Presidential address: Sustainable finance and ESG issues—value versus values

The address explores differences in investor and manager motivations for sustainable finance, distinguishing between value-driven (pecuniary, risk-return) and values-driven (non-pecuniary, preference-based) approaches. Misunderstandings arise when these perspectives are conflated, obscuring the interpretation of ESG practices, regulations, and research outcomes. The finance research community is urged to clarify these distinctions through deeper empirical and theoretical work.

Growth in interest in and motivations for ESG investing

Interest in ESG has grown markedly, illustrated by global Google Trends data and increasing active mutual fund ownership in higher ESG-rated firms. Studies reveal heterogeneity in motivations: value investors integrate ESG for risk and return considerations, while values investors exclude or include firms based on ethical, social, or religious grounds. Evidence from surveys shows mixed motivations: for example, 25% of Vanguard retail investors are motivated by ethics, while 7% expect outperformance and 25% view ESG as climate risk hedging. Geographic differences are evident, with Europe leading in ESG mutual fund assets under management compared to the United States. Country-level factors such as legal systems, cultural norms, and policies strongly influence ESG fund size and corporate ESG scores.

Value versus values: Performance and outcomes

Performance evidence is mixed. Values-based investing, often reliant on exclusionary screening, can reduce investment opportunities, while value-based investing seeks better risk management and returns. Some investors are willing to sacrifice returns for sustainability outcomes, while others expect ESG to enhance returns. The heterogeneity of ESG funds complicates performance comparisons, as they range from social justice or faith-based strategies to risk-focused ESG integration.

Outcomes also differ: value investors prioritise business processes and risk management, while values investors focus on societal or environmental impacts. Biodiversity is a key example, with the Kunming-Montreal Global Biodiversity Framework setting 2030 disclosure and monitoring requirements. Beyond equities, ESG factors increasingly affect fixed income and real estate. Green, social, and sustainability-linked bonds highlight differing value and values motivations, while sovereign green bonds raise questions about pricing and “greenium” effects.

Value, values, and environmental issues, including climate risk

Climate risk exemplifies the dual perspectives. Value investors focus on risk pricing, hedging, and regulatory impacts, while values investors emphasise ethical imperatives. Disclosure is central but inconsistent, limiting the ability to price climate risks. Recent research has grown, with over 500 climate finance papers identified, but more work is needed on differences in investor and manager decision-making, risk types, and behavioural effects.

Value, values, and the role of owners: Voice versus exit

Shareholders influence ESG through proposals, engagement, and voting. Value-oriented activists, such as hedge funds, focus on financial risk, while values-oriented groups often act through religious or ethical organisations. Divestment remains contested: studies suggest it rarely changes firm behaviour and can impose high costs, though it may signal social pressure. Exclusion may impact cost of capital only if values investors represent a large market share. Portfolio tilting may be more effective than full divestment.

Social and governance issues

Social issues lack consistent definitions and differ in importance across investors. Disagreement also persists over what constitutes effective corporate governance, with low correlations among rating agencies. Boards increasingly integrate ESG metrics into executive compensation, though metrics remain underdeveloped. Evidence suggests firms adopting such metrics show stronger environmental, social, and financial performance. Questions remain over diversity’s role in governance and whether good governance is essential for environmental and social progress.

Conclusions

ESG means different things depending on whether investors focus on value or values. These orientations shape performance expectations, investment strategies, and firm engagement. The finance research community is encouraged to provide clarity, separating pecuniary from non-pecuniary motivations to better understand implications for markets, firms, and societies.