Corporate Sustainability and Stock Value in Asian–Pacific Emerging Markets: Synergies or Tradeoffs among ESG Factors?

Abstract

We use structural equation modelling to examine whether multi-dimensional corporate sustainability (CS)—measured by environmental, social and governance (ESG) factors—affects stock value. We find that investors are willing to pay for each dollar of earnings that the highly rated ESG company generates. Moreover, the positive synergistic effect among the ESG factors implies that companies that focus on any single dimension or the equally weighted aggregation of ESG factors understate the value relevance of CS. In other words, successful sustainability practices should comprise all of the dimensions of CS in order to gain benefit from their synergistic effect with stock value. However, the synergistic effect among ESG factors does not imply that the individual components of CS should be weighted equally in sustainability practices. Our findings show that social engagement emerges as the main driver of CS and should be weighted more heavily than the other factors in sustainability practices. Interestingly, when we account for corporate economic performance, we find that investors put more (less) value on CS when corporate economic performance is weak (strong). This implies that economic performance and ESG performance contain similar information, and that their effects on stock value subsume each other.