ESG RATINGS, MARKET VALUATION AND ENVIRONMENTAL PERFORMANCE: EVIDENCE FROM MALAYSIAN LISTED FIRMS

Abstract

Environmental, Social and Governance (ESG) ratings are increasingly used to guide investment decisions and sustainability disclosure, yet their ability to reflect realised environmental outcomes remains uncertain. This study examines whether ESG ratings capture market valuation and reported environmental performance among Malaysian listed firms. Based on 625 ESG-rated firms from an initial screen of 1,124 Malaysian listed companies, the analysis estimates ordinary least squares regressions with HC3 heteroskedasticity-robust standard errors, controlling for firm size, pretax return on assets and financial leverage. The valuation model uses 551 observations, while the CO₂ emissions model uses 523 observations because of environmental disclosure gaps. The results show that composite ESG scores are positively associated with price-to-book ratios (β = 0.033, p < .001), suggesting that Malaysian equity investors treat ESG ratings as value-relevant market signals. ESG scores are also strongly associated with environmental sub-scores, indicating internal consistency within the same commercial rating system. However, the relationship between ESG scores and logged CO₂ emissions is economically small and weakly negative after controls (β = −0.014, p = .032), while firm size remains the dominant predictor of reported emissions. These findings show that ESG ratings in Malaysia capture valuation relevance and disclosure visibility more clearly than realised environmental performance. The study contributes by distinguishing ESG ratings as market signals, internally consistent commercial scores and imperfect proxies for environmental outcomes. It highlights the need for more comparable, transparent and assured climate-related reporting before ESG ratings can be treated as reliable indicators of environmental performance.