1.

Introduction

Recently, the notion of environmental, social, and governance (ESG) has grown rapidly and is widely accepted around the world, especially in advanced countries [1]. Many investors and capital managers now include ESG factors as an integrated part of the investment decision-making process [2,3].

There is growing interest in companies that are committed to an environmentally friendly business mission and are designing their practices to act in a responsible and long-term manner for the benefit of local populations and the environment. Consequently, companies are progressively addressing environmental, social and governance (ESG) issues. While using resources for ESG activities may seem counterproductive to maximizing value, it improves corporate sustainability by helping companies serve the interests of various stakeholders and leads to improved financial performance [4,5].

Previously, ESG was practiced by a small number of niche private real estate investors and was considered of little or marginal economic importance. Even so, ESG is now being considered as an investment philosophy adopted by a growing number of large investment institutions. Investors are now showing a tendency to “align their investment decisions with their personal values” [6,7].

European companies strive for a blend of responsible business practices, resource efficiency, and financial success, contributing to a more sustainable and flexible business environment. Remarkably, in major European demands, ESG indicators are now integrated circuit into the incentive structure of 90% of companies, representing an increase of 11 percentage points compared to the previous year [8]. This means that companies take environmental, social, and governance (ESG) principles seriously.

In general, these non-financial indices improve a company’s performance and credibility. CSR and ESG are critical in the financial economy [9]. Implementing ESG enhances a firm’s image, growth, and value. Though, development is still in its early stages in Greece. Corresponding to a report by Ernst and Young [10], more than 90% of nonnative investors opt to invest in businesses that quickly comply with ESG revelation practices.

Greek companies, both large and small market players, are making extensive attempts to adopt ESG energy efficiency, while smaller companies are also implementing it. The latter companies, under specific circumstances, could potentially benefit from the new models and ensure their development and sustainability, especially when selling abroad or acting as suppliers to large domestic companies [11]. A company’s actions to decrease its environmental fingerprint are now regarded as an important element and criterion for a company’s operations and are at the heart of its strategy.

The purpose of this study is to demonstrate the impact of ESG practices on the profitability of Greek food businesses. Specifically, it aims to determine whether these businesses will experience advantages by implementing ESG criteria.

This article is organized into five sections, of which this introduction is one. The second section provides the literature framework on financial performance and ESG criteria. The third section presents the methodology. The fourth section summarizes the results and finally presents the discussion and conclusions.

2.

Literature Review

In recent years, an increasing number of companies have been actively working to protect the environment and make positive contributions to society. They are making investments in initiatives that have a beneficial impact on the planet. Additionally, a growing number of individuals are opting to allocate their funds toward causes that promote ethical values, such as environmental conservation and social justice. This trend has gained widespread popularity globally, with projections indicating that by 2022, approximately $41 trillion will be directed toward these altruistic endeavors [12].

In fact, when researchers tried to study the different parts of ESG (environmental, social, and governance), they found different results on whether ESG affects a company’s financial performance positively or negatively, or not at all [13].

Several studies have shown that companies which have implemented ESG standards tend to have multiple benefits compared to those that have not. According to Gebhardt et al. [14], it was found that the integration of ESG key performance indicators (KPIs) into internal management systems has a positive effect, enhancing ESG performance. In addition, researchers have demonstrated a positive correlation between ESG parameters and firms’ financial performance, which appears to be stronger in the extended term [15].

Sandberg et al. [16] discovered that higher ratings of ESG standards are strongly consistent with improved return on assets (ROA) and return on equity (ROE). Zhou et al. [17] showed that the increased performance of listed companies is associated with improved ESG performance and increases their market value, with a clear mediating effect on financial performance. Moreover, operating capacity is an important mediation channel through which ESG performance affects the market value of a company.

Additional information, on ESG expectations related to sustainable development. Many authors [18,19, 20] have found that the complexity of the external environment, which is changing rapidly, has an impact on business. Thus, businesses are expanding beyond financial returns to other activities that will add value to the business and make it an entity that has the potential to evolve in the future.

Nevertheless, the fact that a company’s ESG investments could negatively affect earnings and value, even if they do not directly affect financial performance, is a point of scepticism for some investors [21]. Empirical studies on ESG disclosure have reached mixed results [22]. Consequently, it cannot be claimed that ESG models always have a positive role. There is also confirmation that ESG does not affect corporate performance at all.

According to other research scientists, there is a claim that the application of ESG criteria, as they are vague, they are going to harm or endanger the companies that apply them.

Nollet et al. [23], Azmi et al. [24] examined the financial results after the adoption of ESG criteria. However, the data on the relationship between ESG standards and financial performance is obscure. Agreeing with this, Elnahas et al. [25] similarly discover no differences between acquiescent and non-acquiescent companies regarding corporate social obligation (CSR) (ESG scores).

Further Cheng et al. [26] found that the more actively a company engages in CSR activities, the more difficult it is to achieve the earnings maximization aim owed to additional costs. Similarly, Hasan et al. [27] state that the performance of the environment has an effect on accounting rendering. As well, findings have also shown that corporate social performance has a remarkably negative effect on financial performance [28,29].

The implementation of ESG standards in Greece began in August 2021 with the ATHEX ESG index of the Athens Stock Exchange. Initially, the index included 35 top-performing publicly traded companies in environmental, social, and corporate governance categories covered by an ESG framework. The initial 35 participating companies were evaluated based on their 2019 non-financial performance [30].

Among the companies participating in the index, the companies with the highest market capitalization are Coca-Cola Tri-Epsilon, OTE, OPAP, Eurobank, PPC, Alpha Bank, National Bank of Greece, and Mytilineos [31].

Greek ESG standard philosophy is still developing. Looking at the companies mentioned above, the food sector does not seem to be very developed when it comes to ESG issues. However, this is a dynamic and promising area that is beginning to comply with corporate governance and ESG standards. Therefore, this study investigates the economic efficiency of food companies applying ESG criteria. According to the above literature review, is the application of ESG beneficial for Greek food companies or does it simply hinder their performance? Or will it not affect profits?

3.

Methods and materials

This study explores the potential relationship between ESG criteria and the economic profitability of firms adopting the criteria. The sampling frame took place in Greece with a sample of 20 companies from all over the country. Specifically, the research method was exploratory by creating a questionnaire. In the questionnaire, 29 variables relating to environmental, social, and corporate governance (ESG) standards and financial data were collected, with the reference year set between two periods: before and after the implementation of ESG. The separation of the financial results into two periods was done to provide a better understanding of the influence of ESG on the financial data.

The analysis carried out was a comparative analysis of all the financial reports of the companies before and after the introduction of the ESG standards. The average of these as well as the standard deviation was calculated using the SPSS v.27 statistical package.

To analyze and define the impact of ESG on the financial performance of the companies, the main and most important numerical or financial ratios were performed. They were divided into three categories of indicators: Performance Indicators Valuation Indicators and Financial Leverage and Asset Leverage ratios. Specifically, the Net Profit Margin Index, Return on Assets (ROA), Return on Equity (ROE), P/E ratio, Debt Ratio, Asset Fixing Ratio, Interest Coverage Ratio, and Debt to Equity Ratio.

The table below presents averages of the results of the indicators. A more accurate analysis requires the analysis of the two periods before and after, as well as their transformation. In addition, a virtual visualization is provided showing the evolution of the indicators before and after the intervention.

4.

Results

As shown in the above table (Table 1), it appears that companies’ average ESG ratings are generally higher after ESG adoption than before. However, this contrasts with their change - transmutation.

Table 1.

Financial indicators before and after ESG implementation are expressed as mean, standard deviation, and their transmutation.

Their transformation results from the difference between the average of the indicators before and the average of the indicators after the adoption of the ESG criteria. The changes in the indicators of net profit margin, return on invested capital, return on equity and the P/E ratio which expresses the valuation of a company are at low levels. Specifically, they range from about 1.5 to 5 percentage points with an average of 3.87 percentage points with a minimal to neutral effect of the criteria on the profitability of companies.

On the other hand, the other indicators related to the financial adequacy and asset structure, of a company, receive negative values in their variation (Debt Index, Asset Fixing Index, Interest Coverage Ratio, Debt to Equity Ratio). According to these numbers, it seems that companies after the introduction of the ESG model are in a crucial and risky situation.

Analytically, the Net Margin Index was calculated at 8.21% and after ESG at 11.81%. There is an increase in the rate of 3.60%. Such a ratio reflects the percentage of net profit of the company excluding operating expenses. In this case, before the standards, the average business showed the result that for each 1 euro 0.08 cents is net profit. While, after the implementation of the standards increased to 1 euro 0.12 cents is net profit.

The Return on Assets (ROA) examines how much of the investments (either by shareholders or foreigners) made in a company are profitable. Before ESG the index was estimated at 8.54% and after ESG at 13.81%. It shows an increase of 5.27%. That is, before the criteria the number of companies had a return on capital at 1 euro 0.08 cents net profit and afterwards, they showed 0.13 cents net profit.

The Return on Equity (ROE) examines how efficiently the investments (by the shareholders themselves) made in a company generate profits. Before ESG the ratio was evaluated at 24.74% and after ESG at 26.28%. It shows an increase of 1.54%. Before the standards the number of firms had a return on capital at 1 euro 0.24 cents net profit and after they showed 0.26 cents net profit.

The P/E ratio is included in the category of valuation indicators. The official name of the index is earnings multiple or price to earnings per share ratio. Before the introduction of the ESG model, the valuation of companies was calculated at 4.84% and after the implementation of the 9.91% model, it almost doubled.

The debt ratio shows the percentage of third-party creditors involved in financing the assets of the company. Thus, before ESG it was measured at 23.23% and after 22.24%. It resulted in a decrease of 0.98% meaning, almost 1% of investors exited after the implementation of ESG.

The Asset Fixing Index together with the Interest Coverage Ratio contributes to the ability of enterprises to repay the annual interest or financial charges due. Before the implementation of the criteria, the Asset Consolidation Index was calculated at 37.88% and the Interest Coverage Ratio at 43.96% was low. According to Vassiliou and Heriotis [32], the Interest Coverage Ratio should exceed 200-250 % because its explanation is based on how many times the company has to pay the annual interest. This combination shows that the rate at which fixed assets are liquidated for interest redemption is not satisfactory as the interest coverage ratio is low. While, after the adoption of the standards the combination of 35.75% and 31.74% this combination shows that the rate at which fixed assets are liquidated for interest redemption is still not satisfactory as the interest coverage ratio is even lower by 12.22%.

Finally, the Debt-to-Equity Ratio is a transformation of the debt ratio and provides the same information instead of total assets the total equity of the company is taken. As follows, before ESG it was calculated with a rate of 40.99%, and after 36.89%. It results in a decrease of 4.10% which means, almost 4% of investors exited after the implementation of ESG. The percentage of creditors exited is three times higher than the percentage of debt ratio and this is because the amount of equity is high compared to total assets but still, its definition does not differ much.

Figure 1 is the visualization of Table 1 above, providing a more detailed understanding of the progression of the indicators. The evolution of the financial indicators, relating to the period when the ESG criteria were not applied, is represented in the diagram by the blue line, while the orange line represents the values of the indicators obtained after the adoption of the standards.

Figure 1.

The evolution of the indicators before and after the adoption of the ESG criteria

It can be observed that the two lines do not have sharp changes but only differentiate at the end in the interest coverage ratio. This is a logical reflection as, as mentioned above, in the period after the implementation of the ESG criteria the ratio decreased by 12.22% burdening firms as the ability of firms to pay annual interest decreases.

5.

Discussions and Conclusions

The available literature on the effect of ESG criteria on financial returns is controversial. Some researchers argue that ESGs positively influence companies, but a significant number of researchers point out that there is a negative relationship between ESGB and financial entities. This study focuses on the food industry, a dynamic sector and constantly evolving in contemporary challenges and consumer demands.

Based on the results, the adoption of ESG standards by the food industries in Greece is at an early stage. With existing data, the effect can be divided into two parts. The primary concern is the profitability and valuation of companies that seem to improve following the implementation of ESG, but the overall effect is neutral without any benefits. In particular, the profitability of own funds (ROE) and the multiplier of profits (P/E) have improved significantly with the latter having doubled. This proves that ESG standards are of high-value thanks to the development of a sustainable strategy that they offer to businesses and increase their valuation.

The second segment discusses how criteria influence companies’ ability to pay interest charges, leading to a significant reduction. It’s possible that one of the company’s activities was decreased due to environmental criteria, which led to a negative impact on pre-tax and interest profits, leading to a negative situation.

To summarize, the effect of ESG is generally characterized as moderate to neutral. ESG influences can be addressed by industries and companies with high annual turnover, as we can assume. According to Petkou et. al. [33], food industries that have over 500 million annual turnover, invest in ESG and emphasize environmental criteria.

Even if an enterprise is powerful, it should be on standby and develop mechanisms that can handle any unwanted situation, as a sustainable risk and sufficient risk. The fact that Greek businesses are ignorant of risk is a result of it being a completely new situation they will have to face. The topic of additional costs arises when discussing sustainability investments that involve complex systems and facilities in both small and large industries. Due to the lack of resources, both monetary and non-monetary, for supporting these sustainability criteria, the latter are not interested in introducing them.

This review provides an overview of the results reported by various studies and researchers. It is important to continue research to analyze the impact of ESG on companies and encourage the adoption of a sustainable strategy for the future.