Working Paper: CEPR ID: DP17908
Authors: Alex Edmans
Abstract: Interest in ESG is at an all-time high. However, academic research on ESG is still relatively nascent, which often leads us to apply gut feel on the grounds that ESG is so urgent that we cannot 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 that create long-term financial and social value. A large literature on corporate finance studies how to value investments; asset pricing explores how the stock market prices risks; welfare economics investigates externalities; private benefits analyze manager and investor preferences beyond shareholder value; optimal contracting considers how to achieve multiple objectives; and agency theory examines how to 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
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Shareholder value maximization (G34) | long-term investments (G31) |
| Shareholder value maximization (G34) | present value of all future cash flows (G00) |
| Shareholder primacy (G34) | exclusive focus on shareholder value (G34) |
| Sustainability risks (Q01) | expected cash flows (G19) |
| Company-specific risks (G32) | discount rate (E43) |
| Sustainable stocks (Q01) | higher returns (G12) |
| ESG metrics (Q56) | societal impact (F69) |
| Increased investor engagement (G24) | managerial initiative (M54) |
| Executive pay linked to ESG performance (M12) | other important dimensions of performance (L25) |
| Regulatory interventions (G18) | market failures (D52) |