A study of potential factor investing strategy from ESG score and intangible capital in Thailand

Abstract

The independent study aimed to examine the relationship between Environmental, Social, and Governance (ESG) scores and Intangible Capital Ratio (ICR) and their implications for buy-and-hold returns (BHR) and stock performance among Thai listed companies. The study focuses on firms listed on the Stock Exchange of Thailand (SET) with available ESG scores, covering the period from 2018 to 2022 (169 companies).

The finding for the first objective found that an increase in the ESG score leads to a rise in the ICR, these findings highlight the importance of ESG scores and company size & high BTM in determining a firm’s ICR. However, the study also considered fixed effects in terms of Stock, Year and Industry factors. The influence of the ESG score on the ICR did not demonstrate statistical significance. We could not conclude from this analysis. There is a gap in recognizing and capitalizing on the potential of ESG investing to build and enhance intangible capital. Moreover, ESG investment is considered as a long-term value, it might take time to create value through company.

The second objective: the findings show that ESG score and the ICR do not significantly influence the return (RI) across all models. We do not have sufficient evidence to claim a significant relationship between these independent variables and Return. The result supported the existing research on ESG did not significantly affect stock performance and ESG/CSR investments may indicate agency problems. Moreover, there is in line with CFA global ESG survey that some investors did not integrate ESG in the process of valuation. In addition, intangible assets like brand reputation, patents, or proprietary technology can play a crucial role in a company's success and potential for growth. Their value might not always be fully reflected in short-term stock price movements but could have long-term effects on a company's market position and financial performance.

However, the study conducts a portfolio analysis to further explore abnormal returns and risk aspects. The portfolio characterized by a Low ESG Score and High ICR (LH) demonstrates an impressive cumulative return of 61.64%, outperforming the SETTRI benchmark at 21.99%. Furthermore, the LH portfolio exhibits the highest alpha at 55.95% and better risk-adjusted performance based on the Sharpe and Treynor ratios.

In conclusion, the dissertation highlights the challenge and opportunity presented by the gap in integrating ESG investing with intangible capital. With a limited sample size of 169 SET companies providing ESG score data, further analysis is recommended to deepen our understanding of this subject. There is significant potential for comprehensive ESG assessment, valuation, reporting standards, regulatory support, and increased awareness to facilitate the full integration of ESG principles into investment strategies and the valuation of intangible capital.