How Do ESG Ratings Impact the Valuation of the Largest Companies in Southern Europe?

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

The topic of the article is relevant to the emerging research direction of this period, namely the relationship between ESG scores and companies’ valuations.

The structure of the article is clear; however, I have a few remarks:

• The objective of the paper should be stated more clearly in the Introduction.
• In line 274, you mention that some hypotheses are presented in the Introduction, but they are not actually included. These should be explicitly introduced.
• In lines 51–53, be more specific about the other metrics that have been developed.
• Sections 2.1 and 2.4 could be merged, as they discuss similar aspects of ESG ratings.
• In lines 243–251, you should cite the studies to which you are referring.
• The formulation “To assess the impact of ESG ratings on European economies…” is not appropriate, since the analysis is conducted at the company level rather than at the macroeconomic level.
• Regarding the sample, provide a synthesis of it for each country.
• The conclusions are supported by the research results; however, it would be advisable to include references to strengthen the arguments.

Author Response

Comment 1: The objective of the paper should be stated more clearly in the Introduction.

Response 1: The objective of the paper is now stated more clearly in the Introduction

Comment 2: In line 274, you mention that some hypotheses are presented in the Introduction, but they are not actually included. These should be explicitly introduced.

Response 2: Based on your feedback, we added two paragraphs at the end of the Literature Review section, where we clearly state the two research hypotheses.

Comment 3: In lines 51–53, be more specific about the other metrics that have been developed.

Response 3: Juca et al. [1] refer to the various score measures that have been developed.

Comment 4: Sections 2.1 and 2.4 could be merged, as they discuss similar aspects of ESG ratings.

Response 4: Sections have been merged.

Comment 5: In lines 243–251, you should cite the studies to which you are referring.

Response 5: Citation added

Comment 6: The formulation “To assess the impact of ESG ratings on European economies…” is not appropriate, since the analysis is conducted at the company level rather than at the macroeconomic level.

Response 6: Corrected (To assess the impact of the ESG ratings and firm performance in Southern European economies, we selected our sample from large-cap companies from the relevant indices of the four Southern European countries)

Comment 7: Regarding the sample, provide a synthesis of it for each country.

Response 7: Based on the reviewer’s previous comment, we have now included detailed information on the firms used in our sample for each country. Specifically, in the first appendix table, we present the list of companies analyzed per country. This addition ensures full transparency and allows readers to clearly identify the composition of the dataset.

Comment 8: The conclusions are supported by the research results; however, it would be advisable to include references to strengthen the arguments.

Response 8: References have been added

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

The manuscript investigates the relationship between ESG (Environmental, Social, and Governance) ratings and firm valuation in Southern Europe using data from 110 large-cap firms across Portugal, Italy, Greece, and Spain (2018–2022). The authors employ Ohlson’s valuation model with multiple ESG factors and firm-level financial variables (EPS, DPS, tax provisions), and test robustness with Ridge and Lasso regressions. Results suggest that social factors have a positive association with firm valuation, while environmental factors are negative or weakly significant, and polluting firms paradoxically enjoy a valuation premium.

The paper addresses a timely topic and makes a potentially valuable contribution by focusing on Southern Europe—a region underexplored in ESG–valuation literature. The structure and language are clear, but several conceptual, methodological, and interpretational issues need to be addressed before publication.

 

Strengths

• Timeliness and regional focus: ESG–valuation relationships in Southern Europe are underrepresented; this study adds a relevant geographic perspective.

• Use of Refinitiv ESG data aligns with previous research and ensures comparability.

• Integration of “polluting dummy” is an interesting attempt to differentiate market perception.

• Clear structure and logical flow of sections (Introduction → Literature Review → Methodology → Results → Discussion).

 

Major Weaknesses

(A) Conceptual and Theoretical Issues

• Lack of a clear theoretical framework: The study does not explicitly ground the hypotheses in financial theory (e.g., stakeholder theory, legitimacy theory, or signaling theory). The hypotheses are descriptive rather than theoretically motivated.

• Inconsistent research motivation: The introduction emphasizes ESG’s growing importance but does not articulate why ESG valuation effects might differ in Southern Europe beyond referencing the 2008 crisis.

• Hypotheses formulation: The two hypotheses are vaguely worded and appear post hoc; the second hypothesis (polluting firms) is introduced late without conceptual development.

(B) Methodology and Data Concerns

• Model specification: Ohlson’s model is used, but the theoretical link between ESG ratings and accounting variables in this model is not well justified. The paper does not report diagnostic tests (heteroskedasticity, autocorrelation, multicollinearity details beyond VIF).

• Sample composition: “Large-cap” firms from four indices (IBEX35, PSI20, ATHEX20, IT40) give small and potentially unbalanced samples. The study treats these pooled firms as homogeneous despite institutional, fiscal, and disclosure differences.

• Missing variable control: No firm-level fixed effects or macroeconomic variables (GDP growth, inflation, COVID period dummy) are included, raising omitted variable bias concerns.

• Endogeneity: ESG and firm value may be bidirectionally linked; the study does not address reverse causality or use instrumental variable / lag structure to mitigate it.

• Scaling and winsorization: Mentioned but not detailed. Readers need to know which variables were winsorized and at what percentile.

• Multicollinearity treatment: The Ridge/Lasso regressions are reported descriptively but not fully interpreted; the methodological rationale for mixing these regularization techniques with OLS should be clarified.

(C) Empirical Presentation

• Tables: Descriptive and regression tables are not formatted to MDPI standards (e.g., missing notes, inconsistent decimal alignment, unreported R², F-statistics).

• Results interpretation: Discussion overstates the findings. For instance, the claim that “investors begin to integrate social responsibility” lacks robustness given the low R² and weak significance.

• No robustness or alternative models: The study could use alternative valuation metrics (Tobin’s Q, Market-to-Book ratio) or lagged ESG scores to test consistency.

• Polluting dummy interpretation: The conclusion that polluting firms are rewarded by markets could be confounded by size or sector fixed effects; these are not controlled.

(D) Writing and Referencing

• Redundancy: Several sections of the literature review (e.g., definitions of ESG, rating disagreement) are long and descriptive, adding little analytical depth.

• Recent citations: While 2024–2025 references are used, some foundational works on ESG valuation (e.g., Friede et al., 2015 meta-analysis) are repeated without deeper synthesis.

• Language and style: Overall clear but repetitive; “it can be observed that…” appears excessively. Editing for conciseness is needed.

 

Minor Comments

1. Abstract should explicitly state the dependent variable, method, and key numerical findings.

2. Keywords could be streamlined (avoid redundancy between “valuation” and “performance”).

3. Figure or conceptual diagram illustrating hypothesized relationships would improve clarity.

4. Include a summary statistics table with R² and correlation matrix.

5. Reference formatting inconsistencies (e.g., missing italics, spacing before DOI).

Author Response

Comment 1: Lack of a clear theoretical framework: The study does not explicitly ground the hypotheses in financial theory (e.g., stakeholder theory, legitimacy theory, or signaling theory). The hypotheses are descriptive rather than theoretically motivated.

Response 1: In the revised version of the paper, we have added a dedicated subsection at the end of the Literature Review entitled “Theoretical Framework.” This new section outlines the theoretical foundations underlying our analysis, drawing on Stakeholder Theory (Freeman, 1984), Legitimacy Theory (Suchman, 1995), and Signaling Theory (Spence, 1973). Building upon these perspectives, we now explicitly link our theoretical framework to the development of the two hypotheses presented immediately thereafter. We believe that this addition provides a clearer conceptual grounding for our research and strengthens the overall coherence between literature review and the hypotheses formulation, which we hope that meets your expectations.

Comment 2: Inconsistent research motivation: The introduction emphasizes ESG’s growing importance but does not articulate why ESG valuation effects might differ in Southern Europe beyond referencing the 2008 crisis.

Response 2: We fully understand your point. The motivation behind conducting this research lies in the absence of similar studies in existing literature. To the best of our knowledge, there is no empirical research that specifically examines the relationship between ESG metrics and firms’ market value in Southern Europe. For this reason, we have chosen to focus on these four countries—Portugal, Italy, Greece, and Spain. The aim is to investigate whether firms in Southern European countries exhibit patterns similar to those observed in other regions and markets worldwide. If not, the study seeks to interpret and explain the factors that may account for these differences.

Comment 3: Hypotheses formulation: The two hypotheses are vaguely worded and appear post hoc; the second hypothesis (polluting firms) is introduced late without conceptual development.

Response 3: Based on your feedback, we added two paragraphs at the end of the Literature Review section, where we clearly state the two research hypotheses.

Comment 4: Model specification: Ohlson’s model is used, but the theoretical link between ESG ratings and accounting variables in this model is not well justified. The paper does not report diagnostic tests (heteroskedasticity, autocorrelation, multicollinearity details beyond VIF).

Response 4: We sincerely appreciate your insightful feedback. In response, several modifications were implemented in our empirical model, and some regressions were re-estimated accordingly. Specifically, a Breusch–Pagan test was conducted to assess the presence of heteroskedasticity. The results, presented in the updated table, indicate no significant evidence of heteroskedasticity in the baseline model. Nonetheless, the Durbin–Watson statistic revealed strong autocorrelation among the residuals, suggesting a violation of the OLS assumptions. To remedy this, Newey–West heteroskedasticity- and autocorrelation-consistent (HAC) standard errors were employed. Furthermore, a correlation matrix was added to enhance the understanding of variable interrelationships. Collectively, these refinements are expected to increase the robustness and credibility of our empirical findings.

Comment 5: Sample composition: “Large-cap” firms from four indices (IBEX35, PSI20, ATHEX20, IT40) give small and potentially unbalanced samples. The study treats these pooled firms as homogeneous despite institutional, fiscal, and disclosure differences.

Response 5: We fully understand your point, and indeed, we also attempted to expand our sample to include additional firms. However, what we observed is that most companies in this region are still lagging behind in terms of ESG reporting practices, providing incomplete disclosures or none at all. This limitation led us to focus exclusively on large-cap firms. Undoubtedly, there are notable differences among the selected firms and countries. Nevertheless, several important similarities can also be identified. All firms operate within the European Union market, share a common currency, and are subject to largely harmonized banking and regulatory frameworks. Moreover, many of these companies have cross-country operations within the four selected countries. These economies are primarily service-oriented and are geographically located in the same region of the world, which provides additional grounds for our sample composition. We have added some references from similar researches in our paper.

Comment 6: Missing variable control: No firm-level fixed effects or macroeconomic variables (GDP growth, inflation, COVID period dummy) are included, raising omitted variable bias concerns.

Response 6: The inclusion of additional macroeconomic variables was avoided for specific reasons. In recent years, Europe has undergone an unusually volatile macroeconomic phase, characterized by unusually high inflation and a decline in GDP growth rates. Such conditions are not representative of normal economic behavior within the European Union, and incorporating these variables could have distorted the interpretation of the results by capturing short-term fluctuations rather than structural effects. Moreover, the study did not initially control for the COVID-19 period. However, this is a valid consideration, and future analyses may incorporate a COVID-19 dummy variable to enhance the robustness and explanatory power of the model. Nevertheless, this is a very valid point, and it can certainly be included as a suggestion for future research.

Comment 7: Endogeneity: ESG and firm value may be bidirectionally linked; the study does not address reverse causality or use instrumental variable / lag structure to mitigate it.

Response 7:   This is a key concern in the empirical examination of the relationship between ESG performance and firm value is the possibility of endogeneity, particularly reverse causality. That is, it may be the case that firms with higher market valuations or stronger financial positions are better equipped to invest in ESG initiatives, rather than ESG performance directly influencing firm value. Nonetheless, there is a substantial body of literature suggesting a directional influence from ESG performance to financial outcomes. For example, Eccles et al. (2014) demonstrate that companies with high sustainability profiles exhibit superior stock market performance and more effective internal governance processes over time, implying that ESG is a strategic capability rather than a passive consequence of firm value. Furthermore, the meta-analysis by Friede et al. (2015), which synthesizes findings from over 2,000 empirical studies, concludes that the vast majority report positive or non-negative relationships between ESG and financial performance. Thus, while we recognize the theoretical possibility of bidirectional influence, our modeling approach is grounded in the prevailing empirical consensus that ESG performance acts as a determinant—rather than merely an outcome—of firm valuation.

Comment 8: Scaling and winsorization: Mentioned but not detailed. Readers need to know which variables were winsorized and at what percentile.

Response 8: We applied winsorization at the 1st and 99th percentiles (i.e., at 1% and 99%) for all continuous variables, including Earnings Per Share, Tax Provision (scaled), Dividend Per Share, ESG Ratings, and Share Price. Additionally, the Tax Provision variable was scaled, as the reported figures were expressed in millions, while the other variables were on a much smaller numerical scale. This adjustment was made to improve the interpretability of the model and to avoid potential distortions that could arise from large numerical discrepancies among the variables.

Comment 9: Multicollinearity treatment: The Ridge/Lasso regressions are reported descriptively but not fully interpreted; the methodological rationale for mixing these regularization techniques with OLS should be clarified.

Response 9: Based on your comment, we added an additional paragraph before Table 5 in the Results section, where we explain in detail why we specifically employed the Ridge and Lasso estimations to address potential multicollinearity issues. This clarification helps readers with a statistical background better understand the rationale behind the use of these techniques. Furthermore, we would like to note that in the second regression, which includes the Polluting Dummy, we also applied Newey–West robust standard errors, consistent with the approach used in the first regression. This adjustment ensures that our model adheres more closely to the assumptions of the Ordinary Least Squares (OLS) framework and improves the reliability of the inference.

Comment 10: Tables: Descriptive and regression tables are not formatted to MDPI standards (e.g., missing notes, inconsistent decimal alignment, unreported R², F-statistics).

Response 10: Tables have been corrected to meet MDPI standards. 

Comment 11: Results interpretation: Discussion overstates the findings. For instance, the claim that “investors begin to integrate social responsibility” lacks robustness given the low R² and weak significance.

Response 11: The explanatory power of the models, as indicated by R² values of approximately 0.10 and 0.11, is relatively modest but consistent with expectations in financial econometric settings, where stock prices are driven by numerous firm-specific and market-level factors. Given that the current analysis isolates the effect of ESG variables, the observed R² can still be interpreted as meaningful evidence that ESG performance contributes to explaining firm value. These findings suggest that environmental and social responsibility is beginning to play a measurable role in shaping investor perceptions and market valuation, particularly within Southern European markets.

Comment 12: No robustness or alternative models: The study could use alternative valuation metrics (Tobin’s Q, Market-to-Book ratio) or lagged ESG scores to test consistency.

Response 12: We fully understand your suggestion regarding the use of the Market-to-Book Ratio or Tobin’s Q as alternative proxies for firm value. We initially considered incorporating the Market-to-Book Ratio and even began collecting data from Refinitiv. However, the available data for this metric were incomplete. Given the large number of missing observations, we decided that its inclusion could compromise the reliability of our estimations.

Comment 13: Polluting dummy interpretation: The conclusion that polluting firms are rewarded by markets could be confounded by size or sector fixed effects; these are not controlled.

Response 13: To a certain degree, the effect of the polluting dummy is partially captured by the Tax Provision variable, which serves as a proxy for firm size. Larger firms typically incur higher tax payments as a result of increased revenues and profitability. Nevertheless, the model does not explicitly control for sector-specific effects, which could influence the results. This limitation provides an interesting avenue for future research, either through sectoral fixed effects or by extending the current analysis to incorporate industry-level characteristics.

Comment 14: Redundancy: Several sections of the literature review (e.g., definitions of ESG, rating disagreement) are long and descriptive, adding little analytical depth.

Response 14:  Indeed, there are sections that add little analytical depth but they serve the purpose that a reader that knows nothing on the subject will be able to understand (as the journal suggests).

Comment 15: Recent citations: While 2024–2025 references are used, some foundational works on ESG valuation (e.g., Friede et al., 2015 meta-analysis) are repeated without deeper synthesis.

Response 15: Friede et al., is only referenced as one of the researchers that outline that ESG uncertainty impacts both social outcomes and economic welfare

Comment 16: Language and style: Overall clear but repetitive; “it can be observed that…” appears excessively. Editing for conciseness is needed.

Response 16: Editing for conciseness has been applied .

Comment 17: Abstract should explicitly state the dependent variable, method, and key numerical findings.

Response 17: Based on your comment, we have revised the abstract to explicitly include the two hypotheses tested in the study, as well as the main empirical findings.

Comment 18: Keywords could be streamlined (avoid redundancy between “valuation” and “performance”).

Response 18:  keywords have been revised

Comment 19: Figure or conceptual diagram illustrating hypothesized relationships would improve clarity.

Response 19: While we fully understand the motivation for adding a conceptual diagram, we consider that the two hypotheses are already clearly articulated and theoretically grounded in the final part of the Literature Review section. This part now explicitly outlines the relationships between ESG metrics, firm value, and the moderating role of the polluting dummy, making the underlying conceptual structure sufficiently clear without the need for an additional figure.

Comment 20: Include a summary statistics table with R² and correlation matrix.

Response 20: Based on the reviewer’s comments, we have added a Correlation Table and expanded our Summary Statistics table to include all variables used in the analysis. In addition, we now report the R² values for each regression model to provide a clearer interpretation of the explanatory power of our estimations. We believe that these additions significantly improve the transparency and completeness of our empirical results. Moreover, as shown in the correlation matrix, there are no strong correlations among the variables, which further supports the robustness of our model specification.

Comment 21: Reference formatting inconsistencies (e.g., missing italics, spacing before DOI).

Response 21: references have been revised

Author Response File: Author Response.pdf

Reviewer 3 Report

Comments and Suggestions for Authors

This manuscript covers a very interesting and topical subject – the impact of ESG on valuation, which has, in my opinion, thus far been neglected.  The paper is well written and well structured.

I believe it holds a great potential but there are minor suggestions to it as follows:

• The title is very attractive and catchy. The title itself drew me to accept the invitation to review.
• The abstract is solid. It states the problem, the main objective and methodology used to tackle it.
• The introduction section seems somewhat unfinished and “rushed”. I feel you can add 1-2 paragraphs to address the methodology used.
• On the other hand, the literature review section is too extensive. Even though this is vital (to cover all the important findings thus far), try shortening it a little bit.
• The section 3 is very well established and well rounded.
• The results section reveals all the important findings. Please ensure the format of the tables is as in the template.
• Please give an explanation on the selection of the 4 Southern European countries. Why these countries? Give a rationale.
• Conclusion section is very solid.
• References are ok

This is a very fine study and I rarely come across with this kind of well-rounded work.

Congratulations on the solid work!

Author Response

Comment 1: The introduction section seems somewhat unfinished and “rushed”. I feel you can add 1-2 paragraphs to address the methodology used.

Response 1: Introductions has been revised and paragraphs have been added

Comment 2: On the other hand, the literature review section is too extensive. Even though this is vital (to cover all the important findings thus far), try shortening it a little bit.

Response 2: Unfortunately, based on reviewers comments we had to add two  paragraphs where we clearly state the two research hypotheses.

Comment 3: The results section reveals all the important findings. Please ensure the format of the tables is as in the template.

Response 3:  Tables have been revised

Comment 4: Please give an explanation on the selection of the 4 Southern European countries. Why these countries? Give a rationale.

Response 4: We would like to thank the reviewer for this constructive comment and fully acknowledge your point. In response, we have added two new paragraphs toward the end of the Literature Review section and before the Hypothesis Development section, where we explain in detail—supported by relevant literature—why we selected these four countries (Portugal, Italy, Greece, and Spain) and what they have in common. Specifically, these countries share similar macroeconomic characteristics and have historically been exposed to comparable macro-financial challenges. They all operate within the same monetary and interbank framework of the Eurozone, while their economies are largely service-oriented, with tourism representing a key sector. Considering these similarities, analyzing them as a unified group allows us to examine the broader Southern European region—an economically and politically significant area of the continent that has not yet been thoroughly studied in the context of ESG performance and firm value. We have also included the corresponding references in the revised manuscript and in the updated reference list for further verification. Thank you again for this valuable suggestion.

Author Response File: Author Response.pdf

Round 2

Reviewer 2 Report

Comments and Suggestions for Authors

1. General Assessment

The revised manuscript presents an empirical analysis of the relationship between ESG ratings and firm valuation in Southern European economies (Portugal, Italy, Greece, and Spain), using Ohlson’s valuation model and firm-level data from Refinitiv. The authors have made visible improvements compared to earlier versions, particularly in:

• Clarifying the theoretical framework and hypothesis formulation;

• Expanding the methodological explanation (diagnostic tests, multicollinearity handling, Ridge/Lasso regularization);

• Providing robustness checks and addressing autocorrelation concerns;

• Strengthening the conclusion with policy and regional implications.

The paper contributes to the limited literature on ESG-valuation relationships in Southern Europe, a region often underexplored in ESG research.

2. Strengths

• Clarity of purpose and hypotheses: The two hypotheses are clearly stated and logically grounded in Stakeholder, Legitimacy, and Signaling theories.

• Data transparency: The sample construction and data cleaning steps are well documented.

• Methodological rigor: The authors implement Ohlson’s model, correct for autocorrelation (Newey-West), and discuss robustness tests (Ridge, Lasso).

• Interpretation and discussion: The paradoxical “pollution premium” finding is discussed thoroughly and linked to prior literature.

• Improved structure and readability: The manuscript flows better, and transitions between literature, method, and results are smoother.

3. Weaknesses and Points for Further Improvement

1. Model specification and robustness:

   • The adjusted R² remains modest (~0.09–0.12), which is acceptable in finance but should be explicitly discussed as a limitation of explanatory scope.

   • Consider including firm fixed effects or industry dummies in future versions to further control for unobserved heterogeneity.

   • The authors may briefly justify the exclusion of additional macroeconomic controls (e.g., GDP growth, interest rate, inflation).

2. Multicollinearity and ESG decomposition:

   • Although Ridge/Lasso corrections are applied, ESG sub-scores remain highly correlated. Reporting variance inflation factors (VIFs) numerically in an appendix would improve transparency.

3. Result interpretation:

   • The discussion on the positive polluting dummy is interesting but could further reference existing literature on “brown premium” and “carbon risk pricing” to contextualize investor behavior in Southern Europe.

4. Presentation and technical details:

   • Some tables (especially Tables 1–6) would benefit from clearer titles, consistent decimal alignment, and significance marking (e.g., using *, **, *** consistently across all).

   • Abstract could be more concise (currently nearly 250 words) and emphasize the novelty rather than restating the method.

5. References and formatting:

   • The reference list is extensive and up-to-date; however, a few recent works (2025) appear repetitive. A shorter, curated list focusing on key empirical ESG-valuation papers would increase impact.

4. Recommendation

Recommendation: Minor Revision (accept after minor revision)

The manuscript is substantially improved, methodologically sound, and regionally relevant. A few stylistic and analytical clarifications (noted above) would enhance its publication quality, but the overall contribution justifies acceptance after minor revision.

Author Response

Comment 1: The adjusted R² remains modest (~0.09–0.12), which is acceptable in finance but should be explicitly discussed as a limitation of explanatory scope.

Response 1: We added a note in the Discussion acknowledging the modest adjusted R² (0.09–0.12) as a limitation.

Comment 2: Consider including firm fixed effects or industry dummies in future versions to further control for unobserved heterogeneity.

Response 2: We have added a note in the Discussion section indicating that future research could apply fixed-effects panel models or include sectoral controls to capture firm-specific and industry-related differences more accurately.

Comment 3: The authors may briefly justify the exclusion of additional macroeconomic controls (e.g., GDP growth, interest rate, inflation).

Response 3: In the revised version of the manuscript, we have added a dedicated paragraph in the Discussion section addressing this specific issue. In particular, we link our interpretation of the results to the concept of the brown risk premium, as we recognize a clear connection between the observed investor behavior and the tendency of markets to favor financially stable, higher-emission firms during periods of economic uncertainty. This new paragraph provides additional theoretical context and helps explain why, given the exceptional macroeconomic environment of 2018–2022, investors may have prioritized profitability and stability over environmental performance. The integration of this discussion strengthens the interpretation of our findings and situates them within the broader literature on carbon risk pricing and market behavior toward polluting industries.

Comment 4: Although Ridge/Lasso corrections are applied, ESG sub-scores remain highly correlated. Reporting variance inflation factors (VIFs) numerically in an appendix would improve transparency.

Response 4: As suggested, we have now included the numerical VIF values for all variables in a second appendix to improve the transparency οf our analysis.

 

 

 

 

 

Comment 5: The discussion on the positive polluting dummy is interesting but could further reference existing literature on “brown premium” and “carbon risk pricing” to contextualize investor behavior in Southern Europe

Response 5: In the revised version, we have added a dedicated paragraph in the Discussion section focusing specifically on the Southern European context. This new paragraph integrates our empirical findings with the broader literature on the brown premium and carbon risk pricing, particularly referencing the ECB Working Paper Series No. 3030 (“Green and Brown Returns in a Production Economy”), along with other relevant studies already cited in our paper. This addition provides stronger theoretical grounding for the observed valuation premium among polluting firms in Southern Europe and situates our results within the broader debate on investor behavior toward environmentally intensive companies.

Comment 6: Some tables (especially Tables 1–6) would benefit from clearer titles, consistent decimal alignment, and significance marking (e.g., using *, **, *** consistently across all).

Response 6: We have implemented all the requested formatting and presentation changes. Specifically, all tables now report values with two decimal places, while the regression result tables present three decimal places to enhance transparency and precision. We have also standardized the significance asterisks and included a clear legend to ensure consistency and ease of interpretation. In addition, for the two main regression tables, we have added detailed descriptive captions above each table to provide readers with a clear understanding of the content and structure of the results.

Comment 7: Abstract could be more concise (currently nearly 250 words) and emphasize the novelty rather than restating the method.

Response 7: Based on your previous comments, we have revised the abstract to include the two hypotheses tested in the study, as well as the main empirical findings and is limited to 198 words (guidelines state up to 200 words)

Comment 8: The reference list is extensive and up-to-date; however, a few recent works (2025) appear repetitive. A shorter, curated list focusing on key empirical ESG-valuation papers would increase impact.

Response 8: Four papers focusing on key empirical ESG-valuation have been added.

 

Author Response File: Author Response.pdf