The ten most downloaded academic ESG papers of all time

October 5, 2020

#1 The Consequences of Mandatory Corporate Sustainability Reporting

Authors: Ioannis Ioannou and George Serafeim

Year Published: 2017

Journal: Harvard Business School Research Working Paper No. 11-100

Number of Downloads (as of October 2020): 15,113

Summary: More and more governments are making corporate sustainability reporting mandatory. This paper looks at the effect of sustainability disclosure regulations on firm valuation and disclosure practices. The paper explores ESG reporting mandates in China, Denmark, Malaysia and South Africa. The authors compare data from periods prior to the mandated regulation to the period after the enforcement.

The authors find that following the regulations, the treated firms significantly increased their sustainability disclosure. They also find that treated firms are more likely to volunteer to receive assurance in order to enhance the credibility of their disclosure, even if assurance is not mandatory. The increased sustainability disclosures also seem to be linked to an increase in the firm’s valuations. All in all, this paper points towards the effectiveness of ESG disclosure mandates in increasing the quality and quantity of reporting as well as creating value for participating firms.

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#2 Aggregate Confusion: The Divergence of ESG Ratings

Authors: Florian Berg, Julian F Kölbel and Roberto Rigobon

Year Published: 2019

Journal: MIT Sustainable Initiative

Number of Downloads (as of October 2020): 8,547

Summary: As investors commit to integrating ESG information into their investment decisions, ESG rating agencies are emerging as prominent institutions. Such third-party assessments are becoming key financial determinants, however, there is a strong disagreement between the ratings provided by the different agencies. The divergence of ESG ratings has major consequences such as diluting the impact of ESG ratings, hampering an organisation’s motivation to improve their ratings, and leading to a lack of clear data for empirical research purposes. 

This paper aims to investigate the divergence in ESG ratings. It compared data from six prominent rating agencies. The authors find that measurement divergence, i.e. which indicators are used to measure the same attributes, is the key driver of the rating divergence. For example, some agencies measure the attribute of gender equality by % of women on the board, while others measure it by the gender pay gap. Unfortunately, weights divergence plays only a minor role. This refers to how much weighting the raters assign to each attribute. Hence, investors cannot consolidate the disagreement between the ratings by readjusting the weightages.

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#3 Corporate Social Responsibility and Access to Finance

Authors: Beiting Cheng, Ioannis Ioannou and George Serafeim

Year Published: 2011 

Journal: Strategic Management Journal

Number of Downloads (as of October 2020): 6,477

Summary: According to UNGC, a large share of companies have declared CSR to be an important factor for their organisation. However, it is unclear whether CSR leads to value creation. This paper investigates whether a better performance on corporate social responsibility (CSR) strategies leads to better access to finance for companies. The authors evaluate 7 years of data for nearly 2500 publicly listed companies.

The findings suggest that firms who have a better CSR performance face significantly lower capital constraints. Capital constraints refer to the restrictions on the amount of investments that a firm may be able to obtain. The authors hypothesize and provide evidence for two mechanisms that may be at play in driving this correlation - 1. Reduced agency costs due to better stakeholder engagement and 2. Increased transparency, which leads to lower information asymmetry between the firm and investors. 

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#4 Active Ownership

Authors: Elroy Dimson, Oğuzhan Karakaş and Xi Li

Year Published: 2015

Journal: Review of Financial Studies

Number of Downloads (as of October 2020): 5,516

Summary: Investors and other shareholders are increasing their engagement with business on ESG issues. This paper refers to the engagement for ESG-related issues between shareholders and business as ‘Active ownership’ or ‘ESG activism’, and explores how active ownership impacts the firm. The authors analyse corporate social responsibility (CSR) engagements in American public companies from 1999 to 2009, and suggest that successful engagements are followed by positive returns to the company. 

The authors find that successful engagements are more likely when the firms are large, mature and have reputational concerns. This trend is specifically relevant in consumer-facing industries. Overall, the paper highlights the key influence of reputational threats, emphasizing the importance of stakeholders, customer opinion and loyalty.

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#5 From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance

Authors: Gordon L. Clark, Andreas Feiner and Michael Viehs

Year Published: 2015

Journal: A report by University of Oxford and Arabesque Asset Management

Number of Downloads (as of October 2020): 4,824

Summary: This report aims to settle the debate whether responsibility and profitability can go hand-in-hand. The findings create a business case for corporate sustainability. The authors claim that contrary to what many believe, responsibility and profitability are complementary to one another. By conducting a meta-study of over 200 sources, the report finds that 88% of sources suggest that companies with better sustainability practices also have better operational performance and lower risk. Ultimately translating to higher cash flows. 

Furthermore, better sustainability practices also translate into positive outcomes for investors. The results suggest that investment strategies that incorporate ESG issues outperform comparable non-ESG strategies. This report encourages companies to adopt sustainability practices and pushes investors to integrate ESG strategies into their investment decisions.

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#6 Why and How Investors Use ESG Information: Evidence from a Global Survey

Authors: Amir Amel-Zadeh and George Serafeim

Year Published: 2017

Journal: Financial Analysts Journal

Number of Downloads (as of October 2020): 4,800

Summary: With a sharp rise in companies adopting better governance practices and sustainability trends, investors are presented with an influx of ESG information. This paper surveys senior investment professions at mainstream investment organisations to explore why and how investors use ESG information. The authors evaluate survey responses from over 400 investors.

The results show that the ESG data’s ‘relevance to investments performance’ is the most cited motivation (82%) for the use of ESG information. This highlights the importance of financial materiality. This is followed by a motivation based on client-demand. At the same time, a significant share of respondents also believe in ‘active ownership’ - the use of ESG information to address climate and social issues. However, these trends are more prominent in the US than in Europe. In terms of how the ESG data is used, strategies of negative screening, investor engagement and ESG integration are all equally used. However, the lack of reporting standards and the divergence amongst ESG ratings are reported as major hindrances for investors.

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#7 ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies

Authors: Gunnar Friede, Timo Busch and Alexander Bassen

Year Published: 2015

Journal: Journal of Sustainable Finance & Investment

Number of Downloads (as of October 2020): 4,512

Summary: To conclude whether there is a relation between ESG and financial performance, this paper conducts an extensive review of over 2000 empirical studies. This correlation has been debated since the 1970’s. This paper claims that around 90% of all the studies find a positive ESG and financial performance relationship. They also find that this relationship appears to be stable over time.

The review explores studies from several different contexts including emerging markets and varying regions around the world. The large-scale nature of this review allows the authors to make generalised statements. The evidence makes a strong case for a positive relation between ESG and financial performance. 

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#8 Environmental, Social and Governance Key Performance Indicators from a Capital Market Perspective

Authors: Alexander Bassen and Ana Maria Masha Kovacs

Year Published: 2008

Journal: Zeitschrift für Wirtschafts- und Unternehmensethik

Number of Downloads (as of October 2020): 4,373

Summary: While ESG reporting is becoming increasingly popular and important for obscuring investments. ESG is non-financial information and hence, the data is largely qualitative in nature, scattered between various reporting styles and difficult to quantify. This poses a problem for investors. They cannot easily judge the relevance of the information, nor use it for comparisons between companies. 

This paper examines an attempt by the German Society of Investment Professionals to create a standardised reporting framework for ESG key performance indicators (KPI). The framework defines 12 general and 18 sector-specific KPIs. The methodology emphasizes on measuring and reporting key ESG indicators such as energy efficiency, Carbon emissions and diversity metrics.

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#9 Responsible Investing: The ESG-Efficient Frontier

Authors: Lasse Heje Pedersen, Shaun Fitzgibbons and Lukasz Pomorski

Year Published: 2019 

Journal: NYU Stern School of Business

Number of Downloads (as of October 2020): 4,351

Summary: Investors have little guidance on how to meaningfully integrate ESG ratings into their investment decisions. Moreover, the opinions on whether ESG integration will reap financial benefits vary dramatically amongst academics and ESG professionals. To address this debate, the authors develop a theory that shows both - the potential costs as well as benefits of ESG integrated investing. 

The results are extremely interesting. In their model, the measure of governance - the ‘G’ of ESG -  predicts positive returns for investors. Better governance is linked to profitability. In contrast, the social or ‘S’ measure predicts negative returns. The ‘S’ measure includes “sin-stocks” such as alcohol and tobacco, which while harmful for the people and the planet, lead to positive returns. The evidence on ‘E’ and overall ‘ESG’ measures is mixed and insignificant. 

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#10 Sustainable Investing: Establishing Long-Term Value and Performance

Authors: Mark Fulton, Bruce Kahn and Camilla Sharples

Year Published: 2012

Journal: A report by Deutsche Bank Group

Number of Downloads (as of October 2020): 3,813

Summary: While there is evidence that shows that sustainable investing can be financially beneficial to investors and companies, many SRI fund managers have not managed to capture these returns. Hence, sustainable investing is often believed to yield “mixed-results” by many. This report challenges this. 

The report reviews over 100 academic studies on sustainable investing from around the world. It breaks down the analysis into three different categories - SRI, CSR and ESG. The findings show that SRI tends to rely heavily on negative screening which adds little value to the investors. On the contrary, CSR and ESG factors are highly correlated to lower cost of capital and hence, greater financial returns. Companies with CSR or ESG integration are lower risk and hence outperform the market. 

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