ESG in Corporate Finance

New paper, "Sustainable Investing: Evidence From the Field" (with Tom Gosling and Dirk Jenter). We survey 509 equity portfolio managers, of both traditional and sustainable funds, on whether, why, and how they incorporate firms’ environmental and social performance into investment decisions. 1. Both traditional and sustainable funds rank ES last out of six drivers of long-term value: below strategy, operational performance, governance, culture, and capital structure in that order. Clients interested in financial returns should not overweight a fund's ES credentials above its ability to assess these other factors. 2. This low relative ranking doesn't mean that ES is immaterial in absolute terms. Indeed, 73% of sustainable and even 45% of traditional investors expect ES leaders to deliver positive alpha. Unexpectedly, the most popular reason is that ES is a signal for other important value drivers rather than mattering directly. As I wrote in "The End of ESG", ES is "extremely important and nothing special". 3. ES performance influences stock selection, engagement, and voting for 77% of investors (66% traditional, 91% sustainable). Calls to "ban ES" make little sense as many traditional investors voluntarily incorporate it. 4. Only 24% of traditional and 30% of sustainable investors would sacrificing even 1bp of annual return for ES, citing fiduciary duty concerns. Policymakers and the public need to have realistic expectations of the asset management industry's likely ES impact. It will incorporate financially material ES factors, but it won't subsidize ES investments that offer below-market returns. That’s not because fund managers are greenwashing, but because they are fund managers. Their fiduciary duty is to their clients, whose goals are often financial. 5. But non-financial goals can be pursued through ES constraints such as fund mandates. 71% (61% traditional, 84% sustainable) report that ES constraints required them to make different investment decisions. These constraints sometimes reduced the very ES impact they aim to achieve, for example by preventing funds from investing in ES laggards whose performance they could have improved. 6. Overall, traditional and sustainable investors are more similar than commonly believed. Sustainable investors recognise fiduciary duty and are unwilling to sacrifice financial returns for ES. Traditional investors view ES as material and face ES constraints (firmwide policies, client wishes) preventing investment in "unsustainable" stocks. While some clients are attracted by sustainability labels, many traditional funds invest sustainably and many sustainable ones don't - and chasing a label can prevent true sustainable investing. Big thanks to the those who filled in the survey, beta-tested it, distributed it, and were interviewed. We hope that by directly involving practitioners, we can increase the relevance of academic research. https://lnkd.in/eGzRzE5t

🌍 As private equity firms manage trillions of dollars globally, how do they communicate their sustainability efforts? More importantly, do their disclosures actually reflect tangible environmental and social impacts? These critical questions are tackled in a new study by Jefferson Kaduvinal Abraham, Marcel Olbert, and Florin V. titled "ESG Disclosures in the Private Equity Industry, published in the Journal of Accounting Research (2024). This terrific paper systematically examines how private equity (PE) firms report on environmental, social, and governance (ESG) practices and whether these reports align with real outcomes. Here are the key findings: 1️⃣ Growing ESG Transparency: Using data from 5,468 PE firms between 2000 and 2022, the paper shows a significant increase in voluntary ESG disclosures on firms' websites, particularly after 2011. PE firms are increasingly discussing social and environmental issues alongside governance, with social topics recently surpassing environmental ones. 2️⃣ Demand from Investors: The paper finds that fund investors (Limited Partners, LPs) with ESG preferences are a major driver of increased disclosures. When PE firms raise capital, ESG transparency spikes, especially from firms aiming to attract LPs with strong sustainability commitments. 3️⃣ Positive ESG Outcomes: PE firms that disclose more ESG information also tend to have better ESG performance in their portfolio companies. For example, companies acquired by PE firms with high environmental disclosures saw reductions in emissions and chemical releases of up to 26%. 4️⃣ ESG Outcomes: The study shows that PE firms with more comprehensive ESG disclosures tend to deliver stronger outcomes, suggesting that these disclosures are credible and not merely for appearance, despite concerns about greenwashing in the industry. 📊 Implications: The authors highlight several important implications of their findings. For investors, the research underscores the value of scrutinizing ESG disclosures when allocating capital, as these disclosures are linked to real-world performance. For regulators, the study provides evidence supporting the case for more standardized ESG reporting requirements across the private equity sector. This could help mitigate the risks of greenwashing while promoting genuine improvements in sustainability practices across portfolio companies. 🌱 As ESG issues become more central to private capital, these findings are critical for investors and regulators alike. This important piece of research underscores the need for transparent and reliable ESG reporting, not just to attract capital, but also to drive real-world improvements in sustainability. #ESG #PrivateEquity #Sustainability #CorporateTransparency #ResponsibleInvesting 📖 Read the full paper here: https://lnkd.in/eNKAMqqM

A recent EY survey found that 9 out of 10 global investors are willing to rethink their investments if a company doesn’t even consider ESG factors in its business model. With a specific reference to Private Equity, a PwC survey of 166 PE houses found that 70% consider ESG (Environmental, Social, and Governance) as one of the top three drivers of value. I believe that this shift is particularly pronounced among pension funds and sovereign wealth funds. These Limited Partners, contributing or managing trillions in assets, are required to integrate ESG into due diligence, investment theses, and reporting standards. The rationale extends beyond ethical considerations ... many recognize that ESG standards can reduce exposure to environmental, social, and governance risks, ultimately leading to improved financial outcomes. The numbers from institutional investors are striking, as per a PwC 2021 survey ... → 49% are willing to divest from companies that aren’t considering ESG issues → 79% consider ESG important in investment decision-making (EY, 2021) This creates a cascading effect where private equity firms must embed ESG practices throughout their portfolio companies to meet LP expectations and secure capital commitments. In my opinion, this is reflective of a fundamental transformation, where ESG risk evaluation has evolved from a compliance checkbox to a strategic value driver. What changes are you observing in how institutional capital allocates based on ESG criteria? I would love to hear your thoughts! #esg #investment

As I approach the completion of my second Masters in Economics, I wanted to share my dissertation work examining a question that is increasingly central to corporate strategy and capital markets: 𝐃𝐨 𝐄𝐒𝐆 𝐬𝐜𝐨𝐫𝐞𝐬 𝐭𝐫𝐚𝐧𝐬𝐥𝐚𝐭𝐞 𝐢𝐧𝐭𝐨 𝐦𝐞𝐚𝐬𝐮𝐫𝐚𝐛𝐥𝐞 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞, 𝐨𝐫 𝐝𝐨 𝐭𝐡𝐞𝐲 𝐫𝐞𝐦𝐚𝐢𝐧 𝐥𝐚𝐫𝐠𝐞𝐥𝐲 𝐬𝐢𝐠𝐧𝐚𝐥𝐢𝐧𝐠 𝐦𝐞𝐜𝐡𝐚𝐧𝐢𝐬𝐦𝐬? Using firm-level data from Indian listed companies, I conducted a structured empirical analysis to evaluate the relationship between ESG performance, operational profitability, and market valuation. 𝐊𝐞𝐲 𝐢𝐧𝐬𝐢𝐠𝐡𝐭𝐬: • ESG shows a clear positive impact on profitability, indicating stronger internal efficiency and governance • However, ESG has no significant impact on firm valuation, pointing to a gap between performance and market pricing • Traditional drivers like size and leverage continue to dominate valuation outcomes 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐜 𝐓𝐚𝐤𝐞𝐚𝐰𝐚𝐲𝐬: • ESG is evolving from a reputational overlay to an operational performance lever, particularly through governance discipline and risk mitigation • There exists a clear lag between ESG adoption and market recognition, highlighting inefficiencies in how sustainability signals are interpreted by investors • In emerging markets like India, ESG may currently function more as a strategic differentiator in internal performance rather than a fully priced valuation driver 𝐓𝐡𝐞 𝐦𝐨𝐬𝐭 𝐢𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐭 𝐢𝐧𝐬𝐢𝐠𝐡𝐭 𝐟𝐨𝐫 𝐦𝐞: ESG is already influencing how firms operate, but markets are still catching up in how they value it. 𝐖𝐡𝐚𝐭 𝐧𝐞𝐱𝐭: As disclosure frameworks mature and investor awareness deepens, ESG is likely to transition from a performance lever to a priced market signal. I would truly value perspectives from those working across ESG, investing, and corporate strategy - especially on how this gap between performance and valuation is evolving in practice.

What role does ESG play in shaping financial decisions? I recently explored how ESG (Environmental, Social, and Governance) factors are transforming the financial landscape, Not just for large institutions but also for individual account managers and loan officers. The insights were eye-opening, and I’d like to share some key takeaways. Imagine: You're a loan officer evaluating a small business seeking funding. On paper, Their financials look stable, but then you assess their ESG risks. Maybe their carbon footprint is high, or their governance practices raise concerns. Do these factors matter? Absolutely. Studies show that businesses with strong ESG performance enjoy lower costs of capital and higher credit ratings. According to a 2022 MSCI report, companies with high ESG ratings experienced 14.2% lower borrowing costs than their peers. This isn’t just a trend it’s becoming the standard. What stuck with me was learning how to calculate a borrower’s attribution factor using PCAF (Partnership for Carbon Accounting Financials) standards. It's a practical way to quantify emissions linked to loans and investments. This isn’t just about meeting regulatory requirements; it’s about understanding the bigger picture. I also reflected on how ESG impacts smaller clients those private or middle-market businesses often overlooked in big sustainability conversations. For them, ESG integration isn’t just a “nice-to-have”; it’s critical for long-term survival. From my perspective, adopting ESG considerations in financial decision-making isn’t just about compliance or risk management. It’s about aligning financial goals with sustainable outcomes a win-win for lenders, borrowers, and the planet. What do you think? How can we better incorporate ESG into our everyday financial decisions? I'd love to hear your thoughts. #ESG #Sustainability #Finance #RiskManagement

🌍✨ Diving into the world of #sustainabilitymanagement, one study at a time. Join me as I explore interesting research by brilliant minds, uncovering insights that could shape our future. 🌱🔍 Today: "The Effects of Mandatory ESG Disclosure Around the World", published recently in the Journal of Accounting Research (see DOI at the end). Governments around the world are increasingly requiring companies to disclose their environmental, social, and governance (ESG) activities. But do these regulations lead to meaningful change? A new global study examines the impact of mandatory ESG reporting and reveals important insights. The study finds that when companies are required to disclose ESG efforts, investors gain clearer insights, reducing uncertainty and improving stock market liquidity. This means shares can be bought and sold more easily, making markets more stable. Regulations are most effective when enforced by government institutions rather than stock exchanges. Additionally, requiring full compliance rather than allowing companies to simply explain why they do not comply results in better outcomes. The impact of mandatory ESG reporting is most significant in countries where corporate transparency was previously weak. This suggests that regulation can help create a more level playing field for investors and stakeholders. For investors, companies with strong and transparent ESG practices are likely to be more stable and trustworthy. Policymakers should ensure that ESG regulations are not just implemented but also properly enforced. Consumers and stakeholders can play a role by demanding transparency and holding companies accountable. As ESG considerations become central to investment and business strategy, mandatory disclosure may be a key step toward more responsible and sustainable corporate practices. These findings are particularly relevant in light of the current backlash against the European Corporate Sustainability Reporting Directive (CSRD). As debates continue over the burden of ESG reporting requirements, this study provides evidence that well-enforced disclosure rules can enhance market transparency, reduce investment risks, and create more stable financial markets, countering arguments that such regulations are merely bureaucratic obstacles. Congratulations to Philipp Krueger, Zacharias Sautner, Dragon Yongjun Tang 汤勇军, and @Rui Zhong for this inspiring work! The picture shows the title page of the article (DOI: 10.1111/1475-679X.12548)

📈 Can ESG strategies truly drive long-term market value? A new global study (Chau et al., 2025) finds that ESG performance and firm value follow a nonlinear S-curve: • 🟢 Early ESG actions raise firm value through low-cost gains. • ⚠️ Mid-level efforts risk diminishing returns as costs grow. • 🌿 High ESG maturity eventually restores value, building trust and competitive advantage. But here’s the twist: this effect isn’t universal. 📍 In countries with weaker governance or environmental oversight, ESG performance sends a stronger market signal, boosting firm value more. In contrast, in advanced markets, ESG gains may already be “priced in,” leading to muted effects. So what’s the takeaway? Sustainability must be strategic. Firms and investors must calibrate their ESG actions based on local context, institutional quality, and maturity level. 📚 Why future research matters: Understanding how ESG’s financial impact shifts across economies and ESG rating systems is vital for aligning capital flows with sustainable outcomes. Without clarity, investors risk misjudging performance—and firms risk under- or over-investing in ESG. #ESG #Sustainability #CorporateFinance #ESGInvesting #ClimateFinance #StakeholderCapitalism #Governance #InternationalMarkets #RiskManagement

This list demonstrates how intangible sustainability factors convert into measurable financial metrics. Sustainability is often framed in qualitative terms: trust, culture, reputation, stakeholder alignment. In reality, these are upstream variables that influence cost of capital, revenue growth, operating margins, impairment risk, and enterprise valuation. Investor perception affects financing conditions. When ESG performance reduces perceived regulatory or reputational risk, it lowers risk premiums embedded in equity and debt. That directly influences cost of capital and long-term valuation. Consumer sentiment shapes demand. Sustainability alignment strengthens pricing power, accelerates product growth, and protects market share. Revenue uplift and premium capture are commercial outcomes, not communications benefits. Supplier relations are resilience drivers. Strong oversight and collaboration reduce volatility, avoid write-downs, and stabilize operating costs. Weak sustainability governance increases exposure to stranded assets and supply disruptions. The employee value proposition impacts profitability. Engagement, inclusion, and purpose correlate with lower turnover, reduced hiring costs, and higher productivity. Human capital strategy becomes an operating margin lever. Brand and reputation influence both growth and downside protection. Sustainability perceptions affect customer loyalty, acquisition efficiency, goodwill, and even acquisition premiums. Reputational damage from inaction carries measurable financial consequences. Strategic agility strengthens capital allocation. Embedding sustainability into risk management and investment decisions prioritizes resilient assets, reduces operating expenses over time, and anticipates regulatory shifts. Sustainability does not operate as a standalone project with a single payback period. It affects multiple financial lines simultaneously: earnings, risk exposure, and discount rates. The conversation, therefore, should not center on whether sustainability creates value. It should focus on how effectively organizations translate intangible drivers into financial performance and embed that logic into enterprise decision-making. Source: BSR & GlobeScan, Business Value of Sustainability: Trajectory and Strategies, February 2026. #sustainability #esg

The impacts of #ESG-related factors continue to grow, and companies vary significantly in their level of preparedness to address them. Consequentially, it is more critical than ever for investors to scrutinize the data in mergers and acquisitions (M&A) targets. More and more investors are realizing this and increasing their adoption of ESG due diligences. A survey by KPMG has found that ESG due diligence is on the rise and is becoming fundamental in investment decision-making, enabling visibility into adverse effects of ESG factors and ensuring better preparedness for resilient and sustainable growth. Investors are increasingly convinced that ESG due diligence can successfully identify valuable opportunities and critical risks. 63% of investors are willing to pay a premium for companies that align with their ESG priorities. 53% of investors have had deals canceled and 42% of investors have opted for a purchase price reduction due to material findings on an ESG due diligence.

Let’s be real—“doing good” for the planet isn’t always enough to get businesses moving. But here’s the kicker: 71% of C-suite leaders now believe ESG investment is a competitive advantage, up from 60% in 2023. So, what’s driving this shift? Here are four big reasons why ESG is becoming a must-have for organizations: 1. Risk Management 🔥 Climate risks aren’t hypothetical anymore—they’re here. Think about the LA fires or extreme weather events. Proactively tackling these risks, staying ahead of regulations, and addressing social impacts can protect your business from disruptions. Fun fact (or not-so-fun?): climate-related losses for suppliers could hit $1.3 trillion by 2026. Is your business prepared? 2. Performance Excellence 📈 Businesses committed to ESG aren’t just doing good—they’re doing well. On average, they’ve seen profits grow 9.1% over the last three years (up to 11% in the US!). Why? Because strong ESG practices improve efficiency, cut waste, and drive operational excellence. 3. Brand Differentiation 🏷️ A solid ESG strategy isn’t just a nice-to-have—it’s a trust-builder. With 90% of S&P 500 companies issuing ESG reports, it’s clear that transparency and sustainability are the new brand differentiators. Customers and clients are paying attention—are you? 4. Improved Valuation 💱 Here’s what investors care about: resilience, innovation, and long-term vision. ESG-aligned companies are checking all those boxes, which is why by 2025, 11-15% of U.S. investment managers are expected to put 40% of their portfolios into ESG investments. That’s a game-changer. So, what’s your organization doing to make ESG part of its core strategy? Let’s chat in the comments! #Sustainability #ESG #Leadership #Innovation #Growth #climatechange #environment