Do ESG Factors Influence Investment Attractiveness of the Public Companies?

Even though many papers on how ESG disclosure or performance affects companies’ performance exist, the topic remains disputable and controversial. The growing importance of ESG scores in investment decision-making has risen a question of whether the ESG score and its pillars influence the investment attractiveness of the public companies. Using a sample of S&P 500 companies from 2010 to 2020 we examine the relationship between the ESG performance and investment attractiveness, expressed by Tobin’s Q, ROE, cost of capital and probability of paying dividends. We use the difference in means, panel regression and propensity score matching analysis and conclude that higher ESG performance does not influence the investment attractiveness indicators. However, we provide evidence that ESG-score transition to the above-median level may lead to a fairer valuation, higher probability of paying dividends and lower cost of capital, while return on equity is not subject to change. While previous research mainly focuses on one indicator such as a company’s value or cost of debt, this paper develops a set of investment attractiveness indicators and covers not only composite ESG performance but also its environmental, social and governance pillars separately; as well as emphasizes the influence on the industrial sector. Overall, our results suggest that managers pay strong attention to ESG performance if their performance is below-median, although good ESG performance does not guarantee investment attractiveness.