Abstract

The relationship between sustainable practices and a firm’s financial performance is an open debate among academics, managers and investors worldwide. Despite large literature in the field of corporate social responsibility (CSR) and corporate financial performance (CFP), there is still a lack of unanimous consensus around the impact of sustainability on a firm’s economic achievements. This study aims to analyse this relationship and fill some of the gaps within existing literature using two geographical samples, a European and a global one, proceeding to compare obtained results. Such analysis was performed employing an ex ante implied proxy for the cost of equity, which has been selected in order to overcome methodological weaknesses of previous studies. Results show that sustainability can reduce the cost of equity due to lower firm riskiness, as perceived by markets and investors. Geographical specificities, on the other hand, do not play a significant role. CSR practices have the potential to create a type of goodwill or moral capital for more sustainable firms that acts as protection when negative events occur, preserving shareholder value and reducing the firms’ cost of equity.

Key words: Cost of equity, Price Earnings Growth (PEG) ratio method, corporate social responsibility (CSR), EPS forecasts, riskiness.