This study investigates the imbalance of ESG investing across its environmental (E), social (S), and governance (G) pillars. We find that E plays a more significant role in influencing the imbalance level, and mutual funds prioritize mitigating E risks over S and G risks, which is more pronounced in funds with higher sustainability ratings. Moreover, our findings indicate that investors respond to ESG imbalance, with the level of imbalance showing a negative impact on fund flows, especially for funds with higher sustainability ratings. However, this negative relationship is mitigated as climate change concerns increase. Furthermore, we find that political ideology plays a role in the ESG imbalance, with the imbalance of funds in blue states being more driven by lower environmental considerations compared to those in red states. Additionally, we observe that the ESG imbalance is positively associated with various fund risks. Our study offers implications for policymakers and stakeholders in the asset management industry regarding ESG investing practices

We develop a continuous-time model in which an ESG investor hires a manager to run a project and incentivizes the manager to fulfill ESG responsibilities. The manager’s private efforts and ESG investing determine the project’s cash flow and ESG performance subject to random shocks. We derive the optimal contract and its implementation after introducing carbon credits following the cap-and-trade program in practice. We provide comparative static analysis and empirical implications. The results demonstrate that ESG investing enhances contract efficiency. The more significant the carbon emission reduction, or the less the cost of ESG investing, the higher the contract efficiency, the average q, the marginal q, and the optimal investment–capital ratios, implying that ESG investing mitigates inefficiencies arising from information asymmetry and enhances investment values. Our model predictions are partially verified by empirical facts

We examine whether firms' ESG performance is influenced by bondholder preferences. We argue that insurance companies have unique incentives to monitor bond issuers' ESG performance because insurers face enhanced exposures to ESG shocks in their balance sheets and trading operations. Consistent with this argument, we find that firms with higher bond ownership by insurance companies are associated with higher future ESG ratings. To address potential identification concerns, we test changes in bond issuers' ESG ratings following the initial bond investment by insurance companies. We find that firms' ESG performance improves after insurance companies' initial bond investment. We also find that this improvement in ESG performance is concentrated in firms with greater reliance on bond financing and investment capital from insurance companies. Our study underscores the importance of bond ownership structure in influencing corporate ESG performance

Using a sample of 3083 firms from 62 countries over 18 years, we analyze how the structure and identity of firms' material owners influence their Environmental, Social, and Governance (ESG) performance. We find that firms with founding families or other individual investors as owners underperform, unless family members serve as CEOs, when they outperform all others. Non-family management and government entities also perform significantly better in most analyses. These results are robust to multiple data and methodological stress tests. Our findings show that ownership matters for ESG performance and give us an indication of the preferences of different types of owners regarding ESG

We provide the most comprehensive analysis to date of the relation between ESG ratings and stock returns, using 16,000+ stocks in 48 countries and seven different ESG rating providers. We find very little evidence that ESG ratings are related to global stock returns between 2001 and 2020. This finding obtains across different regions, time periods, ESG (sub)ratings, ESG momentum, ESG downgrades and upgrades, and best-in-class strategies. We further find little empirical support for prominent hypotheses from the literature on the role of ESG uncertainty and of country-level ESG social norms, ESG disclosure standards, and ESG regulations in shaping the relation between ESG and global stock returns. Overall, our results suggest that ESG investing did not systematically affect investment performance during the past two decades

We examine how natural disasters affect the corporate environmental, social, and governance (ESG) disclosure policies of firms located close to disaster areas. We study firms located in counties neighboring those impacted by natural disasters and find that, on average, these firms increase their ESG disclosure transparency over the period subsequent to the disaster. Given that our sample firms are located outside of the area directly impacted by the disaster, the changes in disclosure transparency after the disaster are consistent with managers increasing their preference for transparency as their risk salience increases. Further, we find that firms with a higher percentage of local institutional ownership are more likely to increase ESG disclosure after experiencing nearby disasters. The findings suggest that managers strategically react to a change in investors' risk perception by increasing ESG disclosure

We study the association between environmental, social, and governance (ESG) government risk management and firm-level IPO underpricing between 2008 and 2018. Examining 7446 IPOs issued in 36 countries, we find that IPO underpricing tends to be lower in countries with higher ESG Government Ratings. When we uniquely examine the environmental, social, and governance pillars, we find that underpricing tends to be lower in countries with stronger risk management practices in each of these areas. Additional analysis indicates that the negative impact of ESG ratings on IPO underpricing is more pronounced in countries with more transparent financial disclosures, higher liability standards, and stronger shareholder protections

We reexamine the impact of hedge fund activism on corporate social performance as measured by ESG ratings. Using a high-quality dataset on hedge fund activism, we find that the impact of hedge fund activism on ESG ratings is neither statistically nor economically significant. In our preferred model, relative to control firms, the ESG ratings of target firms increase by 0.033, about 1.6 % of the sample standard deviation, following activist interventions. In addition, we find no evidence that stock market reactions to the announcement of activist interventions are significantly higher for firms with high ESG ratings, inconsistent with the view that hedge fund activism harms corporate social performance to benefit shareholders

We examine how sovereign rating downgrades affect firms' environmental, social, and governance (ESG) policies, leveraging the sovereign “ceiling” rule as a quasi-natural experiment that generates exogenous variation in corporate credit ratings. Under this rule, firms originally rated at or above the sovereign rating (bound firms) face a higher likelihood of downgrade following a sovereign downgrade. Using a difference-in-differences (DiD) setting, we find that bound firms experience a decline in ESG performance following a sovereign downgrade. This decline occurs only after the downgrade, not before, validating the parallel trends assumption. Our analysis further indicates that this effect is not driven by financing frictions and is concentrated in countries with a shareholder-centric orientation, and among firms with low institutional ownership from countries with strong social norms. Additional evidence suggests that affected firms experience an increase in ESG-related incidents, damaging their reputation post-downgrade. Overall, our findings underscore the crucial role of sovereign risk in shaping corporate sustainability practices

We review the financial economics-based research on Environmental, Social, and Governance (ESG) and Corporate Social Responsibility (CSR) with an emphasis on corporate finance. In doing so we focus on the most debated and researched issues. Although a firm's ESG/CSR profile and activities are shown to be strongly related to the firm's market, leadership and owner characteristics as well its risk, performance and value, there still exist conflicting hypotheses and results that we show are not resolved, leading to continued questions and a need for more research