Abstract
This chapter presents an overview of sustainable finance literature focusing on studies using environmental, social and governance (ESG) practices, and conducts a descriptive and comparative analysis of the Refinitiv ESG database worldwide. With increasing interest in ESG investing, it is common to integrate ESG factors into portfolio decisions. The authors first address the relevant literature to set the background for further studies. The chapter documents an increasing trend in ESG reporting and points out differences in ESG scores in terms of development level, region, industry, and legal origin for the period 2002-2019. Theoretical models and empirical tests, which integrate ESG factors into corporate performance, can only be established by a better understanding of ESG databases. Therefore, further research in the Refinitiv ESG database, as well as other ESG databases, is significant. This chapter contributes to this stream of research by explaining the Refinitiv ESG database with descriptive and comparative analysis, paving the way for new research on the subject.
TopIntroduction
For many years, finance theorists believed that individuals base their investment decisions on Bayesian techniques and come up with the optimal investment decision that maximizes their utility, which is the expected return with respect to risk. Thus, the expected return is considered the only benefit that is promised to an investor (Usul,Özdemir, & Kiessling, 2017). However, with the emergence of challenging ideas from psychology and decision-making literature (Kahneman & Tversky, 1972, 1979; Kahneman, 2003), other types of benefits are proposed such as expressive and emotional benefits. Yet, financial benefit retains its significance as utilitarian benefits and is perceived to be a part of total benefit (Statman, 2004). Social concerns in financial markets have been studied heavily in the literature, which produced the concepts of corporate social responsibility, socially responsible investing, ethical investing, sustainable investing, impact investing, and ESG (Environmental, Social, Governance) investing. Sustainable finance is considered an umbrella term for the above-mentioned concepts by researchers (Drempetic, Klein, & Zwergel, 2020). However, the initial attempts to explain such concerns were mostly “normative” studies that present “what socially responsible firms and investors should do”. As various theoretical frameworks are continuously being developed in the field, the studies have evolved from being “normative” to “descriptive” (Leins, 2020). This chapter presents an overview of sustainable finance literature focusing on studies using ESG practices and conducts a descriptive and comparative analysis of the Refinitiv ESG database worldwide.
Sustainable investing is getting increasing attention both by researchers and by investors reaching $35.3 trillion across the United States, Canada, Japan, Australasia, and Europe as reported by the 2020 Global Sustainable Investment Review, published by Global Sustainable Investment Alliance (GSIA). This represents a 15% increase in sustainable investment assets under management from 2018 to 2020. Therefore, the sustainable investment appears to become a significant source of funding for those who are seeking to raise capital all over the world, shaping global capital markets. When the total assets managed under sustainable investment from 2018 to 2020 are considered, the US and Europe are the leading markets, representing more than 80% of the world’s sustainable investing assets. The ratio of sustainable investment assets in the five major markets, namely Canada, Europe, Australasia, the US, and Japan are 62%, 42%, 38%, 33%, and 24% respectively in 2020 (GSIA, 2021). The report highlights that ESG integration stands out as the most common sustainable investment strategy.
Key Terms in this Chapter
Behavioral Finance: Financial paradigm that studies financial decision-making incorporating irrationality of investors and inefficiency of the financial markets into account. This paradigm has an interdisciplinary assessment in the sense that it combines finance theory with psychological biases.
Environmental, Social, Governance (ESG) Score: Ratings produced by various data providers to assess the environmental, social, and governance performance of companies, which disclose related information.
Social Finance: Financial approach, which prioritizes investment alternatives better aligned to environmental and social objectives along with financial returns. This approach is significant in promoting projects with social impact, which struggle to raise capital.
Sustainable Finance: Type of finance that incorporates environmental, social, and governance (ESG) considerations into the financial decision-making process, which paves the way for a higher level of investments in sustainable projects with a long-term orientation.
Sustainable Development Goals (SDGs): Global goals introduced by the United Nations in 2015 to take action to protect the world and achieve a more fair, prospering, peaceful environment for all people by 2030. These goals are presented under 17 headings, which call for action in social, environmental, and economic sustainability.
Socially Responsible Investing (SRI): Type of investment strategy, which takes social, environmental, and governance concerns into account in investment decisions aiming for a more sustainable world.