Presidential Address: Sustainable Finance and ESG Issues—Value versus Values

✍🏻️ Author: LAURA T. STARKS

📖 Source: The Journal of Finance, Volume 78 Issue 4, August 2023

Introduction

The article, "Presidential Address: Sustainable Finance and ESG Issues - Value versus Values," by Laura T. Starks, explores the complexities and misunderstandings surrounding sustainable finance and ESG issues. The article begins by highlighting the growing importance of ESG considerations in investment decisions and corporate practices, and the need for further research to address the challenges and gaps in understanding.

Discussion

One of the key themes of the article is the distinction between value and values motivations in sustainable finance. Value motivations are primarily driven by financial considerations, such as risk management and return optimization, while values motivations are rooted in ethical, social, and environmental concerns. The article emphasizes the interplay between these motivations and their implications for investment decisions and corporate behavior.

The article also explores the challenges associated with measuring ESG factors, particularly governance. It cites research indicating substantial discrepancies in ESG ratings across different services, especially in the governance domain. The article also touches upon the ongoing debate regarding the appropriate objective function for firms, reflecting the complexities of defining and evaluating good corporate governance.

Another theme of the article is regional variations in ESG performance, focusing on environmental scores. The article highlights the differences in E scores across countries, with European firms often outperforming their North American counterparts. The discussion attributes these differences to regional governmental policies and actions related to environmental concerns, as evidenced by the correlation between the Yale Environmental Performance Index (EPI) and S&P E scores.

The article acknowledges the significant growth in academic research related to sustainable finance and ESG issues. It references the extensive body of work on topics such as carbon emissions pricing, hedging, and the impact of climate risks on markets and corporations. However, it also emphasizes the need for further research to address gaps in understanding investor and manager perspectives, firm decision-making processes, and the interplay between climate risk management and nonpecuniary preferences.

The article presents an analysis of average company ESG scores by country, focusing on environmental, social, and governance dimensions. The discussion highlights the variations in ESG performance across different countries and emphasizes the influence of underlying country characteristics on company ESG or corporate social responsibility (CSR) scores.

Conclusion

The article concludes by discussing the implications of the misunderstandings and complexities surrounding sustainable finance for investors, corporations, and asset markets. It underscores the need for greater clarity and understanding to guide investment decisions, corporate practices, and policy development in the realm of sustainable finance.

Overall, the article provides insights into the complexities, challenges, and implications of sustainable finance and ESG issues, highlighting the need for further research and greater clarity to guide decision-making and practices in this rapidly evolving field.