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Applying Economics—Not Gut Feel—to ESG

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  • Alex Edmans

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.

Suggested Citation

  • Alex Edmans, 2023. "Applying Economics—Not Gut Feel—to ESG," Financial Analysts Journal, Taylor & Francis Journals, vol. 79(4), pages 16-29, October.
    • Handle: RePEc:taf:ufajxx:v:79:y:2023:i:4:p:16-29
    DOI: 10.1080/0015198X.2023.2242758
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    Cited by:

    1. Zhijun Lin & Qidi Zhang & Chuyao Deng, 2024. "Multiple Large Shareholders and ESG Performance: Evidence from Shareholder Friction," Sustainability, MDPI, vol. 16(15), pages 1-28, July.

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