ESG Commitment and the Value of “Walking the Talk”: Evidence from Closed-End Funds

By | April 5, 2022

Does a firm’s initiative for Environmental, Social, and Governance (ESG) increase firm value? In our recent working paper, we investigate how a firm’s commitment to ESG can increase (or decrease) the firm value using closed-end funds (CEFs) as an empirical laboratory. In particular, we focus on the role of credible commitments to ESG in determining the impact of ESG on firm value. ESG initiative is a long-term investment requiring large expenses without immediate returns. Thus, a firm’s ability to communicate its commitment to ESG is a crucial condition for the success of the ESG efforts, potentially leading to an increased firm value. However, not all ESG commitments are credible, and there is a growing concern for “greenwashing” in the industry. We hypothesize that only those closed-end funds which pledge their commitment to ESG and actually increase the ESG score in their portfolio holdings will trade at a higher market value relative to its portfolio value (henceforth, the “walking the talk” effect).            

Empirical Setting

The literature offers conflicting empirical findings on the impact of ESG on firm value. The conflicting findings are partly due to an empirical challenge in measuring the market value of a firm relative to its fundamental value. Moreover, it is hard, if not impossible, to compare different firms’ ESG exposure in different industries and to evaluate their impact on firm value. Using CEF as an empirical laboratory, we can objectively observe a firm’s market value relative to its fundamental value based on its portfolio holdings. At the same time, unlike other regular public corporations, we can directly measure a CEF’s ESG footprint based on its investment holdings. We measure a CEF’s ESG score based on its portfolio stocks’ ESG scores. Put simply, we can objectively measure a firm value and its ESG activities in this novel empirical setting not explored in the literature. 

We also focus on the United Nations (UN) Principles for Responsible Investment (PRI) as a uniform platform to showcase a fund’s commitment to ESG. The PRI is the largest global initiative on ESG investment launched in 2006, and it is considered the most influential platform where financial institutions can pledge their commitment to socially responsible investment (Kim and Yoon, 2022). Pledging ESG is heavily dependent on a firm’s business model and changing environment of the industry (Bolton and Kacperczyk, 2021). For example, Costco Wholesale Corp. and Exxon Mobil Corp. would not have exactly the same goals and actions for their ESG initiatives. Compared to these regular public firms, CEFs are more uniform in their goals and business models, and the U.N. PRI serves as an equal-footing venue for investment firms to pledge their commitment to ESG. In addition, closed-end funds are better positioned to sustain their long-term CEF commitment without concerns about a temporary fund flow shock, which is often a major concern for open-end funds (Coval and Stafford, 2007).


We find that a closed-end fund trades at a higher premium (i.e., lower discount) when it enrolls in the U.N. PRI andincreases the ESG scores in its portfolio holdings. Signing the U.N. PRI or increasing the ESG score alone does not significantly increase the CEF’s premium. This “walking the talk” effect highlights the positive complementing effect of the pledged ESG commitment and actual ESG efforts in improving firm value. The result is statistically and economically significant even after controlling for a host of determinants of closed-end funds premia/discounts. Consistent with prior studies in the literature (e.g., Lins, Servaes, and Tamayo, 2017), the result is largely driven by the environmental and social component of ESG rather than the governance component.

We also find that the complementing effects of the ESG commitment and actions are greater for funds facing higher hurdles to make their ESG commitment credible. Specifically, the “walking the talk” effect is greater when the stock market condition is not favorable to CEFs keeping their pledge to the ESG investment (e.g., energy stock returns are higher than ESG stock returns).  

Importantly, our analysis shows that “walking the talk” provides a firm with an advantageous position when ESG-related regulations become more stringent. A firm with a credible commitment to its long-term improvement in ESG would be less exposed to ESG regulatory sanctions, and this beneficial effect would be more favorably perceived by investors when the ESG regulations become more stringent. To test this conjecture, we consider several ESG regulatory stringency indexes related to environmental and social issues such as the Environment Policy Stringency Index developed by the Organization for Economic Cooperation and Development, the number of enforcement actions by the U.S. Environmental Protection Agency, the U.S. announcement of withdrawal from the Paris Agreement in June 2017, and the number of penalties imposed by the Occupational Safety and Health Administration. Our analysis shows that “walking the talk” increases a CEF’s premium when the environmental and social regulations become more stringent.


In this paper, we use a novel empirical setting of the CEFs as a laboratory to substantiate the causal impact of ESG on firm value. We find that CEFs pledging to ESG by becoming signatories of the U.N. PRI trade at a higher price compared to their net asset values only when they actually increase the ESG score in their portfolio holdings . The results are more pronounced when funds face higher hurdles to take actions to honor their ESG commitment. The positive impact is also greater when ESG-related regulations become more stringent. Communicating a firm’s credible commitment to ESG is an important step to ensure the favorable impact of ESG on firm value, and this benefit is related to an advantageous position when ESG regulations become more stringent.

Hyun-Soo Choi is an associate professor of finance at the KAIST College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Hugh Hoikwang Kim is an associate professor of finance at the Darla Moore School of Business, University of South Carolina. 

Yun-Soo Kim is a Ph.D. student at the KAIST College of Business, Korea Advanced Institute of Science and Technology (KAIST)

This post is adapted from their paper, “ESG Commitment and the Value of ‘Walking the Talk’: Evidence from Closed-End Funds” available on SSRN.

The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.

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