STUDY ON THE EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON FINANCIAL WEALTH OF KAZAKHSTAN COMPANIES

STUDY ON THE EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON FINANCIAL WEALTH OF KAZAKHSTAN COMPANIES

Tamerlan Kenzhebulatov

Student, M.Narikbayev Kazguu University, Kazakhstan, Nur-sultan

Roman Dovolnov

MA(Social Science) Economics, M.Narikbayev Kazguu University, Kazakhstan, Nur-sultan

ABSTRACT

Large investors in Kazakhstan began to rethink their risks and portfolio structure. As one of the largest providers of capital in the world's financial markets, they are aware of their responsibility and influence in addressing global challenges, and see that non-financial risks (cataclysms, pandemics, other environmental and social aspects) can have a very specific impact on the financial results of companies.

This study outlooks on financial stability of Kazakhstan and Russia 40 largest companies associated through CSR strategy with publicly shared financial statements in order to assess on which financial indicators CSR have the most effect on. The analysis was based on annual reports and reports on sustainable development (including integrated reports, reports on sustainable development and social responsibility. Conclusion and results based on three metrics of CSR as Environmental, Social and Governance Ratings are proposed to Kazakhstan companies in regard of developing CSR.

Keywords: CSR, ESG, Kazakhstan, financial wealth, ROE, EBITDA, leverage.

During the last years of rapid changes and a variety of possible risks, it is vital to find a balance between financial organizational outcomes, public welfare, and environmental protection to successfully preserve the organization's trustworthy image (Griffin,2010; Park et.al. 2014; Lu et al., 2019). In PwC's September 2021 COP26 Global Investor Survey, nearly 80% of respondents said ESG risk is an important factor in investment decisions; and about 50% expressed their readiness to abandon companies that did not take sufficient and effective measures on ESG issues.

The modern business environment is progressively encouraging the application or implementation of the idea of corporate social responsibility (CSR), which encourages companies to operate transparently, safeguard the environment, and prioritize social welfare (Eckert, 2017).

Purpose: The objectives of the study are utilized to gain a clear understanding of the goal of this study is to determine the most important factors that can be influenced by the level of CSR among publicly traded companies in Kazakhstan. An additional goal of the research is to compare the findings of two models: Kazakhstan and Russian companies.

The reason of proposing two model regression analysis is to compare which rating affect on which financial result in Russian public companies as CSR in this country has been developing much earlier than in Kazakhstan. Putting everything into account, the current study constructs and analyzes one hypothesis, which is supported by regression analysis results.

ROI, EBITDA, leverage ratio are dependent variables, while ESG rating published by RAEX Europe and PwC Kazakhstan and number of realized CSR programs are independent variables. The following is how the hypothesis is constructed:

H1: ESG Rating has an effect on ROI;

H2: ESG Rating has an effect on EBITDA;

H3: ESG Rating has an effect on D/E;

Object: A total of 40 publicly traded firms are included in the sample, with 20 from Russia and the remaining 20 from Kazakhstan. The sample size data was obtained between 2018 and 2021. The current study's response rate is drawn from publicly traded corporations that function in a variety of industries;

In statistical modeling, regression analysis is a statistical process for estimating the relationships among variables. It includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps one understand how the typical value of the dependent variable changes when any one of the independent variables is varied, while the other independent variables are held fixed [1]. A hypothesis test is a statistical test that is used to determine whether there is enough evidence in a sample of data to infer that a certain condition is true for the entire population. A hypothesis test examines two opposing hypotheses about a population: the null hypothesis and the alternative hypothesis. The null hypothesis is the statement being tested. Usually the null hypothesis is a statement of “no effect” or “no difference”. The alternative hypothesis is the statement you want to be able to conclude is true [2]. In statistics, linear regression is an approach for modeling the relationship between a scalar dependent variable y and one or more explanatory variables (or independent variables) denoted X. The case of one explanatory variable is called simple linear regression [3].

Thus, based on statistical analysis of p-values on, we can formulate regression formulas as:

Y(ROE) = 29 + 1.34*ER + 1.9*SR + e;

Y(EBITDA) = 10 + 64*GR+ e;

Y(Leverage) = 14 – 168*ER + 119*SR + 155*GR+e;

It can be seen that ROE model for Kazakhstan’s sample showed that Environmental and Social Ranks as well as number of CSR programs and incentives with increasing numbers have an impact on the increase of ROE. This is associated with conclusion provided by Liy et al. (2021), where it was showed that empirical results generally indicate that socially responsible behavior, primarily of large joint-stock companies, can act as a driver for attracting investments even in a low-transparent and informationally inefficient market. EBITDA also showed high association with all factors of ESG, which reflects the idea of Yen and Andrea (2019) that increase in ESG rating increases brand strength and number of customers which increases revenue streams.

Leverage factor showed association with all three factors of ESG rating, but with Environmental Rating with negative sign. It means, that with every increase in Environmental Rating, the leverage ratio will decrease. That might be justified with the fact that as investors oversee low risks and increased CSR strategy, they might invest more into company, therefore, debt share decreases as a result.

Leverage, EBITDA and ROE values in the sample take both positive and negative values. Despite the strong spread between the minimum and maximum, the average values for both variables are positive: 7.5% for Leverage and 14% for ROE, which signals the competitiveness and attractiveness of companies in the sample for investors. The fact that the return on equity is twice the leverage shows that, on average, the firms included in the sample operate not only with equity, but also with borrowed funds. And the higher the amount of borrowed capital, the higher the leverage ratio and the lower the ROE.

Based on p-values, presented in tables above, it can be seen that regression formulas are the following:

Y(ROE) = 20 + 1.61*ER + 1.4*SR+ 111*GR+e;

Y(EBITDA) = 15 +229*ER+ 39*GR+ e;

Y(Leverage) = 10 - 181*ER + 113*SR + e;

All three ranks had an influence on ROE of Russian companies, which reflects the idea that ESG and CSR were earlier developed in Russia, that’s why investors are ready to fully assess all three ranks [4]. Environmental rank also had an influence on EBITDA, which reflects the idea that Russian companies are largely affected by ER. In the study by Cheng (2013), it can be seen that aggressive Environmental Policy can lower Leverage ratio, which is in line with the results of this study.

Moreover, this result supports another objective of the current research: with increasing ROE, CSR increases as well. According to Godfrey (2005), greater CSR contribute to moral capital, which in turn improves reputation among shareholders. For Leverage Ratio model results were the same as in Kazakhstan model, while in EBITDA model the influence of ER is positive with significant p-value.

The analysis showed that despite the limitations imposed on the analysis by the instability and imperfection of emerging markets, corporate social responsibility has an impact on the company's financial results. At the same time, the mere presence of a company in the rating has a stronger effect on profitability and market capitalization than the rating score. That is, we can conclude that the presence in the rating is perceived by investors and consumers as a positive signal.

In this study through analysis of 40 companies, where 20 companies are Kazakhstan-based, and 20 are Russian based. Through research performed, it can viewed that the strongest rating, named as Environmental rating had the most influence in all three financial indicators.

References:

1. Atrill, P. and McLaney, E. (2008), Accounting and Finance for Non-specialists, 6th ed., Pearson Education, Upper Saddle River, NJ.
2. Aupperle, K.E., Carroll, A.B. and Hatfield, J.D. (1985), “An empirical examination of the relationship between corporate social responsibility and profitability”, Academy of Management Journal, Vol. 28 No. 2, pp. 446-63.
3. Balabanis, G., Phillips, H. C., & Lyall, J. (1998). Corporate social responsibility and economic performance in the top British companies: Are they linked? European Business Review, 98(1), 25–44. https://doi.org/10.1108/09555349810195529
4. Baughn, C. C., Bodie, N. L. (Dusty), & McIntosh, J. C. (2007). Corporate social and environmental responsibility in Asian countries and other geographical regions. Corporate Social Responsibility and Environmental Management, 14(4), 189–205. https://doi.org/10.1002/csr.160