Commitment to environmental, social, and governance (ESG) practices can enhance company value and mitigate equity misvaluation, a new study by researchers at Kyushu University in Japan has found.
The study, which was published in the Business Strategy and the Environment journal, drew on data from 2,636 firms across 31 countries between 2015 and 2022, and was undertaken to mark the 20th anniversary of the launch of the Principles for Responsible Investment (PRI) by the UN in 2006.
The companies assessed included firms in the manufacturing, raw materials, services and IT sectors among others, with the researchers noting that ESG performance is linked to higher intrinsic value and improved market efficiency.
Intrinsic value
“We focus on firms’ intrinsic value, as it goes beyond short-term metrics like costs and profits to include future opportunities and risks,” commented Xinyu Wang, a PhD student at Kyushu University’s Graduate School of Economics and the paper’s lead author. “This offers a more stable measure of long-term value, which aligns with ESG’s vision of sustainable value creation and a resilient global financial system.”
In conducting their assessment, the researchers applied the Residual Income Model (RIM), which incorporates a company’s book value and excess earnings, before comparing intrinsic value with market capitalisation to measure ‘misvaluation’, assessing how far stock prices diverge from their true worth.
Stronger ESG disclosure and performance was linked to higher intrinsic value, with ESG performance itself having a larger impact than disclosure alone.
“These results align with our theoretical analysis,” Wang added. “For instance, signaling theory suggests that ESG disclosure reduces information asymmetry and perceived risk. Agency theory indicates that strong ESG performance often reflects more effective internal governance, strengthening trust among key stakeholders, including investors, customers, and employees.”
Quality and quantity
Jun Xie, assistant professor at Kyushu University’s Urban Institute and a co-author of the study, added that the study underpins the fact that investors not only care about the quantity of ESG information, but also its quality, saying
“This highlights the need for companies to communicate their substantive progress honestly, rather than relying on promotional, greenwash-like messaging,” Xie commented.
The researchers also noted, however, that the positive impact from ESG practices is not uniform across regions, with the effects ‘more pronounced’ in advanced economies, compared to developing ones.
The full report, Environmental, Social, and Governance Factors as Tools for Improving Market Efficiency: A Study on Equity Misevaluation, can be found here.
