Raymond Fisman is a Slater Family Professor in Behavioral Economics at Boston University. This post is based on a recent paper by Professor Fisman, Professor Pulak Ghosh, Professor Arkodipta Sarkar, and Professor Jian Zhang. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; and Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales.
Globally, investment in so-called ESG (environmental, social, governance) funds has grown exponentially in recent years, far outstripping the rate of growth of assets under management more generally. Much of the growth and attention has focused on the “E” in ESG, with sustainable investment seen as one mechanism for disciplining firms that generate negative environmental externalities.
There are many potential drivers of this increase – it may reflect return expectations resulting from anticipated climate regulation, a proliferation of ESG funds that service a latent demand for socially responsible investment, or a shift in investor preferences resulting from greater salience and attention to environmental concerns. Yet distinguishing amongst these various explanations is a challenge. For example, the signing of the Paris Agreement on climate change potentially affected all three factors – it gave greater visibility to environmental issues and thus may have impacted investor preferences, signaled to asset management firms a potential market, and also imposed (in theory) binding constraints on companies’ carbon footprints.
