Using survey data from a sample of senior investment professionals from mainstream (i.e. not SRI funds) investment organizations we provide insights into why and how investors use reported environmental, social and governance (ESG) information.

The primary reason survey respondents consider ESG information in investment decisions is because they consider it financially material to investment performance. ESG information is perceived to provide information primarily about risk rather than a company’s competitive positioning.

There is no one size fits all, with the financial materiality of different ESG issues varying across sectors. Lack of comparability due to the lack of reporting standards is the primary impediment to the use of ESG information.

Most frequently, the information is used to screen companies with the most often used method being negative screening. However, negative screening is perceived as the least investment beneficial while full integration into stock valuation and positive screening considered more beneficial.

Respondents expect negative screening to be used less in the future, while positive screening and active ownership to be used more.

By: Amir Amel-Zadeh, University of Oxford – Said Business School and George Serafeim, Harvard University – Harvard Business School

See the full paper here at SSRN

Or as Harvard Business School Accounting & Management Unit Working Paper 17-079