Valuation Effect of ESG: Market Sentiment or Growth Potential?

Event Date: 28 January 2026

Speaker: Xuerui Fang, University of Lancaster

Venue: CW404b, Cathedral Wing, Strathclyde Business School

Time: 2pm

Abstract:

This paper examines whether valuation premiums associated with stronger Environmental, Social, and Governance (ESG) performances reflect short-term market sentiments or long-term growth opportunities. Using a decomposition of the marketto-book ratio into sentiment and growth component, we show that high-ESG firms display strong growth prospects but are also subject to firm-specific sentiments. Notably, ESG premiums in large firms are mainly explained by long-term growth potentials, whereas those in smaller firms are predominantly shaped by sentimentinduced overvaluations. Furthermore, we find that ESG premiums deliver sustained economic benefits, such as green innovation, employee satisfaction, labor productivity, and customer awareness, but only when supported by fundamental growth characteristics. Finally, we provide evidence that both institutional investors and sell-side analysts reinforce firms’ long-term value creation but have limited ability to correct valuation errors driven by market sentiment.

Published: 25 February 2026