Much of our research is concerned with the "business case for sustainability", i.e. how and when ecological and social sustainability can be aligned with economic interests. In a recent project, we investigated the status quo regarding this question in the academic literature. Scholars and investors have published more than 2000 empirical studies and several review studies on the relationship between environmental, social and governance (ESG) criteria and corporate financial performance (CFP). This project extracted all provided primary and secondary data of the previous academic review studies.
The results show that the business case for ESG investing is empirically very well-founded. Roughly 90% of studies find a nonnegative ESG–CFP relation/ratio. More importantly, the large majority of studies report positive findings. Furthermore, we highlight that the positive ESG impact on CFP appears stable over time. Based on these research outcomes, we have come to an important conclusion for investors and financial markets as a whole: based on extant/existing literature, the business case for being a good firm is undeniable.
One key area of investigation is the relevance of climate change for investment opportunities and future risks. In December 2015 at the UN conference on climate change in Paris (COP21), 195 nations committed to a global agreement to cut greenhouse gas (GHG) emissions to sustainable a level, i.e. to hold the increase in global average temperature well below 2 degree Celsius from pre-industrial levels. For financial markets, two big challenges of this decarbonization process can be identified: first, the International Energy Agency (IEA) estimates that over the period from 2014 to 2035 cumulative investments of $53 trillion in energy supply and energy efficiency are required. Thus, investors have to redirect capital flow toward players that positively contribute to a climate-resilient economy. Second, various business sectors are currently consuming greater levels of fossil fuels and generating higher amounts of GHG emissions than ever before in history. Thus, investors face substantial financial risks in terms of stranded assets. Our research is situated as a response to these two challenges, i.e. we attempt to understand and shape the role of financial markets towards successfully facilitating the transition to a low-carbon economy.
In order to further foster sustainable finance, we consider so-called impact investments as a key lever. In a nutshell, this type of investment puts the social and/or environmental impact first and considers financial performance afterwards. In other words, the impact on the real world is at the heart of this investment style/strategy. In this context, the recently published T100 report of tonic comes to remarkable conclusions: 100% impact portfolios are presently achievable; they can be constructed in any geography, including both developing and developed countries and communities. Furthermore, 100% impact portfolios can be constructed across all asset classes. These findings motivate us to better understand the market for impact investments. Thus, our research investigates corresponding investor behavior and expectations and at the same time lays out the foundations for impact assessments.
In times of increasing voluntary non-financial corporate disclosure, investors are confronted with increasingly more information that differs from ordinary financial valuation determinants that are commonly used in capital markets. Thus, our research is also shaped by questions about investor’s behavioral reactions to ESG information in stock markets. Most financial markets lack transparency when it comes to the climate impact of an investment. This is especially true for investment funds which channel millions of private savings into company stocks and bonds every day. Hence, building on insights from behavioral change research, we investigate how to promote more climate-friendly investing. We model investor’s underlying cognitive processes when assessing ESG information and study consequences for portfolio choice and pricing on the individual as well as market level.
At the core of our research, we investigate the link between environmental, social and governance (ESG) performance and corporate financial performance (CFP). In order to understand and explain this relationship in detail, we look at different mechanisms, contingencies and moderating factors. We attempt to illustrate which elements of corporate strategy are central for a positive ESG-CFP relationship. In order to obtain relevant information, we analyze firm’s sustainability and financial reports. Our research considers a wide range of stakeholder expectations and determines their materiality for businesses. Finally, we investigate how specific financial market behavior may facilitate or hinder the integration of ESG criteria within investment decisions and corporate strategies.
Research on sustainable finance opens up possibilities for a close collaboration with partners from the financial industry. We are part of an EU funded Climate-KIC innovation project led by South Pole Group and CDP Europe. The project team aims at developing the world’s first climate impact rating for investment funds. Working together with key financial industry and NGO stakeholders, we develop an easy-to-use tool supporting climate conscious decision-making. Furthermore, Prof. Busch is member of the Scientific Board of the Association for Environmental Management and Sustainability in Financial Institutions (VfU). In addition, our projects receive funding from the Federal Ministry of Education and Research (BMBF).