SRI, ESG and Value of Sustainability

This chapter is dedicated to some of the most relevant “new frontiers issues” of corporate governance: ESG indexes and their connection/relationship or impact on financial and operating performance and Cost of capital for the firms.
Although corporate finance has historically researched about the determinants of stock and bonds returns and modelling future yields, recently the corporate governance has focused its attention on measuring the impact of non-financial information on listed companies’ corporate financial performance. According to the efficient market theory, all new information has the potential to impact the market value of shares. Therefore, it could be stated that the more complete and more reliable the information available, the more accurate is the valuation of the future performance of equity. Even if extra-financial information may not necessarily affect the price of a company’s share during normal operations, in cases where reputational or monetarily quantifiable litigation risk exists, investment professionals pay strong attention to the respective information .
This field of study has become more relevant over time due to the increasing attention of investors. Needless to say, the challenge is to verify whether considering sustainability, environmental and social issues also payoffs in terms of performance and added value to the firm. Whether it is reasonable to say that such strategies of firms do contribute to the establishment of a more sustainable business context as envisioned in Waddock (2017), there are substantial doubts about the role of ESG in shaping both profitability and firm value [see among others Lee et al. (2018)].
It is however evident that evaluation of ESG matters enables a thorough understanding of the risks and opportunities a company faces, allowing enhanced security selection and risk management. Additionally, ESG analysis leads to improved understanding of how future trends could affect a certain industry or the entire economic landscape for that matter . In particular, the ESG scores combine different elements , among which climate change – as one of the most prominent and challenging environmental issues facing companies – has a particular relevance for financial markets. It is foreseeable that companies will have to operate under different conditions in the near future. With this in mind, private capital has an important role to play in preventing and mitigating the impact of climate change.