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. The sustainable part of corporate social performance completely explains its positive relation with firm value. In parallel, those ESG initiatives that are irrelevant to sustainability do not affect firm value. These findings remain robust even after controlling for potential endogeneity concerns using multiple identification strategies. Moreover, corporate sustainability is positively associated with stock returns and sustainability-based hedge portfolios would 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, corporate social performance, ESG, SRI, CSR

JEL Classification: G32, G34, L21, M14, Q56