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5. Sustainability andStock PricesThe previous two sections investigated the linkbetween sustainability and corporate performancewhere we found a significant positive correlation:• 90% of the cost of capital studies show that soundESG standards lower the cost of capital.• 88% of the operational performance studies showthat solid ESG practices result in better operationalperformance.Based on these results, the following section analyseswhether this information is beneficial for equity investors.In doing so, we use the same methodology as before:we examine the effects of environmental, social, andgovernance (ESG) parameters on stock prices separatelyand then consider the effects for the aggregate scores.5.1 Stock Prices andthe ‘G’ DimensionThe way in which the quality of corporate governanceinfluences stock price performance has been the subjectof in-depth analyses in financial economics and corporatefinance literature. 135 The research has focused on particularfeatures of governance structures in order to revieweffects on profitability and financial performance. Thefocus has been on both external governance mechanismssuch as the market for corporate control, 136 the level ofindustry competition, 137 and internal mechanisms suchas the board of directors 138 and executive compensationpractices. 139 It has also been shown that revealed financialmisrepresentation leads to significantly negative stockmarket rections. 140‘A portfolio that goes long in well governed firms and short inpoorly governed firms creates an alpha of10% to 15% annually overthe time period 1990 to 2001.’Cremers and Nair, 2005135 The financial economics literature in general and the corporate finance literature in particular have clearly focused more on research which relates the corporategovernance quality to corporate financial performance. This is because it is often claimed that the quality of corporate governance is easier to quantify than thequality of environmental or social performance, and that the financial consequences are easier to measure.136 See Gompers, Ishii, and Metrick (2003) for the most prominent example of research on the relation between takeover exposure and stock-price performance.Their results have been confirmed by Core, Guay, and Rusticus (2006).137 For example: Giroud and Mueller (2010) and (2011).138 Evidence is, for example, provided by Yermack (1996).139 For example, Core, Holthausen, and Larcker (1999).140 Karpoff, Lee, and Martin (2008). The authors study 585 firms which have been involved in financial misrepresentation cases with the SEC over the time periodfrom 1978 to 2002. 25.24%.33