The Eco-Agency Problem and Sustainable Investment

Abstract

In times of heightened environmental consciousness and a global call for urgent action, corporations are playing a critical role in addressing pressing environmental challenges. As concerns about climate change, resource depletion, and ecosystem degradation intensify, businesses are under mounting pressure to align their strategies with sustainable practices. Despite that, there is strong evidence of underinvestment in sustainability and environmental efforts by corporations. In this article, we first define the eco-agency problem—the special conflict of interest between the corporate officers who focus on short-term profitability and the other stakeholders who seek long-term profitability and sustainability—and then discuss existing coping measures, such as green bonds, CoCo bonds, and ESG compensation metrics. To assess the extent of the eco-agency problem, we have conducted an experimental study of both professional and nonprofessional investors. According to our findings, both groups exhibit strong and significant preferences for sustainable investments. Revealing the preferences of investors towards sustainability can inspire corporate officers to embrace their role as sustainability advocates, encouraging them to align their decisions with investor preferences, and can thus drive positive change both within their organizations and across industries. In order to mitigate the eco-agency problem, we claim, on the basis of our study, that a unique environmental disclosure is required. By embracing transparency as a strategic advantage, corporations can transcend traditional reporting boundaries, heralding a new era in which investors implement their ecological preferences in the capital market pricing mechanism.

Keywords: sustainability, ESG, corporate governance, experimental economics, green bonds, CoCo bonds, disclosure