Benchmarking Sustainable Performance in Shareholder Wealth Creation: A Data Envelopment Analysis Approach

Abstract

The evaluation of companies' sustainability performance in generating shareholder wealth is increasingly reliant on environmental, social, and governance (ESG) ratings. This study introduces a novel approach by applying data envelopment analysis (DEA) as an alternative to conventional linear regression methods. A conceptual framework has been developed to integrate E-, S-, and G-scores into DEA models, enabling a more nuanced interpretation of whether a company's ESG efforts contribute to or undermine wealth creation. This approach also assesses the relative effectiveness of a company's ESG initiatives compared to its peers, taking into account key wealth creation variables. An empirical analysis was conducted on a sample of 80 listed South African companies, calculating the technical efficiency of each company. The findings indicate that linear regression analysis falls short in benchmarking individual companies' ESG efforts in relation to shareholder wealth creation. In contrast, DEA effectively addresses this challenge by offering a robust benchmarking tool. The practical implications of this study are significant, as the concepts of 'fruitless' and 'fruitful' ESG efforts introduced here provide companies with a transferable framework for comparing their sustainability performance against peers. The empirical application underscores the value of DEA in distinguishing between productive and counterproductive ESG strategies, thereby enhancing the precision of sustainability assessments in the context of shareholder wealth.