Drivers of Value Creation and the Effect of ESG Risk Rating on Investor Perceptions through Financial Metrics

Abstract

This study delves deeply into the multifaceted nature of investor value creation, focusing on financial health, growth, profitability, cash flow, and ESG (environmental, social, and governance) risk ratings. The research employs partial least squares structural equation modeling (PLS-SEM) to dissect the interactions among these variables in a sample of 482 S&P 500 firms. Data were obtained from the FINRA database (2023) and Sustainalytics ESG risk ratings (2023). The results indicate that solid financial health enhances investor value creation. While growth fosters profitability, its direct impact on value creation and cash flow appears limited. The study also uncovers that ESG risk ratings negatively moderate the relationship between cash flow and value creation. This finding suggests that higher ESG risks lead to increased operational and compliance costs, which can reduce working capital and operating cash flow. Additionally, although sustainability investments may initially incur higher costs, they generate long-term value in terms of investment cash flow. A high perception of ESG risk can also raise financing costs, negatively impacting financial cash flow. These findings offer significant contributions to both academic theory and practical applications, shedding light on the complex interplay between financial and sustainability indicators in driving value creation for investors.