Will ESG investing solve our pressing problems?
Sustainable investing suffers from a principal-agent problem. Far more impact will be achieved when business leaders incorporate sustainability into business decisions.
ESG investing has been arguably one of the hottest trends in the financial markets in recent years, with funds purportedly aligned with environmental, social and governance goals hitting US$3 trillion by the end of 2021.
The strong demand for ESG-related funds in capital markets is driven by the twin virtues often promised for ESG investing: These funds are expected to deliver not only positive ESG impact as their labels suggest, but also superior financial returns. Doing well and doing good at the same time is a strong value proposition that makes investors feel great.
The empirical question is whether ESG or sustainable investing delivers both the desired financial and environmental results in practice. An increasing body of research casts doubt on these claims.
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