Andrew Siwo is an Adjunct Assistant Professor at New York University and a Lecturer at Cornell University. This post is based on his memorandum. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff; and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.
Confusion surrounding ESG (environmental, social, and governance) data and mislabeling of sustainable investment products complicates adoption and regulation. The sophistication of investors and regulators is necessary for the proper consumption of ESG data and development of financial products. In many ways, divergent and informed investor viewpoints often drive capital market activity; for example, a seller and buyer of a stock, often with opposing views of its future value, are matched to consummate a trade. Subsequently, research analysts assign “buy,” “sell,” or ‘hold” predictions to forecast a company’s estimated future value. Since asset managers often access data from several sources, qualitative ESG factors can be less suitable for standardization and difficult to pin down. Such attempts for standardization, in some cases, are further complicated partly due to incomparable characteristics (e.g., the maximum return of a bond is par, and the maximum return of a stock is infinite) across asset classes. Similarly, comparing ESG factors from different sectors, such as a technology company to a utility company, inherently obscures the ability to perform a like-for-like analysis.
