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Valuing ESG: How financial markets respond to corporate sustainability

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  • Chau, Le
  • Anh, Le
  • Duc, Vo

Abstract

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 ESG performance. Furthermore, our analysis highlights the moderating role of country-level institutional quality and environmental sustainability, demonstrating that national contexts significantly shape market responses to ESG ratings. By leveraging the Gaussian Copula approach to address endogeneity concerns, we ensure robust and reliable findings. This study advances the international business literature by offering a theoretical framework to explain cross-country variations in how financial markets price sustainability-linked assets. Our findings underscore the critical role of institutional factors in shaping investor sentiment and corporate strategies in a sustainability-focus global economy. These insights are invaluable for investors, policymakers, and corporate leaders navigating the evolving landscape of ESG-driven finance.

Suggested Citation

  • Chau, Le & Anh, Le & Duc, Vo, 2025. "Valuing ESG: How financial markets respond to corporate sustainability," International Business Review, Elsevier, vol. 34(3).
    • Handle: RePEc:eee:iburev:v:34:y:2025:i:3:s0969593125000319
    DOI: 10.1016/j.ibusrev.2025.102418
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    2. Derrick Kansime Kamugisha, 2026. "Does ESG commitment improve carbon emission performance? Micro-evidence from South African firms," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 31(5), pages 1-25, June.
    3. Fiki Kartika & Hadri Kusuma & Yuni Nustini, 2026. "Disentangling Environmental Social and Governance (ESG) Performance To Enhance Firm Value," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 90-105.

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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