Seven Myths of ESG

Abstract

The trend to incorporate Environmental, Social, and Governance (ESG) matters into corporate boardrooms and capital markets is pervasive. Nevertheless, considerable uncertainty exists over what ESG is, how it should be implemented, and its financial and nonfinancial impacts on corporate outcomes and fund performance. In this Closer Look, we explore seven commonly accepted myths surrounding ESG, many of which are not supported by empirical evidence.

We ask:
• What is ESG expected to solve: short-termism by corporate managers or a deeper problem of corporations profiting at the expense of stakeholders?
• Does ESG increase corporate value, or does it represent an incremental cost incurred for society?
• How much ESG investment is new (incremental) investment, and how much repackaging of existing spending?
• Why is governance included as the G in ESG?
• Is it possible to develop a reliable measure of ESG quality?
• Can standardized ESG reporting be done in an informative and cost-effective manner?

Keywords: Corporate governance, ESG, environmental, social, governance, sustainability, socially responsible investing, corporate responsibility, sustainability, ESG ratings, ESG initiatives, ESG disclosure, board of directors, corporate governance research