Valuing ESG: How financial markets respond to corporate sustainability

This study explores how financial markets value corporate sustainability, using a comprehensive dataset of the largest publicly listed firms across 12 countries. Diverging from prior research that assumes a linear or quadratic relationship between ESG performance and firm value, we uncover a cubic response function, characterised by a horizontal-S-shaped effect. Firm value initially increases with ESG ratings up to a critical threshold, then declines as firms face rising costs and diminishing returns, before rising again once ESG ratings exceed a second threshold. We attribute this nonlinear dynamic to two key mechanisms: growth options and stakeholder influence capacity, which interact at different stages of…