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Applying economics – not gut feel – to ESG

Journal

Financial Analysts Journal

Subject

Finance

Publishing details

Financial Analysts Journal 2023 Vol 79:4 p 16-29

Authors / Editors

Edmans A

Biographies

Alex Edmans

Publication Year

2023

Abstract

Interest in ESG is at an all-time high. However, academic research is still relatively nascent, often leading us to apply gut feel on the grounds that ESG is too urgent to wait for peer-reviewed research. This paper highlights how the insights of mainstream economics can be applied to ESG, once we realize that ESG is no different to other investments with long-term financial and social returns. A large literature on corporate finance studies how to value investments; asset pricing explores how the stock market prices risks; welfare economics investigates externalities; optimal contracting considers how to achieve multiple objectives; private benefits analyze manager and investor preferences beyond shareholder value; and agency theory helps ensure that managers pursue shareholder preferences, including non-financial preferences. I identify how conventional thinking on ten key ESG issues is overturned when applying the insights of mainstream economics.

Keywords

ESG; SRI; CSR; Sustainable investing; Responsible business

Available on ECCH

No


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