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The global pricing of environmental, social, and governance (ESG) criteria

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  • Richard P. Gregory
  • Jean Garner Stead
  • Edward Stead

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.

Suggested Citation

  • Richard P. Gregory & Jean Garner Stead & Edward Stead, 2021. "The global pricing of environmental, social, and governance (ESG) criteria," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 11(4), pages 310-329, October.
    • Handle: RePEc:taf:jsustf:v:11:y:2021:i:4:p:310-329
    DOI: 10.1080/20430795.2020.1731786
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    Cited by:

    1. Kiran Fatima & Habiba Azam & Fiaz Ahmad Sulehri & Syeda Ambreen Fatima Bukhari & Hafiz Khalique Ur Rehman Virk & Yunjiang Geng & Marc Audi & Muhammad Saleem Ashraf, 2024. "Sustainability Disclosures and Their Influence on Cost of Capital: A Comprehensive Bibliometric Study," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 13(2), pages 799-810.
    2. Elisabete Nogueira & Sofia Gomes & João M. Lopes, 2023. "Triple Bottom Line, Sustainability, and Economic Development: What Binds Them Together? A Bibliometric Approach," Sustainability, MDPI, vol. 15(8), pages 1-17, April.
    3. Mohanasundaram, S. & Kasilingam, R., 2024. "The sustainability factor in asset pricing: Empirical evidence from the Indian market," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 206-213.

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