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Creating shareholder value through ESG engagement


Improving ESG can boost investment returns. The reason is simple: better ESG means healthier firms. Healthier firms trade at higher prices. Hence, improving ESG can boost firm valuation—and investment returns. We formalize this intuition. We estimate how eight key E, S, and G variables influence firm valuation. Our data cover over 2200 firms globally. These variables have a significant impact, which can vary across sectors. Enhancing ESG can unlock significant shareholder value. For example, firms adopting top decile practices across all eight variables would boost their equity valuation by 35% on average. Which ESG improvement(s) can boost share price mostly depends on firms. More than half the gains come from just one or two ESG variables. Our research allows identify such improvement(s) for each firm, and hence prioritize ESG engagement. Focusing on creating shareholder value should prove persuasive with firms, creating a virtuous circle between impact and returns.

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Exhibit 1

Source: Refinitiv and authors’ calculations

Exhibit 2

Source: Refinitiv and authors’ calculations

Exhibit 4

Source: Refinitiv, Trucost and authors’ calculations

Exhibit 5

Source: Refinitiv, Trucost, and authors’ calculations. Reading note: cutting carbon emissions in line with peers’ best practices boosts equity valuation by at least 6% for half the firms; at least 18% for 10% of firms, and at least 25% for 5% of firms

Exhibit 6

Source: Refinitiv, Trucost, and authors’ calculations

Exhibit 7

Source: Refinitiv, Trucost, and authors’ calculations

Exhibit 9

Source: Refinitiv, Trucost and authors’ calculations

Exhibit 10

Source: Refinitiv, Trucost and authors’ calculations

Exhibit 11

Source: Refinitiv, Trucost and authors’ calculations

Exhibit 12

Source: Refinitiv, Trucost and authors’ calculations

Exhibit 13

Source: Refinitiv, Trucost and authors’ calculations

Exhibit 14

Source: Refinitiv, Trucost and authors’ calculations


  1. The ESG Advantage in Long-Term Investing, December 2019.

  2. Recently, Bolton and Kacperczyk (2020), Hsu et al. (2020) and In et al. (2019) show that companies emitting the most greenhouse gases earn higher stock returns than companies emitting the lowest levels.

  3. Firms with best ESG ratings also tend to enjoy lower cost of debt. See for instance Goss and Roberts (2011).

  4. Barko et al. (2018), Hoepner et al. (2018) and Flammer (2015) support Dimson et al. (2015)’s findings, also showing that activism is most effective on environmental and governance topics. Dimson et al. (2019) and Doidge et al. (2019) find that coordination among activists raises effectiveness.

  5. See “Appendix A and B” for details on data structure.

  6. SASB does not cover governance issues and does not have water and waste as a cross-cutting E topic.

  7. Results are robust when scaling with a different variable, such as assets.

  8. See “Appendix A” for a list of MSCI regions.

  9. The unbalance of the panel is addressed with fixed effects, and clustered standard errors are verified in robustness checks.

  10. We validated our conclusions when using clustered standard errors at the firm level (besides the year, region and sector fixed effects of our main model).

  11. The utility sector includes water distribution, which “uses” a lot of water yet not in an adverse way. Hence, we treat Utilities separately from Materials and Energy.

  12. See Chava (2014), El Ghoul et al. (2011, 2018), or Sharfman and Fernando (2008).

  13. Board size and tenure are the two most studied features. Hermalin and Weisbach (2003) review the literature. Most studies find that smaller boards increase firm value. In our sample, half the firms have between 9 and 11 seats at their boards (25th to 75th percentiles), but the rest of the distribution spans both family-sized and headcount heavy C-suites. Regarding tenure, the relationship seems to be nonlinear. Huang and Hilary (2018) find that firms’ Tobin’s Q increases with board experience up to a 9-year threshold. MSCI ACWI firms have a median average board tenure of 6 years, a suboptimal figure. The literature on “overboarding” is univocal (Ferris et al. 2003; Fich and Shivdasani 2006; Harris and Shimizu 2004; Jiraporn et al. 2009) in linking overstretched directors to lower firm performance. Clements et al. (2015) point at improved networking ability as an exception.

  14. The academic literature is mixed on board diversity. Johnson et al. (2013) highlight that gender diversity has gathered much attention. Yet, they conclude that evidence on board gender diversity and firm value is conflicted. Our estimates are positive, but not strongly significant.

  15. We classify firms in two ways: either at GICS level 1 sectors across regions (10 × 4 segments), or as GICS level 2 industry groups globally. The first approach allows comparing a firm with best practices in a region; the second approach allows comparing a firm with best practices globally in a narrower industry. We then compute the average impact associated with adopting “peers” best practices in both approaches.

  16. We define best practice as 10th percentile except for two variables. Literature suggests that 9 years is an optimal Board tenure. We use such figure as best practice. Also, we use the 25th percentile for board size. Smaller (often family-controlled) firms have smaller boards. Using the 25th percentile avoids overstating gains from reducing board size.

  17. Proxy Preview 2021 by As You Sow, The Sustainable Investments Institute & Proxy Impact.



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We thank Nabeel Abdoula, Erland Karlsson, Donough Kilmurray, Arthur Mizne, and Arvella colleagues for helpful comments and insights. The usual disclaimer applies.

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Correspondence to Benoît Mercereau.

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Appendix A: Data

See Exhibit 15, Exhibit 16 and Exhibit 17.

Exhibit 15 Numerical ESG variables.
Exhibit 16 Regions.
Exhibit 17 Financial variables.

Appendix B: Details on data structure

See Exhibit 18, Exhibit 19 and Exhibit 20.

Exhibit 18
figure 13

Source: Refinitiv and authors’ calculations

Waste related information reported (% of firms in 2019).

Exhibit 19 Percentiles of environment intensity variables by sector.
Exhibit 20 Summary statistics of regression variables (2012–2020).

Appendix C: Panel regression with price to book

See Exhibit 21.

Exhibit 21 Impact of ESG variables on equity valuation (panel regression with PB).

Appendix D: Potential gain by country

See Exhibit 22.

Exhibit 22
figure 14

Source: Refinitiv, Trucost and authors’ calculations

Average potential shareholder value creation by country and by engagement subject.

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Mercereau, B., Melin, L. & Lugo, M.M. Creating shareholder value through ESG engagement. J Asset Manag 23, 550–566 (2022).

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  • ESG
  • Global equities
  • Valuation
  • Climate change