Perspective Chapter: The Environmental, Social, and Governance (ESG) Investment and Its Implications

Abstract

Investment management has been an important part in a long-term financial planning for investors around the world. Traditionally, investors aim to maximize the risk premium relative to the riskiness of the investment subjected to certain goals and constraints such as the time horizon, risk appetite, and consumption behavior. Recently, investors, both retail and institutional investors, have shown significant interests in sustainability especially on the environmental, social, and governance, which is often referred to as ESG investments. Studies on ESG investing are unable to reach consensus. We will review literature related to ESG investing in order to identify key limitations that obstruct advancements in this field. In particular, key limitations that we have identified involve the issues of data inconsistencies and the choice of benchmarks, among others. Furthermore, this chapter identifies areas for future research that address these limitations and thus should advance research in this field.

Impact of Environmental, Social, and Governance (ESG) Factors on Stock Prices and Investment Performance

“…Several studies have examined how investors incorporate ESG factors into their investment decision-making processes and the impact of this on their investment performance [37,38] . These studies have found that investors use a variety of methods to incorporate ESG factors into their decision-making, including ESG ratings, exclusionary screens, and thematic investing.…”