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

We investigate the impact of a firm's credible commitment to ESG on firm value. Using closed-end funds as an empirical laboratory, we find that a fund signing the U.N. Principles for Responsible Investment (PRI) is traded at a higher market price compared to its portfolio value only when the fund actually increases the ESG scores of its portfolio. The result is more pronounced for funds facing higher hurdles to take actions to honor their ESG commitments. Importantly, the positive impact is stronger when ESG-related regulations become more stringent. Overall, our analysis suggests that firms' commitment to ESG can lead to higher firm value when they can credibly "walk their talk" and this benefit is related to the direction of ESG regulations