Does Investing in ESG Pay Off? Evidence from REITs

Abstract

This article investigates the impacts of environmental, social, and governance (ESG) performance on a firm's valuation, cash flow, and risk. Using newly available GRESB ESG performance data from 2019 to 2021 for global equity real estate investment trusts (REITs), we document that REITs with higher ESG performance scores have lower firm value and lower operating cash flow. Moreover, we show that strong ESG performing REITs exhibit higher firm risk. These results suggest that REIT management may overinvest in ESG activities at the expense of shareholder value. We are the first to our knowledge to provide evidence of overinvestment in ESG for REITs.

Keywords: ESG, Sustainability, REIT, COVID-19, Valuation, Risk, Overinvestment

JEL Classification: G34, Q56, G32, R30