Proceedings of The 11th International Conference on Modern Research in Management, Economics and Accounting
Over-investment in the Environmental, Social, and Governance Pillar: Is there a Cost of Being too sustainable?
This paper builds on the current corporate social performance (CSP) research and contributes to the literature by deriving a CSP over-investment hypothesis. I determine the over-investment threshold as the mean year-industry environmental, social, governance (ESG) performance. Asset4 ESG ratings serve as an indicator for ESG performance, i.e. CSP. The final sample includes more than 4.500 firm-year observations for firms listed in the S&P500 from 2005 to 2019. I find an overall positive effect of CSP on CFP. However, the results of my panel data regressions with industry-fixed effects further show a value-destroying effect of CSP over-investment on market capitalization. Additionally, the results of several robustness tests strengthen my findings. Therefore, the conclusion is twofold. First, CSP is not solely ‘greenwashing’ but rather value-enhancing up to an industry-specific threshold. Second, however, a CSP above the average industry CSP lowers firm value. Accordingly, although my results imply that CSP over-investment leads to lower CFP, they do not necessarily imply that CSP over-investment is value-destroying in all industries or regions. Further research must focus on examining the effect separately in different industries and regions.
Keywords: Corporate Social Performance (CSP); Environmental, Social, and Governance (ESG) Performance; Over-investment in Sustainability; Corporate Financial Performance (CFP); Firm Value.