Academic Literature on ESG Remains Skeptical

    Stockholm (NordSIP) – According to a review of ESG and responsible investing by global institutional investors published by the CFA Institute, responsible investing has acted as a risk management tool rather than as a return enhancer for PRI signatories. The study argues a lot remains to be established.

    While reviewing the academic literature on the topic, the author, Pedro Matos, professor of business administration (finance) at the University of Virginia Darden School of Business, notes that “an active debate exists as to whether ESG investing is an effective approach to enhance expected returns.” Discussing the literature on the performance of ESG investments, the author cites research that “90% of the academic studies found a nonnegative relationship between ESG and financial performance”.

    However, the study remarks on the fact that these studies are not published “in what is generally considered to be among the top-ranked finance and economics academic journals”. The argument is that the research is undermined by several issues, including measurement problems, data compatibility, endogeneity issues and time series and regional coverage. The report also notes that there is no consensus on the exact list of ESG issues and their materiality. Reviewing the academic literature on the empirical evidence supporting ESG investing, the author argues it displays a “healthy dose of scepticism” on the topic and emphasises that much more remains to be explored.

    The complexity of the issue is patent in the reports own findings based on UN PRI data, which initially show that there is some evidence that PRI  members “walk the walk”. “We found that institutional investors who join the PRI exhibit better portfolio-level ESG performance, but the differences are not overwhelmingly large.” Unfortunately, there is substantial heterogeneity between investors. While performance improves for non-US domiciled asset managers, the same is not the case for US investors. Considering performance at the strategy, rather than asset manager level, the analysis concluded that for the PRI signatories it considered, there was “no strong evidence for added performance for any of the ESG implementation strategies”.

    Despite these caveats, the report notes that responsible investors increasingly assess stocks in their portfolios based on nonfinancial data on environmental impact, social impact, and governance attributes. The author also warns that investors should be positioning themselves for increased regulation, particularly in Europe where the regulatory agenda is more ambitious than in the United States.

    Image by Steve Buissinne from Pixabay

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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