Faculty of law blogs / UNIVERSITY OF OXFORD

ESG Activity: Doing Financially ‘Well’ by Doing ‘Good’ and Looking ‘Good’


Time to read

2 Minutes


Claire Economidou
Professor of Economics, University of Piraeus
Dimitrios Gounopoulos
Professor of Accounting and Finance, University of Bath
Dimitris Konstantios
Adjunct Lecturer of Economics and Finance, University of Piraeus
Emmanuel Tsiritakis
Professor of Finance, University of Piraeus

The value of an investment is not necessarily merely about returns. A growing number of investors and other corporate stakeholders are calling for their money to go toward stocks or funds that are both profitable over the long term and reflective of their social values. A 2020 report from the US Sustainable Investment Foundation (SIF) shows that sustainable investing assets in 2020 account for $17.1 trillion—or one in three dollars—of the total US assets under professional management; a remarkable sum that amounts to an increase of more than 40 percent since the start of 2018 ($12.0 trillion).

Sustainability is becoming the new aspiration. Over the last years, mega droughts, wildfires, flooding and extreme heatwaves are forcing managers worth their salt to have sustainability in mind, whether for righteous (environmental) or unrighteous (public relations) reasons. Further, the covid-19 pandemic crisis has put human capital and social issues at the forefront of businesses. Issues that were not a priority before have been dragged into the spotlight, attracting significantly greater attention from investors than it has to date as well as scrutiny from regulators, governments, customers and employees.

In a new paper, we examine whether information about a firm’s engagement in environmental, social and governance (ESG) responsible practices is material to market participants. Our empirical analysis focuses on a seminal event in firms’ corporate life, the initial public offering (IPO) which marks the beginning of a firm’s listing life and provides an acrimonious ground for testing important theories. Based on a sample of 1,856 IPOs by US companies over the period 2007-2018, our findings robustly document that ESG sustainability practices do pay off as the market positively responds to firms whose ESG practices are rated by independent private agencies before they become public.

Searching for potential explanations of the market’s positive reaction to ESG-rated issuers’ initial return on equity, which is found to be higher than their ESG-unrated peers, we perform a pre-IPO analysis and show that firms’ ESG risk management performance was most probably induced by firms’ good governance which aligns their interests with those of society and investors rather than managers’ opportunistic self-serving motives. We also perform a post-IPO analysis and show that equity issuers for which there was ESG information prior to becoming public exhibit significantly higher operational performance and market value than their peers for which there is no such information prior to their IPO. Finally, the former appear to attract more financially sophisticated investors with long-term orientations. All these findings together point toward the conclusion that quality-rated ESG activity is an attribute to which the market positively responds, even during important events such as IPOs and challenging times such as global financial crisis.

An important implication of our results is a potential increasing pressure on firms to consider their ESG profiles and receive good ratings in managing their ESG risks. Companies have strong incentives to be good, by serving a social purpose, but it is also important to look good, by being visible through ESG ratings to investors and stakeholders. Further, to the extent that a longer-term oriented shareholder base is desirable for long-term innovation and economic growth, transparent rating of companies’ ESG performance is a way to attract the right investors. Finally, and particularly for the US, stricter regulations about mandatory ESG disclosures is an important step towards benefiting not only firms and shareholders but also other stakeholders.

Claire Economidou is a Professor of Economics at the University of Piraeus, Greece.

Dimitrios Gounopoulos is Professor of Accounting and Finance at the University of Bath.

Dimitris Konstantios is an Adjunct Lecturer of Economics and Finance at the University of Piraeus, Greece.

Emmanuel Tsiritakis is a Professor of Finance at the University of Piraeus, Greece.


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