Does Inclusion in a Smaller S&P Index Create Value?

This study employs an Effect Decomposition Regression (EDR) framework to analyze the impact of ESG initiatives on firm performance, focusing on the importance of firm size. A key finding of this study is that firm size matters in characterizing the relationship between ESG and performance. For large firms, ESG has a significant impact on total revenues, which is characterized by a U-shaped relationship where ESG initiatives initially have a negative impact on performance, and as firm investment on initiatives expand, the impact shifts to a positive influence as scores rise. On the other hand, smaller firms exhibit a monotonically increasing or incremental benefit from ESG engagement. This research underscores the necessity of not just controlling for size but examining ESG-performance behavior by firm size. From a policy perspective, it is clear that before universally advocating for ESG as a value enhancing practice for all firms, one must consider firm size.