ESG Complementarity in the US economy

This  paper  investigates  ESG  from  the  perspective  of changes in  input  elasticities  of  substitution  and complementarity.  Rather  than  compute  elasticities  of  substitution  and  complementarity  from  a  cost function, we compute the elasticities from an Input Distance Function (IDF). We obtaindata on inputs and outputs from Refinitiv Eikon Datastream-Environment, Social and Governance (ESG)database, (formerly  Asset  4).  We  focus  on  the  US  economy  due  to  her  global  role  in  the  world  economy  and hence spillover effects of uncertainties on the rest of the world. The data consist of 5,798 companies comprising  38  US industries  (see  table  1)  that span  for  12  years  from  2009 to 2020  and  include:  (i) financial data on sales, capital and employees; (ii) two financial ratios -return on assets and return on equity and (iii) three main ESG indicators –environment, social and governance scores. We compute Antonelli Elasticityof Complementarity (AEC) and Allen-Uzawa Elasticity of Substitution (AES)from a translog of IDFfunction. We find that standard inputs have positive AEC elasticities; however, ESG cross-elasticities exhibit negative signs, classifying them as q-substitutes. Therefore, an increase in one of the ESG values leads to a decrease in the marginal value of the other while output kept constant. On the  hand, AES elasticities have  a  negative  sign only for the  Governance-Environment “doublet’; the rest of the pairs are positive implying that they are p-complements.