Markets can finance the green transition. But they cannot drive it on their own
A company can invest in reducing emissions and generating environmental benefits without its share price rising. There is no contradiction here: what is beneficial to society does not necessarily coincide with what offers the highest return to investors. Yet, in the debate on sustainable finance, the same promise is often repeated: sustainability pays off. It is a real possibility, but it cannot become the premise on which we entrust the ecological transition to the markets.
Saving energy, making better use of resources and innovating can make a business more competitive. The problem arises when this possibility is turned into a general rule, on the assumption that the most sustainable companies will be systematically rewarded by investors. If that reward does not materialise, it is not the value of the transition that diminishes. Rather, it is the idea that financial gain alone is sufficient to drive it that reveals its limitations.
My recent research, published in *Business Strategy and the Environment*, offers some food for thought on this expectation. The study analyses 151 large European and US companies listed on the EURO STOXX 50 and S&P 100 indices over the period 2015–2024, examining the relationship between environmental, social and governance (ESG) performance, market valuations and profitability. The relationship between ESG and market value is positive on average, but modest and not statistically robust when taking into account the persistent characteristics of the companies and trends common across different years. By contrast, no systematic relationship with profitability emerges.
The research also examines two milestones in European policy on sustainable finance: the 2018 Action Plan and the implementation of the SFDR from 2021. Following these developments, no significant strengthening of the relationship between ESG and market valuations has been observed for European companies compared with their US counterparts. The findings do not prove that these regulations are ineffective, nor do they directly measure the environmental benefits of investments. They relate to large listed companies and do not allow for causal conclusions regarding the effect of regulation. However, they do indicate that we cannot take for granted a stable financial premium associated with better ESG performance.
The underlying reason is well known to economists. When a firm reduces pollution, part of the benefit goes to people who are neither customers nor shareholders: those who breathe cleaner air, those who suffer less harm to their health, and those who will be living in the coming decades. Similarly, a profitable business may pass on environmental costs to the wider community that it does not bear directly. These are known as externalities: effects on other people that market prices do not fully reflect. Even perfectly informed investors can therefore make financially rational decisions without channelling resources towards the uses that are most beneficial to society.
