The global pricing of environmental, social, and governance (ESG) criteria. (2nd October 2021)

• Record Type: Journal Article
• Authors: Gregory, Richard P.; Stead, Jean Garner; Stead, Edward
• Is Part Of: Journal of sustainable finance & investment. Volume 11:Number 4(2021)
• Page Start: 310
• Page End: 329
• Publication Date: 2021-10-02
• Subjects: Asset allocation -- asset pricing -- cost of equity -- sustainable strategic management; G12 -- Q54; Social responsibility of business -- Periodicals; Sustainable development -- Finance -- Periodicals; 332
• DOI: 10.1080/20430795.2020.1731786
• Languages: English
• ISSNs: 2043-0795

Abstract

ABSTRACT: We develop an expanded asset evaluation model dubbed the environmental, social and governance (ESG) model, which includes a sustainability factor that accounts for the value of ecological and natural capital. We incorporate a sustainability factor into the Fama-French [2015. "A Five-Factor Asset Pricing Model." Journal of Financial Economics 116 (1): 1–22] five-factor model plus the momentum factor. Further, we expand previous models by basing ours on microeconomic principles of value maximization and the macroeconomic principles of ecological economics. We estimate the sustainability factor premium and its factor loadings and find that following sustainable strategic management practices reduced the cost of equity by 1.6% to 2.9% per year worldwide. This implies that in 2018, sustainable strategic management practices increased world GDP by $1.3 to $2.3 trillion. Our results support previous research that there is a negative relationship between sustainability performance and the cost of capital.