Sustain and Deliver: Capturing the Valuation Effects of Corporate Sustainability

Abstract

This paper identifies a select few indicators from a large set of environmental, social and governance (ESG) factors; and introduces a corporate sustainability measure. Sustainable part of corporate social performance completely explains its well-documented relation with firm values even after controlling for endogeneity. In parallel, those ESG initiatives that are irrelevant to sustainability have no effect on firm values. Moreover, sustainability-based hedge portfolios could have generated abnormal returns of over 4% per year in the sample period. Together, these results imply that only the sustainable aspects of ESG are associated with superior financial performance in terms of both accounting- and market-based value.

Keywords: Corporate sustainability, ESG, corporate social performance, corporate social responsibility, socially responsible investments, corporate governance

JEL Classification: G32, G34, L21, Q56