This analysis considers the complicated correlation between the Environmental Social Governance (ESG) performance of the corporation and the market valuation, comparing theoretical analysis and empirical evidence. The proponents based on the stakeholder theory suggest that robust ESG reduces risk (operational, reputational, regulatory), capital costs, attracts stakeholders, and stimulates innovation, resulting in the valuation premiums. On the contrary, naysayers, based on shareholder primacy, argue that ESG investments are expensive diversions away from profit maximization, which could use up short-term value. On empirical evidence, results are divided, with majorities saying neither positive nor negative but mostly context-dependent: the association is seen as high in industries where ESG factors are material (e.g., consumer-facing industries), quality ESG disclosure helps to decrease information asymmetry, and within strong institutional frameworks (e.g., developed markets). These results are hard to verify with significant methodological limitations, such as inconsistency in ESG measurement among rating agencies, use of short-term/ cross-sectional data, widespread endogeneity problems making it difficult to draw causal conclusions, and bias of the research toward western markets. The researcher should focus on future research based on longitudinal designs, strong causal approaches (e.g., the use of policy shocks), work on industry-specific materiality models, analysis of stakeholder behavior at a deeper level, and the use of emerging economic countries in addressing the ESG-valuation puzzle.
Zhenghan Zeng (Tue,) studied this question.