Europe, future research should apply complementary research methods to study the nature and strength of this relationship.

Author Contributions

Conceptualization, D.N.S., A.F.P. and Ș.A.N.; methodology, D.N.S., A.F.P. and Ș.A.N.; software, Ș.A.N., A.F.P. and D.N.S.; validation, Ș.A.N., A.F.P., D.N.S. and C.G.B.-D.; formal analysis, C.G.B.-D.; investigation D.N.S.; resources, C.G.B.-D.; writing—original draft preparation, Ș.A.N., A.F.P. and D.N.S.; writing—review and editing, Ș.A.N. and A.F.P.; visualization, Ș.A.N. and C.G.B.-D.; supervision, D.N.S.; project administration, A.F.P. All authors have read and agreed on the published version of the manuscript.

Funding

This research received no external funding.

Data Availability Statement

The data presented in this study are available in the Refinitiv financial markets database.

Conflicts of Interest

The authors declare no conflict of interest.

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Energies 16 01398 g001 550
Figure 1. Market capitalization.
Figure 1. Market capitalization.
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Energies 16 01398 g002 550
Figure 2. Total asset.
Figure 2. Total asset.
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Energies 16 01398 g003 550
Figure 3. Total equity.
Figure 3. Total equity.
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Energies 16 01398 g004 550
Figure 4. Total revenue.
Figure 4. Total revenue.
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Energies 16 01398 g005 550
Figure 5. ESG score.
Figure 5. ESG score.
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Figure 6. CSR sustainability reporting.
Figure 6. CSR sustainability reporting.
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Table
Table 1. Variables and data.
Table 1. Variables and data.
Variable Description Unit of Measure
Market Capitalization The value of units of securities issued multiplied by the last priceEuro
Assets Total assets of the companyEuro
Equity The equity value of preferred shareholders, general and limited partners and common shareholders, without minority shareholders’ interestEuro
Revenue The revenue from all of a company’s operating activities after deducting any sales adjustmentsEuro
ESG Score The overall company score based on self-reported information in the environmental, social, and corporate governance pillarsThe score ranges from 0 (no ESG information) to 100 (all information regarding environmental, social and corporate governance practices)
CSR sustainability reporting The company publishes a separate CSR/H&S/Sustainability report or publishes a section in its annual report on CSR/H&S/Sustainability.Dummy variable: 1 for ‘True’, if it is reporting, and 0 for ‘False’, if it is not reporting
Table
Table 2. Descriptive statistics.
Table 2. Descriptive statistics.
ESGCSRMCTATETR
Mean44.446670.5833331.90E + 096.31E + 091.97E + 094.02E + 09
Median36.545001.0000002.58E + 085.26E + 081.22E + 081.72E + 08
Maximum82.250001.0000001.18E + 105.11E + 101.73E + 103.30E + 10
Minimum7.9500000.0000001,916,377.9,297,911.7,392,629.2,838,597.
Std. Dev.26.820020.5149293.76E + 091.51E + 105.05E + 099.71E + 09
Skewness0.256611−0.3380621.9786412.4825472.6472502.517340
Kurtosis1.5292711.1142865.3327907.7471368.5165757.922246
Jarque-Bera1.2132192.00653110.5510023.5937329.2321624.78826
Probability0.5451960.3666800.0051150.0000080.0000000.000004
Sum533.36007.0000002.28E + 107.57E + 102.36E + 104.83E + 10
Sum Sq. Dev.7912.4502.9166671.55E + 202.51E + 212.80E + 201.04E + 21
Table
Table 3. Unit root test.
Table 3. Unit root test.
MethodStatisticProb.
Levin–Lin–Chu−5.117670.0000
Im–Pesaran–Shin W-stat −2.147860.0159
ADF—Fisher Chi-square21.99180.0376
ADF—Choi Z-stat−2.420640.0077
PP—Fisher Chi-square18.92470.0904
Null Hypothesis: Unit Root (Individual Unit Root Process), Series: ESG, CSR, MC, TA, TE, TR, Exogenous Variables: Individual Effects, Automatic Selection of Maximum Lags, Automatic Lag Length Selection Based on AIC: 0 to 1.
Table
Table 4. Pairwise Granger causality tests.
Table 4. Pairwise Granger causality tests.
Null HypothesesF-StatisticProb.
MC does not Granger Cause ESG0.638130.5665
ESG does not Granger Cause MC0.320450.7397
MC does not Granger Cause CSR1.321700.3461
CSR does not Granger Cause MC0.710560.5351
TA does not Granger Cause MC3.923810.0945
MC does not Granger Cause TA0.050410.9513
TE does not Granger Cause MC4.330340.0810
MC does not Granger Cause TE0.128510.8822
TR does not Granger Cause MC3.954360.0934
MC does not Granger Cause TR0.058090.9442
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Sahlian, D.N.; Popa, A.F.; Nicoară, Ș.A.; Bâtcă-Dumitru, C.G. Examining the Causality between Integrated Reporting and Stock Market Capitalization. The Case of the European Renewable Energy Equipment and Services Industry. Energies 2023, 16, 1398. https://doi.org/10.3390/en16031398

AMA Style

Sahlian DN, Popa AF, Nicoară ȘA, Bâtcă-Dumitru CG. Examining the Causality between Integrated Reporting and Stock Market Capitalization. The Case of the European Renewable Energy Equipment and Services Industry. Energies. 2023; 16(3):1398. https://doi.org/10.3390/en16031398

Chicago/Turabian Style

Sahlian, Daniela Nicoleta, Adriana Florina Popa, Ștefania Amalia Nicoară, and Corina Graziella Bâtcă-Dumitru. 2023. "Examining the Causality between Integrated Reporting and Stock Market Capitalization. The Case of the European Renewable Energy Equipment and Services Industry" Energies 16, no. 3: 1398. https://doi.org/10.3390/en16031398

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