Equity Capital as a Driver of Sustainable Transition

This chapter provides exploratory evidence on the importance of equity capital as a determinant of the performance of environmental, social, and governance (ESG) factors. We suggest that more evidence is needed on the drivers of ESG performance, and we investigate the role of lagged equity capital as its determinant. We argue that due to the long-term payoff structure and cash flow volatility of ESG investments as well as the incentives to direct resources toward existing bondholders, equity capital is better suited to support the implementation of ESG practices compared to traditional debt. We test this hypothesis by analyzing the ESG performance dimensions of an international sample of 6,638 firms and find that firms with a higher equity-to-asset ratio exhibit a significantly higher ESG performance. These results hold on the aggregated ESG score and on the pillar scores. The empirical evidence provided is useful to asset managers and decision makers who must screen firms for their ESG potential and choose the better financial resources in the perspective of firm sustainability aims.