Does Substantive ESG Lead to Higher Market Value in the Automobile Industry?

Previous research has found mixed results on the effect of ESG initiatives on market value. However, recent studies suggest that it is key to differentiate between two types of ESG initiatives: substantive and symbolic. Substantive ESG are costly and long-term oriented initiatives fully integrated into core business processes leading to critical intangible that creates shareholder value. On the contrary, symbolic ESG initiatives are more likely to serve as expenditures. In this paper, we explore whether substantive ESG initiatives positively affect the market value of automobile companies. This research question is less straightforward in the automobile industry than in other industries since substantive ESG has to compete with different core competencies in allocating resources, particularly intense R&D and marketing expenses. Additionally, given that substantive ESG is costly and requires a long-term horizon, we explore a potential U-shaped effect of substantive ESG investing, i.e., whether substantive ESG investing might financially pay off only for high levels but not for the case of low and moderate levels. From a large sample of automobile companies and using structural equation analysis (Partial Least Squares), we find that substantive ESG investing does lead to higher firm value. Importantly, our findings suggest that substantive ESG engagement does not compromise the positive impact of other critical intangibles, such as innovation and advertising intensity, on market value. Our findings also suggest that the effect of substantive ESG on market value is linearly positive rather than curvilinear. Our study has practical implications for both managers and investors.