Applying economics – not gut feel – to ESG

Edmans, A (2023) Applying economics – not gut feel – to ESG. Financial Analysts Journal, 79 (4). pp. 16-29. ISSN 0015-198X

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.

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Item Type: Article
Subject Areas: Finance
Additional Information:

© 2023 CFA Institute
This is an Accepted Manuscript of an article published by Taylor & Francis in Financial Analysts Journal on 12 September 2023, available at: https://doi.org/10.1080/0015198X.2023.2242758

Date Deposited: 18 Sep 2023 10:33
Date of first compliant deposit: 01 Aug 2023
Subjects: Business ethics
Investment appraisal
Economics
Economic theory
Investment theory
Environmental economics
Last Modified: 05 Mar 2024 02:18
URI: https://lbsresearch.london.edu/id/eprint/2966
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