CSR and mainstream investing: a new match? -- an analysis of the existing ESG integration methods in theory and practice and the way forward

Companies and investors perceive the value of corporate social responsibility (CSR) differently; companies strive to obtain a competitive advantage and long-term value by working strategically with CSR, whereas investors see major barriers of integrating environmental, social and governance (ESG) factors into financial valuation models. Investors' current methods of applying ESG data in a financial valuation are categorized as either a ‘single decision model’ where only financial data are valued or a ‘dual decision model’ where both financial data and ESG factors are considered sequentially. As some socially responsible investment funds are able to outperform the market, we argue that the two models identified are insufficient to capture the additional value. On the basis of previous attempts to theoretically link CSR and economic performance, we propose that a new ‘integrated decision model’ should integrate financial data and ESG factors, but should not be based on existing valuation methods. Moreover, it should pursue a single objective, namely ‘value maximization’. A case study on the Danish company Novozymes shows that, in practice, each identified group of the interviewed investors value ESG data differently. One sophisticated investor group implicitly integrates ESG factors into a long-term focused valuation, where considerable value is attributed to ESG factors.