ESG Investing as a Corporate Sustainability Factor

Abstract

This study is a companion study to research projects conducted by Amundi Financial Company on socially responsible investing (SRI) in the stock market. The main idea of the new research is to study the impact of ESG investments on asset prices in the financial market. The methods used by domestic and foreign scientists to test ESG in active and passive management are applied to analyze them. The ideal ESG model is an extended five-factor model that includes both the momentum and stability factors. This extended multi-factor model is based on value maximization principles to determine the cost of capital, where social and environmental risks, in particular, determine the consumption cost; thus, they affect the cost of capital and the cost of equity for firms. Our findings confirm the literature data that sustainability indicators reduce risk and reduce the equity cost for the firm. In addition, the results suggest that the appropriate cost of capital used in the evaluation of investment projects using net present value or internal rate of return methods should be adjusted downward when making strategic decisions on the implementation of sustainable projects.