𝐻0: 𝛽𝐸𝑆𝐺 = 0 𝐻1: 𝛽𝐸𝑆𝐺≠ 0
𝑡 =−0,083 − 0
0,061 = −1,36
As we know that for a two-sided t-test, the critical value at the 5% significant level is ±1,982, and the critical value at the 1% significant level is ±2,623 with 107 degrees of freedom meaning that it can be concluded that 𝑡 value is less than both critical values and we cannot, therefore, reject our null hypothesis saying that ESG Leaders minus Laggers does not affect the excess return in favour for the alternative hypothesis.
Costs synergies can be obtained through different costs methods, whereas the margins for total cost and re-search and development costs have been chosen by the authors to give the best indication of the relationship, as administrative costs and staff costs will not be analyzed since it is too M&A specific from firm to firm re-garding possible obtained cost synergies in those accounts.
Table 30: Regression of E-, S- and G Score on Cost margin
(Authors’ own creation, 2021).
Starting with the cost of revenue margin, it shows that there were 1.337 observations across 226 companies with available data with a mean of 56,70% cost of revenues with a standard deviation of 0,2231 overall. For the coefficients, it shows that social- and governance score both have a negative relationship with the cost of revenue margin and that the Environment score has a positive relationship with the cost of revenue margin.
However, none of the scores is statistically significant as they all have a high p-value and that the regression itself has a low 𝑅2 value. Even though they are not statistically significant, the results support the theory of creating shared value, as if by investing more in the company, ex. Production may lead to higher costs, but in the long run, it is more beneficial for the company and the environment, assuming that the results from the analysis above hold that a higher combined ESG score leads to a higher firm value.
On the other hand, the two scores with a negative relationship might indicate when companies are more fo-cused on creating a better workforce within the company, product responsibility, management or corporate social responsibility, it reduces the cost of revenue margin and creates more profit for shareholders. The com-bined score will overall have a small negative relationship with the cost of revenue margin, which creates the indication that combining the theories above will overall give more profit to shareholders.
Return on invested capital
Table 31: Return on Invested Capital in % across Nordic Companies
(Authors’ own creation, 2021).
The return on invested capital (ROIC) is the benchmark for comparing the performance between business, but within the M&A world, the ROIC is also used to be compared to the company’s WACC as if the invested cap-ital is being used efficiently. In general, the ROIC is the money a company is making based on the average costs it pays on the company’s debt and equity capital, making it an interesting measure for acquirers when valuating and when deciding to buy a company or not. Of the data set, there were 1.367 observations from 233 companies across the years available with a mean return on invested capital in a percentage of 3,97% overall.
Table 32: Regression of E-, S- and G Score on Return on Invested Capital in %
(Authors’ own creation, 2021).
There can be found a positive relationship between ROIC and environmental- and social score, showing when those scores increase by one, the average ROIC between Nordic companies will increase by 0,1 percentage points. Indicating that companies who invest more in resource use, emission friendly or innovative production lines or in the company’s workforce and supply chain, then shareholders gain more on their invested capital.
In addition to this, it shows that there is a negative relationship between the governance score and ROIC which can be supportive for theories of hubris among managers or that management within high score companies lead to spending more of the invested capital to stakeholders or corporate social responsibility strategies.
Overall, the combined score will lead to a positive effect on companies average percentage of ROIC so that companies with higher ESG score leads to generate more profit on the invested capital than companies with lower ESG scores. However, the effect of the social- and governance score is five times higher than the envi-ronmental score. While the envienvi-ronmental score is far from being statistically significant with 𝑝 = 0.657, then the social- and governance score are both statistically significant on a 5% level with 𝑝 = 0,030 and 𝑝 = 0,004 respectively.
Total Enterprise Value
Table 33: Total Enterprise Value across Nordic Companies
(Authors’ own creation, 2021).
In addition to portfolio analysis, a panel regression of the total enterprise value has been made to see the ef-fect. In this regression, there was 1.338 from 2011 to 2019 from 231 different companies across the Nordics with a mean total enterprise value of 50.764,91 mil. DKK.
Table 33: Regression of E-, S- and G Score on Total Enterprise Value
(Authors’ own creation, 2021).
The relationship between total enterprise value and the environment- and the social score is highly positive and being statistically significant on a 1% level, whereas the relationship with the governance score is negative and being statistically insignificant. Combined, the scores have a positive relationship with the total enterprise value, and by saying all scores increase by one, then the combined effect is a positive gain of 860,28 mil. DKK
on the total enterprise value. This doesn’t apply to all companies as the score itself doesn’t bring this added value to the enterprise value. However, by dividing it with the sample mean, it results in a percentage change of 1,695% in the total enterprise value for a company. This effect is the effect of the company investing more in innovative and environmental solutions and investing more in the supply chain, the workforce etc. These results may not be statistically perfect or significant overall. However, they do support the theories of creating shared value, ESG scores increasing firm value and the results above. It also has a slight indication of manage-ment hubris in terms of the negative relationship, but this may also be the results of more invested capital go-ing to corporate social responsibility strategies or stakeholders.
Overall, the panel regression doesn’t apply any fully statistically evidence for the different results, but the rela-tionships give an indication of the possible benefits of investing in a higher ESG score for a company. For an acquirer, it may lead to a more specific screening of the market and help to find the most efficient target, and for the target company, it could bring an intuition of increasing the ESG score in terms of preparing for an M&A in the long run. As the Nordic M&A advisory market is stating that the future brings more crucial ESG due-diligence, this might be an effective tool to help clients.