A blue and black logo Description automatically generatedEduvest – Journal of Universal Studies

Volume 4 Number 10, October, 2024

p- ISSN 2775-3735- e-ISSN 2775-3727

 

 

SHOULD INVESTORS CHOOSE ESG? EMPIRICAL EVIDENCE OF THE SHILLER P/E RATIO

 

 

Harold Kevin Alfredo1*, Anita2, Muhammad Irfan Pratama3

1,2,3Universitas Malahayati, Indonesia

Email: [email protected]1, [email protected]2, [email protected]3

 

ABSTRACT

 

This study investigates the CAPE Ratio values of stock issuers in the LQ-45 Index compared to those in the ESG Leaders Index, employing a quantitative approach to assess whether the ESG Leaders Index yields higher returns. The findings reveal that most issuers in both indices are undervalued relative to the LQ-45 Index, indicating potential for future returns. However, the LQ-45 Index has a greater number of overvalued issuers than the ESG Leaders Index. Notably, the study acknowledges limitations, including a lack of exploration into the relationship between the CAPE Ratio and non-financial factors such as ESG scores, and a narrow focus on Indonesian indices without comparative analysis with foreign indices. Future research is recommended to explore these relationships, apply the CAPE Ratio across specific sectors, and compare Indonesia's ESG Index with those in Southeast Asia, thereby enriching understanding of valuation dynamics in relation to ESG factors.

 

KEYWORDS

Shiller P/E Ratio, Green Stock Index, Conventional Stock Index,Financial Performance, Sustainable Investment.

 

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International

 

 

 

INTRODUCTION

In recent years, the Government of Indonesia has actively promoted an economic transition towards a green economy, supported by the Indonesia Stock Exchange (IDX) through the establishment of the ESG Leaders Index, launched on December 14, 2022. This index features stocks from companies adhering to ESG (Environmental, Social, and Governance) sustainability principles, evaluating their price performance based on strong ESG ratings, minimal controversies, and robust financial results. However, local companies face challenges in implementing ESG practices, including a lack of awareness, limited resources, inconsistent regulatory frameworks, and financial constraints. The green economic transition is crucial for Indonesia, given its rich biodiversity and vulnerability to climate change, as it not only promotes environmental sustainability but also enhances economic resilience and attracts international investment. As global attention shifts toward sustainable practices, businesses that effectively integrate ESG principles are likely to gain a competitive advantage, further underscored by numerous studies exploring the impact of ESG on company value and the influence of ownership structures on ESG policies (Aydoğmuş et al., 2022; Barros et al., 2021; Vitolla et al., 2020).

Research conducted by Xiaofang Huang (2023), found that the growing importance of sustainable finance and green stock indices emphasizes the need for development and transparency to support a more environmentally responsible economy. The report also discusses the emergence of green indices in China and recommends policy recommendations to boost its growth, especially in highly polluting industries and institutional investment. Another study in China found that the transparency provided by ESG ratings has led to steady growth in the corporate financial sector, which can be seen from the stock valuations of companies in the United States and China (Mneimneh et al., 2023). In addition, ESG ratings are also seen to affect the level of environmental sustainability provided by companies, with the increase in the green innovation sector evidenced by the increasing number of green patents and green technology startups in both countries. However, other studies have found the potential for "green washing", although in the long term, this phenomenon will encourage companies to increase the use of green technology in their operations (de Freitas Netto et al., 2020; Sonko & Sonko, 2023).

Research in India found that the performance of BSE-GREENEX is superior to that of BSE-SENSEX & BSE-500 (Bhattacharya, 2013). Another study in India found that there was a positive relationship between energy efficiency (companies consuming less energy per unit of sales) and the value of companies in the stock market. The authors empirically attribute this larger valuation to the lower volatility of stock returns, which is measured by the standard deviation of daily stock returns. Finally, the authors observed that investments in energy-efficient companies are less sensitive to their internal cash flows (Jadiyappa & Krishnankutty, 2022).

Research on corporate valuation using ESG and green accounting in Indonesia found that sustainability performance has a positive effect on company value, while green accounting has a negative effect on company value (Zhan, 2023). Meanwhile, ESG disclosure has no effect on the company's value. Sustainability performance and the implementation of green accounting need attention in order to have a positive impact on the company by increasing the effectiveness and efficiency of its implementation and integrating it into the company's operational activities (Lindawati et al., 2023).

Research on the Greek Stock Exchange found that, while the P/E and P/BV ratios do not correlate with future yields, the CAPE ratio and its variation CAPE 5, which uses 5-year real earnings, is an efficient estimator for future returns. The results of their research indicate information inefficiencies in the Greek Stock Market (Kenourgios et al., 2022). Research in the United States found that, even when CAPE is in the ninth decile, the next 10-year stock yield is, on average, higher than the 10-year US Treasury yield. Thus, the results are largely consistent with market efficiency. Second, consistent with the risk-reward trade-off, they found that CAPE negatively correlates with future stock market volatility (Agyei & Bossman, 2023). Research on the S&P 500 Index found that investors should consider various factors, including required returns and expected earnings growth when making capital allocation decisions across asset classes. Exiting the equity market simply because the CAPE Ratio suggests that the overpriced equity market may not yield the results investors expect (Park, 2021).

Research in Indonesia shows that the Current Ratio and price to book value simultaneously have a positive and significant effect on financial distress in companies in the hotel, tourism, and restaurant sub-sectors listed on the Indonesia Stock Exchange (Arifuddin et al., n.d.). Research in Jordan found that the independent variables, namely ROE, CR, and the OG-P mediating variable, were found to be statistically significant and justified the change in market value. Another factor is that TA and DR failed to prove their influence on the company's market value. The cost of oil and gas emphasizes its impact on market value as a single variable effect and a combined variable effect (BUI & NGUYEN, 2021).

Based on the previous research above, it was found that there is still a research gap in Indonesia that has not been conducted in comparing the value of the LQ-45 Index with the ESG Leader Index using the CAPE Ratio. This study seeks to fill the research gap and find out whether the performance of the ESG Leaders Index is superior to the performance of the LQ-45 Index.

 

RESEARCH METHOD

This research is a type of quantitative research using secondary data. Data related to stock prices and market index prices are taken from the Investing.com website, and data regarding the company's financial statements are taken on the britama.com website. Data on stock issuers included in the ESG Leaders Index and the LQ-45 Index are taken on the IDX.co.id website. Data regarding research articles are taken from situsresearchrabbit.com.

The population in this study is all stock issuers selected to be members of the ESG Leaders Index and the LQ-45 Index from January 2020 - December 2023. The ESG Leaders Index updates its member data twice a year (early March and September). The LQ-45 Index updates its member data 2 times a year (February - July and August - January). The purposive sampling method was used in this study. The criteria for the selected sample are as follows:

1.      Stock issuers that are consistently members of the LQ-45 Index for the 2020 - 2024 period.

2.      Stock issuers that are consistently members of the ESG Leaders Index for the 2021 - 2024 period

3.      The stock issuer conducted an IPO in October 2009.

Based on the criteria set above, the selected stock issuers are shown in the table below:

 

Table 1. LQ-45 Index 2020 - 2024

Number

Issuer Code

1

ADRO

2

ANTM

3

ASII

4

BBTN

5

CPIN

6

ICBP

7

INCO

8

INDF

9

INKP

10

INTP

11

ITMG

12

JPFA

13

KLBF

14

MDKA

15

MEDC

16

MICA

17

PGAS

18

PTBA

19

PTPP

20

SMGR

21

TPIA

22

UNTR

Source: Data processed by the author's team

 

Table 2. ESG Leaders Index 2021 - 2024

Number

Issuer Code

1

ASSA

2

BFIN

3

BMTR

4

DMAS

5

MAPI

6

WOOD

Source: Data processed by the author's team

 

Table 3. Issuers Included in the LQ-45 Index (2020 - 2024) and ESG Leaders (2021 - 2024)

Number

Issuer Code

1

ACES

2

AKRA

3

BBCA

4

BBNI

5

BBRI

6

BMRI

7

BSDE

8

CTRA

9

ERAA

10

EXCL

11

HMSP

12

JSMR

13

MNCN

14

PWON

15

SCMA

16

TBIG

17

TLKM

18

TOWR

19

UNVR

Source: Data processed by the author's team

 

RESULT AND DISCUSSION

The table below displays the results of the calculation of Average EPS on stock issuers, as follows:

 

Table 4. Average EPS for All Issuers (2020 - 2024)

Number

Issuer Code

Average EPS

2020

2021

2022

2023

1

ADRO

133.25

163.54

291.24

282.35

2

ANTM

46.25

33.75

18.22

26.73

3

ASII

454.00

460.00

483.50

519.10

4

ASSA

21.37

25.50

26.98

27.05

5

BBTN

167.10

177.20

191.20

201.30

6

BFIN

228.60

233.40

213.30

190.90

7

BMTR

51.90

54.69

52.19

51.83

8

CPIN

170.40

178.10

179.60

178.20

9

DMAS

16.88

18.36

20.89

21.23

10

ICBP

305.60

343.50

364.10

404.90

11

INCO

95.69

87.33

110.50

145.77

12

INDF

450.60

502.90

538.20

602.50

13

INKP

598.95

733.60

971.39

1038.19

14

INTP

910.81

861.79

785.44

706.18

15

ITMG

2390.93

2568.80

3868.31

4302.49

16

JPFA

97.20

108.60

111.40

113.80

17

KLBF

58.74

49.73

53.30

55.18

18

MAPI

84.90

65.70

52.40

43.20

19

MDKA

10.68

12.63

16.79

17.20

20

MEDC

8.55

8.06

35.80

49.70

21

MICA

34.97

43.57

50.77

54.65

22

PGAS

198.53

189.87

171.58

152.04

23

PTBA

614.30

550.60

533.80

504.80

24

PTPP

130.60

129.90

127.90

126.90

25

SMGR

651.10

619.30

577.30

518.90

26

TPIA

66.74

74.71

99.37

94.95

27

UNTR

1792.30

1902.20

2315.20

2753.10

28

WOOD

20.77

29.23

32.03

33.55

29

ACES

37.35

39.77

41.15

42.65

30

AKRA

189.29

134.40

129.68

127.03

31

BBCA

618.50

599.60

584.60

566.20

32

BBNI

538.70

566.00

626.50

634.00

33

BBRI

541.16

502.07

460.15

413.42

34

BMRI

592.04

599.21

576.89

557.87

35

BSDE

117.65

119.30

123.58

117.50

36

CTRA

59.60

66.90

73.00

76.60

37

ERAA

104.73

102.29

93.72

86.90

38

EXCL

82.40

61.30

39.40

37.10

39

HMSP

945.60

769.00

549.10

311.10

40

JSMR

224.50

229.06

243.31

321.81

41

MNCN

117.54

127.95

131.58

127.32

42

PWON

32.83

34.84

36.48

38.50

43

SCMA

75.37

71.88

65.20

56.98

44

TBIG

126.74

123.76

113.02

105.15

45

TLKM

170.03

183.72

191.29

201.34

46

TOWR

103.70

107.80

111.30

116.20

47

UNVR

506.50

467.00

417.70

360.20

Source: Data processed by the author's team

 

The table below displays the results of the calculation of the CAPE Ratio of each stock issuer based on their index group, as follows:

 

Table 5. CAPE Ratio LQ-45 Index

Number

Issuer Code

CAPE Ratio

2020

2021

2022

2023

1

ADRO

10.73

13.76

13.22

8.43

2

ANTM

41.84

66.66

108.92

63.80

3

ASII

13.27

12.39

11.79

10.88

4

BBTN

9.95

9.41

7.06

6.21

5

CPIN

38.29

33.41

31.46

28.20

6

ICBP

31.33

25.33

27.46

26.12

7

INCO

52.54

52.83

63.35

29.15

8

INDF

15.20

12.58

12.50

10.71

9

INKP

17.41

10.67

8.98

8.02

10

INTP

15.89

14.04

12.60

13.31

11

ITMG

5.79

7.94

10.09

5.96

12

JPFA

15.07

15.84

11.62

10.37

13

KLBF

25.20

32.47

39.21

29.18

14

MDKA

222.02

300.57

245.33

156.98

15

MEDC

69.01

57.84

28.35

23.24

16

MICA

78.07

51.87

62.83

52.15

17

PGAS

8.34

7.24

10.26

7.43

18

PTBA

4.57

4.92

6.91

4.83

19

PTPP

14.28

7.62

5.59

3.37

20

SMGR

19.03

11.67

11.39

12.33

21

TPIA

30.85

24.51

25.86

55.29

22

UNTR

14.84

11.64

11.26

8.22

Source: Data processed by the author's team

 

Table 6. Cape Ratio ESG Leaders Index

Number

Issuer Code

CAPE Ratio

2020

2021

2022

2023

1

ASSA

29.71

130.22

28.72

29.20

2

BFIN

2.45

4.18

4.95

6.31

3

BMTR

5.59

4.75

5.33

5.17

4

DMAS

14.57

10.40

7.61

7.68

5

MAPI

9.31

10.81

27.58

41.44

6

WOOD

26.96

28.74

11.30

8.59

Source: Data processed by the author's team

 

Table 7. CAPE Ratio Combined LQ-45 Index and ESG Leaders

Number

Issuer Code

CAPE Ratio

2020

2021

2022

2023

1

ACES

45.92

32.19

12.05

16.88

2

AKRA

3.36

6.12

10.80

11.61

3

BBCA

10.95

12.17

14.63

16.60

4

BBNI

5.73

5.96

7.36

8.48

5

BBRI

7.52

8.19

10.74

13.85

6

BMRI

5.34

5.86

8.60

10.84

7

BSDE

10.41

8.47

7.44

9.19

8

CTRA

16.53

14.50

12.88

15.27

9

ERAA

4.20

5.87

4.18

4.90

10

EXCL

33.13

51.71

54.31

53.91

11

HMSP

1.59

1.25

1.53

2.88

12

JSMR

20.62

16.98

12.25

15.13

13

MNCN

9.70

7.03

5.62

3.03

14

PWON

15.54

13.32

12.50

11.79

15

SCMA

6.08

4.54

3.16

2.98

16

TBIG

12.86

23.84

20.35

19.88

17

TLKM

19.47

21.99

19.60

19.62

18

TOWR

9.26

10.44

9.88

8.52

19

UNVR

14.51

8.80

11.25

9.80

Source: Data processed by the author's team

 

Below will be a comparison chart of the three indices above, as follows:

 

 

Graph 1. CAPE Ratio Curve of LQ-45 Index, ESG Leader Index, and LQ-45 Index with ESG Leader 2020 - 2024

Source: Data processed by the author's team

 

The table below displays the categorization of CAPE Ratio values as follows:

 

Table 8. Categorization of CAPE Ratio Values

CAPE Ratio

Category

Interpretation

< 10

Very Low

Potential Undervalued

10 - 15

Low

Undervalued or Fairly Valued

15 - 20

Keep

Fairly Valued

20 - 25

Tall

Potential Overvalued

> 25

Very High

Overvalued

Source: Gemini AI

 

Based on the results of the categorization in the table above show that the issuers of stocks included in the LQ-45 Index and the ESG Leader Index are mostly still declared undervalued and have the potential to have higher values in the future. EXCL has an overvalued value due to high market expectations due to the application of 5G technology and good financial fundamentals, and ACES experienced an overvalued period in 2020 and 2021 due to the expectations of investors who believe that ACES's financial performance remains solid despite the impact of COVID-19. Among the issuers included in the ESG Leader Index, ASSA has an overvalued value in 2021 due to market expectations for ASSA's management performance and ASSA's logistics business, which, during the pandemic, had a good performance. In the LQ-45 index, companies in the mining sector, such as ANTM, INCO, MDKA, and MEDC, have an overvalued value due to optimistic signals given by investors because these mining companies do business in the nickel mining sector (ANTM, INCO, and MDKA) as raw materials for battery technology for electric cars, and the petroleum and gas (MEDC) business which is still the energy backbone of the world economy. Companies in the health sector, such as KLBF and MIKA, are overvalued due to positive signals from investors who see the financial performance of these two companies getting better, both during the COVID-19 outbreak and after the COVID-19 outbreak and supported by competent management. CPIN was overvalued both during and after the COVID-19 period due to the views of investors who positively assessed the business strategy carried out by CPIN's management. TPIA is overvalued because in 2020 – 2022, TPIA gets cheap crude oil in the international market, and TPIA's management ability to overcome the increase in crude oil in 2023 along with TPIA is the only company in Indonesia able to produce high-quality Naptha Cracker products so that demand remains high. ICBP has an overvalued value because this company produces snacks and is the parent of the world's largest noodle subsidiary, INDF, so investors consider that the value of ICBP and its subsidiaries is high.

 

CONCLUSION

This study yields several key conclusions: First, the majority of issuers included in both the LQ-45 Index and the ESG Leaders Index are currently undervalued and show potential for higher future returns. Second, there are more overvalued issuers in the LQ-45 Index compared to those in the ESG Leaders Index. However, the study also has notable limitations. It relies on simple quantitative calculations without exploring the relationship between the CAPE ratio and non-financial factors such as ESG scores and the presence of independent commissioners. Additionally, the analysis is limited to stock issuers within specific indices rather than examining broader sector-based performance. Furthermore, the study focuses solely on indices from the Indonesia Stock Exchange, excluding comparisons with similar indices in other countries, such as Malaysia.

For future research, it is recommended to investigate the relationship between the CAPE ratio and non-financial factors. Researchers should also consider applying the CAPE ratio to stock issuers within specific sectors rather than only within selected stock indices. Lastly, comparative studies could enhance understanding by examining the ESG Index in Indonesia alongside indices from other Southeast Asian countries, utilizing the CAPE ratio as a benchmarking tool. These contributions will help address the study's limitations and provide a more comprehensive understanding of the interplay between valuation and ESG factors in the Indonesian market.

 

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