The report analyses and applies mainstream economics insights to Environmental, Social and Governance (ESG) issues. The report highlights that sudden interest in ESG has led to applying gut feeling on the grounds that ESG is too urgent to wait for peer-reviewed research. However, the report demonstrates that the insights of mainstream economics can be applied to ESG, as ESG is no different to other investments with long-term financial and social returns.

The report identifies ten key ESG issues where applying mainstream economics thinking may flip conventional thinking on its head. The issues are:

1. Shareholder value is short-termist: Shareholder Value is commonly attributed to being focused only on the short-term. However, according to the report, maximising shareholder value requires focusing on long-term value.
2. Shareholder primacy leads to an exclusive focus on shareholder value: The report highlights that shareholders have objectives other than shareholder value, and short-term financial returns and shareholder value are not the same.
3. Sustainability risks increase the cost of capital: The report suggests that sustainability risks lower expected cash flows instead of increasing the cost of capital.
4. Sustainable stocks earn higher returns: The report concludes that sustainable stocks may not necessarily earn higher returns as sustainability may already be “priced in”.
5. Climate risk is investment risk: The report notes that climate risk is an unpriced externality but suggests that investors can address it through physical risks by avoiding investments in companies exposed to them.
6. A company’s ESG metrics capture its impact on society: The report suggests that its ESG metrics may not capture its externalities.
7. More ESG is always better: The report recognises that ESG exhibits diminishing returns and trade-offs exist – considering ESG as a magic weapon that defies the laws of economics is wrong.
8. More investor engagement is always better: The report recommends against the traditional approach that more investor engagement is always better. Investors may be uninformed or undermine managerial initiatives, leading to perverse outcomes.
9. You improve ESG performance by paying for ESG performance: The report recommends against the notion that paying for ESG performance will incentivise firms to prioritise ESG issues. Incentivising only specific ESG dimensions may lead firms to underweight others, creating unintended outcomes.
10. Market failures justify regulatory intervention: The report recommends against the assumption that market failures justify regulatory intervention. Regulatory failure may exceed market failure, making regulatory intervention unjustified.

The report highlights some common misconceptions regarding ESG and recommends an approach combining established tools and new ideas. For instance, the report suggests creatively using shareholder rights to create social value, demonstrating how patient capital may help address market failures in ESG investments.