How Corporate Governance Impacts ESG and Financial Performance in Russia

36thEurasia Business and Economics Society Conference - Istanbul HOW CORPORATE GOVERNANCE AFFECT ESG AND FINANCIAL PERFORMANCE: EVIDENCE FROM RUSSIA Elena Makeeva Associate Professor of School of Finance NRU Higher School of Economics Konstantin Popov PhD, Doctoral School of Economics NRU Higher School of Economics Istanbul, Moscow, 2021

Relevance Assets Under Management of ESG Investment Funds, $Bln. Equities Bonds Academic Activity in the field of Corporate Governance and ESG Journal Articles High Quality Articles Mixed Assets Other Weighted Journal Percentile 900 300 94.00 800 250 92.00 700 600 200 90.00 500 150 88.00 400 300 100 86.00 200 50 84.00 100 0 0 82.00 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bloomberg L.P. and IMF calculations. URL: https://blogs.imf.org/2019/10/10/connecting-the-dots- between-sustainable-finance-and-financial-stability/ Authors calculations based on Scopus data. URL: https://www.scopus.com/home.uri Enhancing interest among scientists, especially in the last decade Increasing ESG factors role in making financial and strategic decisions Growing environmental and social concerns within the society Increasing importance of ESG disclosure and practices for institutional investors Tougher institutional regulations in the US, EU and some emerging countries

ESG as a determinant of Corporate Financial Performance Authors Approaches Samples Key Results Growing number of articles dedicated to ESG after 2002, peaking in 2014 and 2016 years Almost 50% of studies confirm significant positive impact of ESG investments on financial performance S-factor, or Socially responsible investments as the most popular theme Socially responsible investing as the most popular key-word Increasing ESG importance due to growing number of investors concerned with it Friede et al. (2015) Literature Reviews using meta- analysis and/or textual analysis 2 200 empirical articles from 1970 to 2015 years 429 articles from Web of Science from 1979 to 2016 Widyawatti (2019) Conenc & Piselli (2020) Daugaard D. (2020) 97% of MSCI companies participate in ESG ratings Companies preparing Sustainability reports grew up from 20 (early 1990s) to 10 000 by now MSCI companies from 2013 to 2019 Over 400 articles Responsibility (CSR) and Sustainability Descriptive statistic analysis Bertolotti (2020) Grewal & Serafeim (2020) on Corporate Social Stakeholders companies Large companies tend to reduce CO2 emissions in order to improve reputation Higher Cost of Capital Environmental risks CSR investment mitigates companies risks ESG enhances investment attractiveness for institutional and foreign investors support enhances market evaluation of 19 public gold-mining companies from 1993 to 2008 years 3 421 US companies from 2005 to 2017 years 1 212 MSCI World Index companies from 2010 to 2018 years 985 US companies from 2002 to 2014 years 2 622 US companies from 2000 to 2013 years 4 168 public Indian companies from 2012 to 2017 years Henisz et al. (2014) Bolton & Kacperczyk (2019) Ginglinger & Moreqau (2019) Lattanzio & Litov (2019) Chemmanur et al. (2020) Choi et al. (2020) Roy et al. (2020) Panel data econometric analysis for companies with higher

CEO Characteristics and ESG Authors Approaches Samples Key Results ESG as a disciplining factor for top-management Mitigating role of ESG for company in case of financial distresses At the same time, increased agency risk in poorly governed companies Panel regressions of stock prices performance / corporate financial performance from ESG factors 12 978 observations in the US from 1995 to 2009 Kim et al. (2014) Huynh (2018) 50 Vietnam biggest public companies from CEO s power is negatively associated with corporate ESG practices Indicators of high CEO power: participation/chairmanship in Board of Directors, significant share in ownership, high CEO remuneration CEO s personal commitment enhances positive impact of ESG on corporate performance, while in other cases CEO s power negatively influences ESG practices Higher CEO s education improves performance, while major specialization has contradicting effects CEO Experience and Liberal political views enhance ESG Foreign and institutional investors lead to better ESG disclosure Companies with better Governance implement ESG practices proactively Klettner et al. (2014) Muttakin & Subramaniam 100 largest Indian public companies from 2007 to 2011 years 88 public companies Bangladesh, Pakistan from 2009 to 2016 years 367 public companies from the UK from 2004 to 2013 years 643 Korean companies from 2005 to 2016 years (2015) Kruger (2015) Panel regressions of corporate ESG indicators from CEOs characteristics from India, Jain, Jamali (2016) Carini et al. (2017) Gupta et al. (2017) Bae et al. (2018) Li et al. (2018) Mun et al. (2018)

Board of Directors Characteristics and ESG Authors Approaches Samples Key Results Companies with better Governance implement ESG practices proactively Better governance : Board committees, lower CEO power, high level of shareholders rights protection The link is self-reinforcing (better ESG performance Board CSR orientation) Board independence, expertise and attitude to ESG can mitigate consequences of executives focus on short-term perspective Such characteristics enhance positive ESG impact on financial performance Insiders in Board of Directors lead to poorer ESG performance, ESG-linked compensation and trainings mitigate this effect Shaukat et al. (2015) independence, specialized Ferrel et al. (2016) MSCI companies Over 300 UK companies from 2002 to 2010 years 256 non-financial UK companies from 2002 to 2014 years 300 Australian companies in 2012 year 54 Italian public companies from 2011 to 2014 years Shukat et al. (2016) Panel regressions of corporate ESG indicators from Board of Directors characteristics Hong et al. (2016) Galbreath (2017) Haque (2017) Cucari et al. (2018) Board size and diversity enhance ESG Integrated reporting IR varies by industries due to different public expectations and stakeholders Board independence also enhances IR IR helps to reduce agency conflict Board power and higher level of investors protection lead to higher levels of transparency Stronger Board mitigates opportunistic behavior Panel regressions of ESG Integrated Reporting (IR) form Board of Directors Characteristics 65 companies from 2012 to 2013 years 55 non-financial Reporting Example Database 134 international companies with IR 956 companies from 31 stock indices from 2006 to 2014 Fasan & Mio (2017) companies from Kilic, Kuzey (2018) Garcia-Sanchez et al. (2019) propensity to managers Vitolla et al. (2020) Textual analysis

Hypotheses H. 1.1 CEO Age, Tenure, previous experience in Civil Service and on CEO position positively affect corporate ESG score; H. 1.2 Higher CEO Educational level, as well as education in Economics, Finance, and Management enhance corporate ESG score; H. 1.3 CEO s membership in Board of Directors negatively affects corporate ESG score. H. 2.1 Board Size, National Diversity and Independence lead to higher corporate ESG score; H. 2.2 Higher number of Directors with Financial Expertise boosts corporate ESG score; H. 2.3 Strategy Committee and specialized ESG Committee existence tends to improve corporate ESG score. H. 3. ESG score improvement makes positive impact on Corporate Financial Performance.

Model Description Parameter Description FinPERFit Corporate Financial Performance indicators: Tobin s Q, Market Capitalization ESG_Participationit Company s participation in S&P Market Intelligence ESG Rating ESG_Scoreit Company s score in S&P Market Intelligence ESG Rating CEO Age (years), CEO Tenure (years), CEO Educational Level, CEO Previous Civil Service Experience (dummy), CEO Previous Experience (years), CEO s membership in Board of Directors CEO_Characteristicsit Board Size (persons), Number of Independent Directors, Directors-expatriates, Directors with Financial expertise, existence of Strategy Committee and ESG Committee BoD_Characteristicsit Controlsit Revenue, Assets, EBITDA margin, Debt Level, NetCAPEX, ROA

SAMPLE DESCRIPTION 82 largest Russian non-financial companies from IMOEX Period: 2013 2019 (7 years) Observations: 526 observations after statistical outliers deletion Sources of data: S&P Capital IQ Market Intelligence, Bloomberg Sample Industrial Structure by Market Capitalization, % Oil & Gas Internet Services Metallurgy Mining Not included in S&P ESG Rating Included in S&P ESG Rating 3.6%6.2% Retail Telecommunications 100% 6.0% 49.6% Power Utilities 5.2% 90% Chemical Industry 80% 46.4% 54.1% 18.2% Other 70% 71.7% 3.9% Construction 60% Transport & Infrastructure 50% Food Industry 40% Ferlilizers Industry 30% 53.6% Health Services 45.9% 20% 28.3% Shipbuilding 10% Pharmaceuticals 0% Transport and Industrial Equipment Industry % OF % OF TOTAL ASSETS % OF MARKET CAPITALIZATION OBSERVATIONS

CEO AND BOARDS PORTRAYS IN COMPANIES WITH AND WITHOUT ESG ALL CEO CHARACTERISTICS DIFFERENCES ARE STATISTICALLY SIGNIFICANT, EXCEPT CEO BOARD MEMBERSHIP 60 90% With ESG Without ESG With ESG Without ESG 80% 50 70% 40 60% 50% 30 40% 20 30% 20% 10 10% 0 0% CEO Age CEO Tenure CEO Corp. Experience Tech Education Economic & Financial Education Management Education Civil Service Experience Board Memvership ALL BOARD CHARACTERISTICS DIFFERENCES ARE STATISTICALLY SIGNIFICANT, EXCEPT NUMBER OF DIRECTORS WITH FINANCIAL EXPERTISE 12 80% 70% 10 60% 8 50% 6 40% 30% 4 20% 2 10% 0 0% Board Size Number of Independents Number of Directors with Fin. Exp. Number of Expatriates Strategy Committee ESG Committee

Binary choice models ESG Participation ESG Participation Marginal effects: Logit 0,0106*** Probit 0,0109*** CEO Age 0,0090* 0,0091* CEO Tenure -0,0037 -0,0043 Education Level -0,1605** -0,1669** Tech 0,0639 0,0704 Financial -0,0760 -0,0545 Management 0,0790* 0,0842* CEO Civil Service Experience (dummy) -0,0110** -0,0110** CEO Previous Experience (Corp) 0,0374 0,0213 CEO BoD Member 0,0126 0,0205 Strategy Committee (dummy) 0,0279 0,0370 ESG / SD Committee (dummy) 0,0044 0,0036 Board Size 0,0925*** 0,0932*** Number of Independent Directors -0,0046 -0,0054 Number of Directors with Financial Expertise -0,0181 -0,0175 Number of Directors-Expatriates 0,4126** 0,4083** EBITDA / Sales -0,1636* -0,1706* Debt / Assets 0,1694 0,1655 NetCAPEX / Sales 526 526 Observations 0,2181 0,2273 Predicted Y 24,06% 24,06% Pseudo R-squared Green is for positive coef., Red is for negative coef. Significance: * - 90%, ** - 95%, *** - 99%.

Hypotheses 1 and 2 Panel models ESG Score Social Score Environmental Score Influencing / Dependent Variables 0,3457* 0,0281 -0,1242 CEO Tenure -2,1063* -1,4969 -1,2229 Education Level -2,8077 -4,1972 -1,6886 Tech -0,3977 -1,8691 -1,8140 Financial -7,4406* -5,8023 -7,9506 Management 4,1613* 4,6778* 3,0865* CEO Civil Service Experience (dummy) -0,6759** -0,7412** -0,4736* CEO Previous Experience (Corp) 3,8104 3,2688 2,9051 CEO BoD Member -3,8468 -4,8713 1,5932 Strategy Committee (dummy) -5,0764* 6,8359* -2,4316 ESG / SD Committee (dummy) 0,9827* 0,4122 0,7059 Number of Independent Directors 0,2468 0,4178 0,1886 Number of Directors with Financial Expertise 1,1397* 1,5543* 0,3949 Number of Directors-Expatriates -1,8810 -5,8920 -3,8469 EBITDA / Sales 9,5418* 2,6081 3,6559 Debt / Assets 39,6631** 46,4151* 29,0520 NetCAPEX / Sales 2,3407 -2,2582 11,2995 ROA 21,9802** 23,8924** 8,4608 CONST 149 149 149 Observations 24,31% 25,92% 35,61% R-squared Green is for positive coef., Red is for negative coef. Significance: * - 90%, ** - 95%, *** - 99%.

Hypotheses 1 and 2 Panel models (Heckman) ESG Participation x ESG ESG Participation x Social Score ESG Participation x Environmental Score Influencing / Dependent Variables Score 0,0277* -0,0023 -0,1341 CEO Tenure -1,7884* -2,2075* -0,2565 Education Level -1,6394 -2,6048 -1,4736 Tech -6,2944* -2,9806 -3,6970 Financial -8,5891* -5,9782* -7,4974 Management 0,7956 0,7319 1,6979 CEO Civil Service Experience (dummy) -0,3915* -0,4161* -0,3366* CEO Previous Experience (Corp) 2,6471 0,7406 1,4656 CEO BoD Member -2,0515 -2,2505 2,7262 Strategy Committee (dummy) 6,9793* 0,6362 -0,5682 ESG / SD Committee (dummy) 0,6119 0,3299 0,5096 Number of Independent Directors 0,3988 0,5564 0,3051 Number of Directors with Financial Expertise 1,1682* 1,6529* 0,5968 Number of Directors-Expatriates 2,0653* - - Size (ln Revenue) 31,8393*** 18,8330*** 0,9061 CONST 526 526 526 Observations Green is for positive coef., Red is for negative coef. Significance: * - 90%, ** - 95%, *** - 99%.

Hypotheses 3 Panel models Influencing / Dependent Variables Ln MarketCap Ln MarketCap Tobin s Q Tobin s Q 0,0112* 0,0167*** - - ESG Participation x ESG Score 0,0113* - - 0,0056 ESG Participation x ESG Social Score 0,0101* 0,0082* - - ESG Participation x ESG Environmental Score 1,2539*** 1,8299** 1,2856*** 1,3081*** EBITDA/Sales -0,3213 -0,0961 0,1343 0,1265 Debt / Assets -1,2493 (-1 year)** -1,1283 (-1 year)* -0,5309 (-1 year) -0,5153 (-1 year) NetCAPEX / Sales 0,1491** 0,3416*** -0,2040* -0,1949* Size (ln Revenue) 9,2125*** 6,5996*** 2,6102** 2,5227** CONST 441 441 441 441 Observations 56,62% 61,11% 13,51 % 11,71% R-squared Green is for positive coef., Red is for negative coef. Significance: * - 90%, ** - 95%, *** - 99%.

Hypotheses 3 Panel models Ln MarketCap 0,0164* Ln MarketCap - Ln MarketCap - Influencing / Dependent Variables Tobin s Q 0,0059* ESG Participation x ESG Score 0,0122* - - - ESG Participation x ESG Environmental Score 0,0123** - - - ESG Participation x ESG Social Score 0,0506** 0,0511** 0,0533** 0,0006 CEO Tenure 0,0407 0,0400 0,0384 -0,0233 CEO Educational Level -0,2546 -0,2741 -0,2691 0,0009 Technical Education (dummy) -0,3017* -0,2668* -0,3001* 0,0417 Economic & Financial Education (dummy) -0,1812* -0,0844 -0,0579 -0,0780 Management Education (dummy) 0,1066 0,0959 0,1117 0,0637 CEO Civil Service Experience (dummy) 0,0168 0,0158 0,0145 -0,0082 CEO Previous Experience (Corp) -0,0904 -0,0842 -0,0864 0,1086 CEO Board Member (dummy) -0,2930* -0,0937 -0,0950 -0,0994 Strategy Committee (dummy) 0,0885 0,0276 0,1128 -0,1369 ESG / SD Committee (dummy) 0,0857** 0,0859** 0,0871** -0,124 Number of Independent Directors 0,0269* 0,0863 0,0863 0,0875 Number of Directors with Financial Expertise 0,0795* 0,0766* 0,0776* 0,0310 Number of Directors-Expatriates 1,2734** 1,2652 *** 1,2889*** 1,2972*** EBITDA/Sales -0,4138 -0,4299 -0,4372 0,4683 Debt / Assets -0,6122 (-1 year)* -0,5604 (-1 year) -0,5965 (-1 year) -0,3244 (-1 year) NetCAPEX / Sales 0,9206 (-1 year)*** 0,9326 (-1 year)*** 0,9302 (-1 year)*** 1,3441 (-1 year) ROA 9,3479*** 10,0247*** 9,9841*** 0,1133 CONST 441 441 441 441 Observations 34,11% 28,35% 30,47% 26,61% R-squared Green is for positive coef., Red is for negative coef. Significance: * - 90%, ** - 95%, *** - 99%.

Hypotheses 3 Maximum likelihood models Ln MarketCap 0,0453*** Ln MarketCap Influencing / Dependent Variables Tobin s Q 0,0184*** Tobin s Q - - ESG Score - 0,0105 - 0,0045 ESG Environmental Score 0,0337** 0,0128* - - ESG Social Score -0,0001 0,0006 0,0026 0,0028 CEO Tenure 0,0647 0,0534 -0,0112 -0,0153 CEO Educational Level -0,0349 -0,0264 0,0892 0,0905 Technical Education (dummy) 0,1394 0,1692 0,0829 0,0957 Economic & Financial Education (dummy) -0,6595** -0,6513** -0,0556 -0,0559 Management Education (dummy) 0,2002* 0,1929 0,0277 0,0305 CEO Civil Service Experience (dummy) 0,0065 0,0062 -0,0008 -0,0013 CEO Previous Experience (Corp) 0,1315* 0,00001 0,0114 0,1258 CEO Board Member (dummy) -0,3015* -0,3082* -0,2960*** -0,3000*** Strategy Committee (dummy) -0,1614 -0,1768 -0,0544 -0,0600 ESG / SD Committee (dummy) 0,0138 0,0143 0,0134 0,0146 Number of Independent Directors 0,0429* 0,0401* 0,0153 0,0142 Number of Directors with Financial Expertise 0,0495* 0,0505* 0,0609*** 0,0609 *** Number of Directors-Expatriates 3,5327*** 3,5760 *** 0,8443 *** 0,8704 *** EBITDA/Sales 0,4095** 0,4082** 0,0447 0,0405 Debt / Assets 0,0126 (-1 year) -0,0146 (-1 year) 0,1621 (-1 year) 0,1545 (-1 year) NetCAPEX / Sales 0,6088*** 0,6285*** -0,1529 *** -0,1416 ** Size (ln Revenue) 0,9848 (-1 year)** 0,9983 (-1 year)** 1,4187 (-1 year)** 1,4250 (-1 year)** ROA 2,3277*** 2,1258*** 1,7340*** 1,6149*** CONST 441 441 441 441 Observations Green is for positive coef., Red is for negative coef. Significance: * - 90%, ** - 95%, *** - 99%.

Key Results CEO Tenure and CEO Civil Service Experience positively affect corporate ESG score, which is consistent with previous research (Hong et al., 2016; Malik et al., 2020) and can be explained by higher attitude of such CEOs to long-term value of company, and values of the whole society. At the same time, previous experience at CEO position negatively affects ESG score, which can be explained by poorer ESG understanding among Russian CEOs. Hypotheses 1 is partly confirmed. Board Independence and Number of Directors-Expatriates are positively associated with Russian companies ESG score, which agrees with Shaukat et al., 2015, Ferrel et al., 2016, Haque (2017). But, specialized ESG Committee is positively associated only with corporate Environmental performance. Hypotheses 2 is partly confirmed. ESG performance makes significant positive impact on Market Capitalization and Tobin s Q of Russian non-financial companies. Hypotheses 3 is mostly confirmed. Social performance seems to be more significant for Russian companies than Environmental one, which can be explained by more significant effects of Occupational Health and Safety, Social Impacts on Communities, Talent Attraction and Retention indicators on Russian companies. Further study is necessary to compare these results with other emerging countries, for example, BRICS countries.

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