Applying Economics—Not Gut Feel—to ESG

Alex Edmans

Financial Analysts Journal, 2023, vol. 79, issue 4, 16-29

Abstract: Interest in environmental, social, and governance (ESG) issues 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 common ESG myths is overturned when applying the insights of mainstream economics.

Date: 2023
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DOI: 10.1080/0015198X.2023.2242758

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