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Sustainability and Financial Accounting: a Critical Review on the ESG Dynamics

• Short Research and Discussion Article
• Published: 13 January 2022
• Volume 29 , pages 16758–16761, ( 2022 )

Cite this article

• Patrizia Tettamanzi 1 ,
• Giorgio Venturini 2 &
• Michael Murgolo   ORCID: orcid.org/0000-0001-6328-4053 1  

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This study gives a depiction of what are the general directions taken by international institutions so to tackle the current health emergency and the most pressing environmental issues, such as climate change and COVID-19 (Schaltegger, 2020; Adebayo et al., 2021).

The role of companies is crucial under disruptive events, such as a crisis or, more in line with the present time, a pandemic, and the pursue of the shareholder value cannot be the essence and the only objective in doing business anymore, since also ESG (i.e., environmental, social, and governance) dynamics have to be taken in due consideration. Moreover, an adequate and effective corporate governance should lead to higher disclosure quality, which subsequently should help protect the entire planet and ecosystems as well. In this context, the principal role of accounting and corporate reporting activities should be oriented towards making emerge what is and what is not done by companies in their business operations, and the disclosure of financial information is currently deemed inappropriate for pursuing a sustainable growth in the medium and long run (Schaltegger, J Account Org Change 16:613–619, 2020; Kirikkaleli & Adebayo, Sustain Dev 29:583–594, 2020; Tettamanzi, Venturini & Murgolo Wider corporate reporting: La possibile evoluzione della Relazione sulla Gestione Bilancio e Revisione, IPSOA - Wolters Kluwer, Philadelphia, 2021). Thus, the objective of this study is to investigate what international and European institutions have planned to do in order to align corporate objectives with environmental and societal needs in the coming years (Biondi et al., Meditari Account Res 28:889–914, 2020; Songini L et al. Integrated reporting quality and BoD characteristics: an empirical analysis. J Manag Govern, 2021).

As of today, our analysis finds that IFRS Foundation (at global level) and EFRAG (at European one) have been taking steps toward the aforementioned issues so to propose disclosure standards more in line with sustainability and environmental needed improvements. In fact, we tried to give a depiction of what are the actual and future strategies that both these institutions are going to put in place: this snapshot will give scientists, engineers, lawyers, and business people an overview of what should be like the corporate world of the near future, from a corporate reporting/accounting perspective (so to better understand what will be expected from companies of all the industries worldwide).

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Introduction

As it is apparent in the international arena, a relevant review of the general rules and the standards of corporate reporting is taking place. The major drivers of it are the climate issues urgency and a “deeper and more focused” stakeholders’ engagement (Shan et al. 2021 ; Adebayo et al. 2021a , b ).

Both public and private entities and institutions worldwide have been trying so far to tackle these issues in the most effective way, but only with COVID-19 spreading across the globe, we could maintain that these actions have begun to be more tangible and explicit. Consider the COP26 meeting as an example (UK Government 2021 ). In November 2021, UK and Italy hosted an event considered the world last chance to get runaway climate change under control. Indeed, for nearly three decades, the UN has been bringing together almost every country on earth for global climate summits — called COPs, which stands for “Conference of the Parties” — and climate change, in that time, has “only” gone from being a fringe issue to a global priority. The COP held in November 2021 was the 26th annual summit and intended to reach an agreement with every nation on how to tackle climate change: 197 countries have agreed upon it, signing the “Glasgow Climate Pact”. The set of decisions consists of a range of agreed items, such as strengthened efforts to build resilience to climate change, to curb greenhouse gas emissions, and to provide the necessary finance for both (UN Climate Change 2021a , b ).

The UN 2030 Agenda as well as the most important international organizations have, therefore, managed to find an explicit solution to the issue in order to define a limit to, among others, those economic activities that — albeit profitable from a mere financial point of view — have, indeed, as a consequence, a negative impact for the environment and for the referential communities. In this, academic and scientific communities confirmed that accounting, reporting, and disclosure practices play a pivotal role in aligning the goals of the several stakeholders’ strategies adopted at corporate level (Schaltegger 2020 ; La Torre et al. 2020 ; Kose & Agdeniz 2021 ; Songini et al. 2021 ; Tettamanzi et al. 2021 ). In this regard, one of the COP26 outcomes was indeed related to “Transparency and Reporting”, making emerge a set of rules through which countries shall be held accountable for delivering results related to their climate action plans and self-set targets under their nationally determined contributions (Kirikkaleli & Adebayo, 2020 ; UN Climate Change 2021a , b ; Adebayo et al. 2021a , b ).

In Europe, this challenge has been faced by the European Commission which proposed in April 21, 2021 the draft for a directive regarding sustainability (i.e., CSRD “Corporate Sustainability Reporting Directive”) that would essentially amend the requirements already defined in the area of “non-financial disclosure” within the framework of another directive, the NFRD “Non-Financial Reporting Directive”. At the end of this drafting and enforcement legal procedure, we will be provided with a first set of sustainability accounting standards and principles to be potentially adopted starting from next October 2022. EFRAG “European Financial Reporting Advisory Group” (which is an association established in 2001 with the encouragement of the European Commission to serve the public interest with regards to international financial reporting standard initiatives at European level) has been appointed to define the aforementioned standards. Also the IFRS Foundation has been taking steps towards this issue, by means of the IASB “International Accounting Standards Board” (founded in 2001 and responsible for the development, promotion and adoption of international financial reporting standard rules IFRS Foundation 2021 ). In this discussion article, we shall provide a snapshot of some of the most relevant global activities regarding sustainability at corporate level (Biondi et al. 2020 ; Songini et al. 2021 ), since only if disclosure and reporting activities expected by companies in the coming years are finally effective and in line with all the aforementioned needed improvements and objectives, business choices and practices — from which environmental and social concerns might arise — shall come more easily under scrutiny and be appropriately monitored.

Sustainability Accounting: Initiatives at Global Level

In essence, through this study, we will make emerge where the IASB (IFRS Foundation) and the EFRAG are heading towards with regards to sustainability reporting.

In general, since 2005, Regulation 1606/02 requires Europe to apply, under certain conditions, the IAS/IFRS (i.e., the international accounting standards) drawn up by the IASB and endorsed by EFRAG (Biondi et al. 2020 ). Having said that, with regard to sustainability reporting at European level, EFRAG appears to have been also entrusted with the corporate sustainability standard setting. Yet, since the scope of the IASB activities is wider and potentially covers the entire globe (with companies, for instance, in Japan and China, among the others, applying IAS/IFRS), it is also worth analyzing the IASB initiatives on this topic so to propose a broader perspective. That said, IASB/IFRS Foundation focus is mostly on listed companies, whereas the aforementioned CSRD proposal should address also privately-held ones; this makes emerge the reasons that stand behind the difference in their current set objectives also in terms of different final adopter (Biondi et al. 2020 ; La Torre et al. 2020 ; Songini et al. 2021 ).

Both at international level, with regard to the activities of the IASB and the IFRS Foundation, and at European level, through EFRAG, the direction of corporate reporting seems to be going in an increasingly value-oriented direction that goes beyond the financial results and beyond the creation of value for shareholders alone (UK HM Treasury 2021 ).

IFRS Foundation has announced the establishment under its control of a new board, the ISSB “International Sustainability Standards Board,” which will be responsible for defining sustainability accounting standards to be applied in the coming financial years. This new board, whose members should possess specific expertise on ESG dynamics, will focus its drafting activity on material information for investors’ decisions and other stakeholders in the world capital markets and on the urgent need for better information about climate-related matters (Schaltegger 2020 ; Adebayo et al. 2021a , b ). In fact, the ISSB would initially focus on climate-related reporting, extending then its work towards the information needs of investors on other environmental, social, and governance (ESG) matters. EFRAG proposed to make its structure “dichotomous” as well, adding to the FRB “Financial Reporting Body”, the NFRB “Non-Financial Reporting Body” — both appointed to carry out the required technical work according to their respective assigned tasks. In this context, it is worth stressing the importance of the interconnections between IASB and EFRAG, since in case of a complete independent development of ESG reporting standards by these two important institutions, the related standards might turn out to be incoherent and hardly comparable — which is necessarily something to avoid (La Torre et al. 2020 ; Kirikkaleli et al. 2021 ; Songini et al. 2021 ).

More in detail, the IFRS Foundation/IASB, as of today, has highlighted the strategic macro-decisions that should guide the future action of the ISSB, defining guidelines at a global level and basing the new standards first of all on the climatic issue, to be extended to the whole sustainability/ESG sector in a broader sense. Furthermore, the creation of this new board has been announced at the UN Climate Change Conference (also known as COP26), held in November 2021. In essence, IFRS Foundation, by means of this and entrusting this board to set IFRS sustainability standards, will undergo a process of robust amendment of its governance, arranging its structure so to be better able to tackle the current and future ESG and sustainability challenges that the entire world has and will increasingly have to face (El Barnoussi 2020 ; García-Sánchez et al. 2020 ; Adebayo et al. 2021a , b ; Shan et al. 2021 ).

EFRAG, on the other hand, with the objective of addressing the action plan for financing sustainable growth and facilitating dialog among stakeholders (European Reporting Lab – EFRAG 2021 ), has already been:

promoting the attitude that should be adopted by corporations towards the interest and public welfare (i.e., “public good”), through the disclosure of quality information, that should be both “retrospective” and “forward-looking”;

calibrating the levels and boundaries of reporting on the uniqueness of each entity; and

recalling the concepts of double materiality and connectivity of information.

Please note that these mentioned points are key principles for drafting the most advanced global reports, such as integrated reporting. Moreover, EFRAG is pushing for producing an increasingly digitized and digitizable information that would definitely allow to overcome many anachronistic procedures still perpetrated in the accounting profession worldwide.

Conclusions

Underlining once again the apparent diversity, as of today, of set goals by the two institutions in discussion (i.e., EFRAG and IASB/ISSB), what does emerge at the moment is the willingness of both institutions to finally manage ESG dynamics also from an accounting and reporting perspective (UK HM Treasury 2021 ). In so doing, companies are increasingly required to provide high quality information that is also clear and comparable — potentially contrasting, subsequently, the “greenwashing” phenomenon. In this context, EFRAG concretely proposed a time plan of actions they have outlined and publicly declared (European Reporting Lab — EFRAG 2021 ) that covers the next 6 years of activity. By 2022, they shall provide the final draft of two “conceptual frameworks” and the “core” topical standards, to be applied to FY23 for reports to be published in 2024. EFRAG has also planned to treat the so-called advanced issues (if any) to be applied to FY25 and subsequent years, by 2024.

To conclude, all these sustainability ventures will, sooner or later, also reach small and medium-sized companies (i.e., “SMEs”) — mainly as the natural consequence of supply chain dynamics. Thus, the scope of application of the new sustainability reporting system shall potentially have a pervasive impact on the entire economic and social fabric of post COVID-19 Europe and the new millennium as well. Having said that, since this phenomenon is still evolving around the globe, from a legislative point of view, the matter in discussion is still in process and under scrutiny. Therefore, the snapshot should be taken as an overview of what will be potentially asked to companies in the coming future, being aware of the fact that radical changes to the above could be brought as well.

In fact, whether and what the actual impacts will be can only be defined in retrospect. Yet, it is worth underlining the actual (apparent) beginning towards a slightly broader and long-term vision of international institutions, making the principles of sustainability their own, without seeing them as the umpteenth “red tape” at global scale — moving, therefore, definitively on from a short termism attitude. That said, only by aligning integrated thinking with action will it be possible to definitively put in place sustainable and successful economic activities for all the communities involved. Otherwise, the price to be paid will be, once again, and increasingly unexpectedly, finding ourselves reliving devastating moments, similar to those that are still scourging the entire planet today, due to the ongoing pandemic crisis.

Availability of data and materials

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This proposal of short discussion article was written only by the three aforementioned authors, i.e., Patrizia Tettamanzi (PT), Giorgio Venturini (GV), and Michael Murgolo (MM). More in detail, MM analyzed and interpreted the original documents drafted by IFRS Foundation and EFRAG. GV informed MM about the issue in analysis, giving him the documentary support needed for the first draft of the document. Besides, GV reviewed the initial work, proposing venues for necessary changes. PT as associate professor of Business Administration and PhD reviewed the final draft of the work, approving its submission. All authors read and approved the final manuscript.

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Tettamanzi, P., Venturini, G. & Murgolo, M. Sustainability and Financial Accounting: a Critical Review on the ESG Dynamics. Environ Sci Pollut Res 29 , 16758–16761 (2022). https://doi.org/10.1007/s11356-022-18596-2

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DOI : https://doi.org/10.1007/s11356-022-18596-2

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Empirical Analysis of ESG and Financial Performance

Student thesis : Master thesis

Globally, investors and financial markets are directing increasingly more attention towards responsible investments. The term “responsible investing” is often interpreted as environmental, social and governance (ESG) concerns for investment decisions with a long-term perspective. The concept has become increasingly more relevant among consumers, government, investors and stakeholders. The increased focus is not based on empirically superior relationships between risk and return, but rather on a shift in demand for responsible investments with a more long-term perspective. Previous studies focusing on the relationship between ESG and financial performance are split into three distinctions; positive, neutral and a negative relationship. These three counterparts find theoretical arguments and statistical evidence supporting their results, and a clear conclusion regarding the relationship is yet to be made. This thesis examines the relationship that has puzzled the academia, with a thorough and critical review of existing literature on ESG investing. The empirical analysis examines portfolios with varying degrees of ESG performance, where the performance has been identified by the companies’ respective ESG and controversy score. These numbers are provided by Refinitiv, which is the successor of Asset 4, and are collected through Thomson Reuters Datastream. By application of traditional asset pricing models, namely the CAPM, Fama & French three-factor, Carhart four-factor and Fama & French five-factor model, the return on various portfolios has been controlled against known risk factors. Moreover, both ESG and controversy factors have been developed to study the relationships in greater depth. The results find evidence that implies a negative relationship between high ESG scores and excess returns. However, this result is not evident in the robustness tests, where the portfolios are divided into sub-periods and classified into different portfolio sizes. In contrary to previous findings, the analysis finds evidence that the companies with the absolute lowest ESG scores have a negative excess return. Nevertheless, the negative alpha is not substantially different from zero. There is no evidence in the analysis that can provide an answer to the question of whether or not controversies have any effect on the excess return. The results are more supportive of the literature that implies a negative correlation between increased ESG initiatives and financial performance measured by excess returns. However, the question of whether ESG is priced in by the financial market remains open for further investigation.

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The ten most downloaded academic ESG papers of all time

#1 The Consequences of Mandatory Corporate Sustainability Reporting

Authors : Ioannis Ioannou and George Serafeim

Year Published: 2017

Journal: Harvard Business School Research Working Paper No. 11-100

Number of Downloads (as of October 2020): 15,113

Summary: More and more governments are making corporate sustainability reporting mandatory. This paper looks at the effect of sustainability disclosure regulations on firm valuation and disclosure practices. The paper explores ESG reporting mandates in China, Denmark, Malaysia and South Africa. The authors compare data from periods prior to the mandated regulation to the period after the enforcement.

The authors find that following the regulations, the treated firms significantly increased their sustainability disclosure. They also find that treated firms are more likely to volunteer to receive assurance in order to enhance the credibility of their disclosure, even if assurance is not mandatory. The increased sustainability disclosures also seem to be linked to an increase in the firm’s valuations. All in all, this paper points towards the effectiveness of ESG disclosure mandates in increasing the quality and quantity of reporting as well as creating value for participating firms.

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799589  

#2 Aggregate Confusion: The Divergence of ESG Ratings

Authors : Florian Berg, Julian F Kölbel and Roberto Rigobon

Year Published: 2019

Journal: MIT Sustainable Initiative

Number of Downloads (as of October 2020): 8,547

Summary: As investors commit to integrating ESG information into their investment decisions, ESG rating agencies are emerging as prominent institutions. Such third-party assessments are becoming key financial determinants, however, there is a strong disagreement between the ratings provided by the different agencies. The divergence of ESG ratings has major consequences such as diluting the impact of ESG ratings, hampering an organisation’s motivation to improve their ratings, and leading to a lack of clear data for empirical research purposes. 

This paper aims to investigate the divergence in ESG ratings. It compared data from six prominent rating agencies. The authors find that measurement divergence, i.e. which indicators are used to measure the same attributes, is the key driver of the rating divergence. For example, some agencies measure the attribute of gender equality by % of women on the board, while others measure it by the gender pay gap. Unfortunately, weights divergence plays only a minor role. This refers to how much weighting the raters assign to each attribute. Hence, investors cannot consolidate the disagreement between the ratings by readjusting the weightages.

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3438533  

#3 Corporate Social Responsibility and Access to Finance

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Summary: According to UNGC, a large share of companies have declared CSR to be an important factor for their organisation. However, it is unclear whether CSR leads to value creation. This paper investigates whether a better performance on corporate social responsibility (CSR) strategies leads to better access to finance for companies. The authors evaluate 7 years of data for nearly 2500 publicly listed companies.

The findings suggest that firms who have a better CSR performance face significantly lower capital constraints. Capital constraints refer to the restrictions on the amount of investments that a firm may be able to obtain. The authors hypothesize and provide evidence for two mechanisms that may be at play in driving this correlation - 1. Reduced agency costs due to better stakeholder engagement and 2. Increased transparency, which leads to lower information asymmetry between the firm and investors. 

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1847085  

#4 Active Ownership

Authors : Elroy Dimson, Oğuzhan Karakaş and Xi Li

Year Published: 2015

Journal: Review of Financial Studies

Number of Downloads (as of October 2020): 5,516

Summary: Investors and other shareholders are increasing their engagement with business on ESG issues. This paper refers to the engagement for ESG-related issues between shareholders and business as ‘Active ownership’ or ‘ESG activism’, and explores how active ownership impacts the firm. The authors analyse corporate social responsibility (CSR) engagements in American public companies from 1999 to 2009, and suggest that successful engagements are followed by positive returns to the company. 

The authors find that successful engagements are more likely when the firms are large, mature and have reputational concerns. This trend is specifically relevant in consumer-facing industries. Overall, the paper highlights the key influence of reputational threats, emphasizing the importance of stakeholders, customer opinion and loyalty.

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154724  

#5 From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance

Authors : Gordon L. Clark, Andreas Feiner and Michael Viehs

Journal: A report by University of Oxford and Arabesque Asset Management

Number of Downloads (as of October 2020): 4,824

Summary: This report aims to settle the debate whether responsibility and profitability can go hand-in-hand. The findings create a business case for corporate sustainability. The authors claim that contrary to what many believe, responsibility and profitability are complementary to one another. By conducting a meta-study of over 200 sources, the report finds that 88% of sources suggest that companies with better sustainability practices also have better operational performance and lower risk. Ultimately translating to higher cash flows. 

Furthermore, better sustainability practices also translate into positive outcomes for investors. The results suggest that investment strategies that incorporate ESG issues outperform comparable non-ESG strategies. This report encourages companies to adopt sustainability practices and pushes investors to integrate ESG strategies into their investment decisions.

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2508281  

#6 Why and How Investors Use ESG Information: Evidence from a Global Survey

Authors : Amir Amel-Zadeh and George Serafeim

Journal: Financial Analysts Journal

Number of Downloads (as of October 2020): 4,800

Summary: With a sharp rise in companies adopting better governance practices and sustainability trends, investors are presented with an influx of ESG information. This paper surveys senior investment professions at mainstream investment organisations to explore why and how investors use ESG information. The authors evaluate survey responses from over 400 investors.

The results show that the ESG data’s ‘relevance to investments performance’ is the most cited motivation (82%) for the use of ESG information. This highlights the importance of financial materiality. This is followed by a motivation based on client-demand. At the same time, a significant share of respondents also believe in ‘active ownership’ - the use of ESG information to address climate and social issues. However, these trends are more prominent in the US than in Europe. In terms of how the ESG data is used, strategies of negative screening, investor engagement and ESG integration are all equally used. However, the lack of reporting standards and the divergence amongst ESG ratings are reported as major hindrances for investors.

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2925310  

#7 ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies

Authors : Gunnar Friede, Timo Busch and Alexander Bassen

Journal: Journal of Sustainable Finance & Investment

Number of Downloads (as of October 2020): 4,512

Summary: To conclude whether there is a relation between ESG and financial performance, this paper conducts an extensive review of over 2000 empirical studies. This correlation has been debated since the 1970’s. This paper claims that around 90% of all the studies find a positive ESG and financial performance relationship. They also find that this relationship appears to be stable over time.

The review explores studies from several different contexts including emerging markets and varying regions around the world. The large-scale nature of this review allows the authors to make generalised statements. The evidence makes a strong case for a positive relation between ESG and financial performance. 

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2699610  

#8 Environmental, Social and Governance Key Performance Indicators from a Capital Market Perspective

Authors : Alexander Bassen and Ana Maria Masha Kovacs

Year Published: 2008

Journal: Zeitschrift für Wirtschafts- und Unternehmensethik

Number of Downloads (as of October 2020): 4,373

Summary: While ESG reporting is becoming increasingly popular and important for obscuring investments. ESG is non-financial information and hence, the data is largely qualitative in nature, scattered between various reporting styles and difficult to quantify. This poses a problem for investors. They cannot easily judge the relevance of the information, nor use it for comparisons between companies. 

This paper examines an attempt by the German Society of Investment Professionals to create a standardised reporting framework for ESG key performance indicators (KPI). The framework defines 12 general and 18 sector-specific KPIs. The methodology emphasizes on measuring and reporting key ESG indicators such as energy efficiency, Carbon emissions and diversity metrics.

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1307091  

#9 Responsible Investing: The ESG-Efficient Frontier

Authors : Lasse Heje Pedersen, Shaun Fitzgibbons and Lukasz Pomorski

Year Published: 2019  

Journal: NYU Stern School of Business

Number of Downloads (as of October 2020): 4,351

Summary: Investors have little guidance on how to meaningfully integrate ESG ratings into their investment decisions. Moreover, the opinions on whether ESG integration will reap financial benefits vary dramatically amongst academics and ESG professionals. To address this debate, the authors develop a theory that shows both - the potential costs as well as benefits of ESG integrated investing. 

The results are extremely interesting. In their model, the measure of governance - the ‘G’ of ESG -  predicts positive returns for investors. Better governance is linked to profitability. In contrast, the social or ‘S’ measure predicts negative returns. The ‘S’ measure includes “sin-stocks” such as alcohol and tobacco, which while harmful for the people and the planet, lead to positive returns. The evidence on ‘E’ and overall ‘ESG’ measures is mixed and insignificant. 

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3466417  

#10 Sustainable Investing: Establishing Long-Term Value and Performance

Authors : Mark Fulton, Bruce Kahn and Camilla Sharples

Year Published: 2012

Journal: A report by Deutsche Bank Group

Number of Downloads (as of October 2020): 3,813

Summary: While there is evidence that shows that sustainable investing can be financially beneficial to investors and companies, many SRI fund managers have not managed to capture these returns. Hence, sustainable investing is often believed to yield “mixed-results” by many. This report challenges this. 

The report reviews over 100 academic studies on sustainable investing from around the world. It breaks down the analysis into three different categories - SRI, CSR and ESG. The findings show that SRI tends to rely heavily on negative screening which adds little value to the investors. On the contrary, CSR and ESG factors are highly correlated to lower cost of capital and hence, greater financial returns. Companies with CSR or ESG integration are lower risk and hence outperform the market. 

Link to paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222740

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ESG investment is an investment behavior in a company that considers the environment (Environment), society (Social), and corporate governance (Governance) together. "Environment" refers to activities such as reducing carbon dioxide emissions and energy consumption; "society" refers to activities such as ...

Keywords : ESG investment, sustainability, SDGs, greenhouse gas emissions, climate change

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Current topics for final thesis

Turning on the heat global warming and corporate risk-taking..

The following topic is suitable for BA or MA students. Please keep in mind that it is best suited for candidates who are familiar with statistical software and time series regression or those who are willing to acquire these skills within the context of their thesis. However, suggestions for alternative methodological approaches (e.g., interviews, literature reviews) are welcome.

If you are interested in the following topic, please get in touch with  Dr. Wiebke Szymczak . 

Turning on the heat? Global warming and corporate risk-taking

Heat is a common metaphor to describe interpersonal conflict. Strikingly, psychological research indeed suggests a link between heat stress and aggressive or asocial behavior. With global temperatures on the rise, one may wonder: what are the consequences of heat stress on corporate decisions? This thesis project will combine meteorological and financial data to test whether heat stress triggers systematic changes in corporate risk-taking, as one possible manifestation of aggressive financial decisions.

Shareholder activism and sustainability. Is shareholder activism a solution or a problem?

On the one hand, the term shareholder activism refers to an investment strategy of a small group of hedge funds which target underperforming firms in order to foster the implementation of financial or governance changes and capitalize on potential increases in shareholder value. On the other hand, shareholder activism refers to the actions of large institutional investors who engage with their target firms to push a non-financial agenda, e.g., better working conditions or higher investments into emission mitigation technologies. There are two possible variants of this thesis project: The first represents a systematic literature review in order to contrast both types of shareholder activism and identify positive as well as negative side-effects of both types of shareholder activism with respect to environmental, social and governance aspects. The second represents an empirical investigation into the non-financial effects of shareholder activism with respect to corporate ESG performance.

Sustainability, but not too much?

Investor objections to corporate sustainability Financial professionals report that some investors respond negatively to sustainability-focused marketing strategies to the extent that relationship managers maintain two slide decks to advertise sustainable investment products. The empirical literature suggests a positive or at least non-negative effect of corporate sustainability on financial performance. Yet, some investors remain reluctant to sustainable investment products. This thesis project aims to review the theoretical literature and explore the motives and rationales of investors who shy away from sustainable investment products.

The effect of disaster experiences on sustainability preferences

Extreme weather events are becoming ever more frequent and severe. While much research has addressed the contribution of the global economy to anthropogenic climate change, the behavioral implications of exposure to extreme weather on economic decisions have yet to be fully explored. A small but growing literature suggests that exposure to extreme weather events and natural disasters can have significant and systematic effects on the risk preferences of economic decision makers. Moreover, the attention-based view of the firm suggests that extreme weather exposure may also emphasize the importance of a stable environment as a basis for economic growth and corporate success. Within the context of this thesis project, the candidate will develop and implement a suitable regression strategy to test the impact of extreme weather exposure on sustainability preferences of households or firms.

Mood effects in ESG ratings

The following topic is suitable for BA or MA students. Please keep in mind it is best suited for candidates who are familiar with statistical software and time series regression or those who are willing to acquire these skills within the context of their thesis. However, suggestions for alternative methodological approaches (e.g., interviews, literature reviews) are welcome.

If you are interested in the following topics, please get in touch with  Dr. Wiebke Szymczak . 

Does the weather at rating offices affect ESG ratings of local firms? Several empirical studies show that local weather conditions can have a systematic effect on investor decisions. However, little is known about the specific biases in ESG ratings. Applying the rationale of investors mood effects to ESG rating agencies, theory may predict higher ESG ratings when raters are in high spirits and lower ESG ratings when spirits are low, ceteris paribus. Within the context of this thesis project, the candidate will gather establishment addresses for the major rating agencies and connect these addresses with relevant climate data in order to analyze how weather variables affect sustainability ratings of local firms.

Don't foul your own nest

Don’t foul your own nest

Does distance between HQs and plants predict pollution intensity? A proliferating number of empirical studies suggest that air pollution has a detrimental effect on local property prices. If top managers and employees in strategic positions live close to corporate headquarters, their own residential property may be affected by local production facilities. Consequently, rational choice theory predicts that they will prefer to keep air pollution as far away from home as possible. Moreover, firms reduce the risk of litigation by keeping firms away from residential areas. This thesis project will combine data on corporate air pollution reported in the toxic release inventory, financial data and corporate location data to analyze whether there exists a systematic pattern to shift polluting activities to facilities further away from corporate headquarters and/or local residential areas.

Assessing physical climate risks

The following topic is suitable for MA students. Please keep in mind that it is best suited for candidates with excellent Excel skills and those who are familiar with GIS and scenario modelling. For all the details, please refer to the full topic description .

If you are interested in the following topic, please get in touch with Dr. Sven Lundie .

Assessing physical climate risks for Altana Management Services GmbH

The importance of sustainability continues to grow at Altana Management Services GmbH. Altana is currently dealing with CDP reporting. The EU taxonomy, CSRD and in particular the TCFD are further topics that Altana will increasingly address in the future.

The effects of climate change on the company's own production are to be investigated as part of the master's thesis, i.e. the physical risks will be qualitatively assessed for the 50 production sites. In addition, the availability of materials is an important topic for the company, as climate change will also have an impact on the supply chain (including delivery times and quantities). Sales markets will also be affected. For this reason, Altana wants to systematically address future scenarios (for different warming scenarios (1.5 as well as 2 degrees), two time horizons) at the production sites that identify the risks and opportunities for the company.

The TCFD will serve as a framework guideline for this project. In a first step, only physical risks and opportunities of climate change will be addressed (e.g. risk assessment regarding future availability of biogenic raw materials or cooling water for production). In a next step, transitory risks, for example, can be investigated, as TCFD reporting by Altana could take place from 2023 onwards (outside this project).

Sustainable investment by a listed insurance company - curse and/or blessing?

The following topic is suitable for MA students. Please be aware that basic knowledge of the German language is required. The thesis itself can be written in English or German. For all the details, please refer to the full topic description .

If you are interested in the following topic, please get in touch with Prof. Dr. Timo Busch .

In close cooperation with the Investment Division of HDI Germany, this thesis sets out to explore ways of integrating sustainability into the investment decisions of a listed insurance company. Among other things, a market and opinion analysis is to be carried out for this master thesis. Possible focus areas include how the insurance company can have a positive impact on biodiversity through their investments and how to deal with data issues in measuring the sustainability of investments and the disparity of definitions of what exactly falls under the term sustainable investment.

Development of a Scope 3 estimation method for industry sectors

Reducing Scope 1 and 2 emissions, those under the direct ownership and operational control of the business is usually the first target in a company’s carbon reduction strategy. However, to become truly carbon neutral, Scope 3 emissions, which are indirect emissions released upstream and downstream in a company’s value chain, need to be prioritised too as scope 3 emission often contribute more than half of the total GHG emissions. With the introduction of the CSRD in the EU it will become compulsory for companies to report on their Scope 3 emission.

The GHG protocol has developed the framework for quantifying scope 3 emissions. Within the GHG protocol 15 sub-categories are further specified to cover all upstream and downstream emissions in detail. However, quantifying relevant scope 3 emissions can be very challenging in practice due to data availability, complexity of calculation and possibly lack of inhouse knowledge with companies.

In order to address corporate needs, the objective of this Master Thesis is to develop a Scope 3 estimation methodology according GHG protocol and to quantify the GHG hotspots along the value chains of industry sectors (following NACE and GICS codes) .

Required activities of this desk top research are, e.g.

• Review and analysis of GHG protocol, GHG ISO standards, CSRD, NACE and GICS, …
• Development of a quantitative estimation methodology for industry sectors
• Research of LCA studies that are representative for industry sectors
• Development of an Excel-based tool for qualifying and/or quantifying GHG hotspots along the value chains of industry sectors
• The student should have an interest in Scope 1, 2 & 3 GHG emissions, LCA/PCF/EPDs, environmental regulation, statistics as well as in methods development.

The Master Student will gain highly relevant GHG accounting knowledge in due course of the work.

Start: as soon as possible

Supervisors: Prof Timo Busch and Dr. Sven Lundie

The student will have the opportunity to align with the supervisor on a bi-weekly basis. Please reach out to Sven Lundie ( info "AT" sven-lundie.com )  if you are interested in this topic.

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Corporate Social Responsibility: the institutionalization of ESG

Anderson, Erika (2023) Corporate Social Responsibility: the institutionalization of ESG. PhD thesis, University of Glasgow.

Understanding the impact of Corporate Social Responsibility (CSR) on firm performance as it relates to industries reliant on technological innovation is a complex and perpetually evolving challenge. To thoroughly investigate this topic, this dissertation will adopt an economics-based structure to address three primary hypotheses. This structure allows for each hypothesis to essentially be a standalone empirical paper, unified by an overall analysis of the nature of impact that ESG has on firm performance. The first hypothesis explores the evolution of CSR to the modern quantified iteration of ESG has led to the institutionalization and standardization of the CSR concept. The second hypothesis fills gaps in existing literature testing the relationship between firm performance and ESG by finding that the relationship is significantly positive in long-term, strategic metrics (ROA and ROIC) and that there is no correlation in short-term metrics (ROE and ROS). Finally, the third hypothesis states that if a firm has a long-term strategic ESG plan, as proxied by the publication of CSR reports, then it is more resilience to damage from controversies. This is supported by the finding that pro-ESG firms consistently fared better than their counterparts in both financial and ESG performance, even in the event of a controversy. However, firms with consistent reporting are also held to a higher standard than their nonreporting peers, suggesting a higher risk and higher reward dynamic. These findings support the theory of good management, in that long-term strategic planning is both immediately economically beneficial and serves as a means of risk management and social impact mitigation. Overall, this contributes to the literature by fillings gaps in the nature of impact that ESG has on firm performance, particularly from a management perspective.

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Research: Boards Still Have an ESG Expertise Gap — But They’re Improving

• Tensie Whelan

Over the last five years, the percentage of Fortune 100 board members possessing relevant credentials rose from 29% to 43%.

The role of U.S. public boards in managing environmental, social, and governance (ESG) issues has significantly evolved over the past five years. Initially, boards were largely unprepared to handle materially financial ESG topics, lacking the necessary background and credentials. However, recent developments show a positive shift, with the percentage of Fortune 100 board members possessing relevant ESG credentials rising from 29% to 43%. This increase is primarily in environmental and governance credentials, while social credentials have seen less growth. Despite this progress, major gaps remain, particularly in climate change and worker welfare expertise. Notably, the creation of dedicated ESG/sustainability committees has surged, promoting better oversight of sustainability issues. This shift is crucial as companies increasingly face both regulatory pressures and strategic opportunities in transitioning to a low carbon economy.

Knowing the right questions to ask management on material environmental, social, and governance issues has become an important part of a board’s role. Five years ago, our research at NYU Stern Center for Sustainable Business found U.S. public boards were not fit for this purpose — very few had the background and credentials necessary to provide oversight of  ESG topics such as climate, employee welfare, financial hygiene, and cybersecurity. Today, we find that while boards are still woefully underprepared in certain areas, there has been some important progress .

• TW Tensie Whelan is a clinical professor of business and society and the director of the NYU Stern Center for Sustainable Business, and she sits on the advisory boards of Arabesque and Inherent Group.

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Private equity firms are harnessing the ESG premium

EY-Parthenon EMEIA Sustainability and ESG Solutions Leader

EY Americas ESG Private Equity Leader; Partner, Private Equity Client Service, Ernst & Young LLP

Related topics

Pei keynote interview esg final (pdf) (pdf), private equity firms are focusing on data to help tell a convincing story on esg..

Three questions to ask

• If PE firms make a commitment to ESG, will it be a competitive advantage?
• Why is explaining the value of ESG to a company so important in ensuring success in ESG value creation?
• Where is the ESG value uplift going to come from and how will it be measured during an exit?

I n the February 2023 issue of the Private Equity International Responsible Investing report, Will Rhode, EY Global Private Equity ESG Leader, and Winna Brown, EY Americas Private Equity ESG Leader, answer seven questions about how private equity can harness the ESG premium and ensure success with ESG value creation.

Download the PEI Keynote Interview ESG

Q. why is it important for pe firms to make commitments around net zero and other aspects of esg.

Rhode: Climate-related risks are a focal point for the majority of investors, consumers, lenders, management and employees. This trend is growing. Over the longer term, the adoption of a systematic approach to ESG will prove to be a competitive advantage by virtue of the value that’s created. Firms that are ahead of the curve will benefit in contrast to those that remain less committed.

At present, the pressure on climate comes from the LPs, who may have made their own net-zero commitments. They are looking for private equity funds to show they are aligned to their climate agenda. But beyond climate, ESG is important because PE firms, by virtue of the vast size of their capital holdings and their ability to steward their portfolio companies, represent an incredibly powerful lever for positive change. PE firms have an advantage, and flexibility in how they approach ESG. They have the ability to be rigorous in how they execute on their strategy, because they have the opportunity to think flexibly about what they want to do before they make any explicit commitments. 

Q. What are the key trends around ESG due diligence?

Brown: Just two to three years ago, most PE firms looked at ESG and sustainability-related issues largely from a risk management perspective. There’s been a key paradigm shift, wherein PE investors are now looking at ESG as a key value driver - and that process begins in the diligence phase. ESG is becoming a key focal point for deal teams in addressing the growing mandate from investment committees, certainly in Europe, and we are also starting to see that in the US. Deal teams are looking for an integrated approach, where ESG diligence zeroes in on the financial implications of an ESG dimension on the performance of a company.

As ESG impacts are sector specific, it is essential for firms to have that sector expertise. There is so much change right now, in terms of decarbonization, transition pathways and the technology that is enabling ESG, so teams need to have a perspective on the sector-specific transition pathway.

Finally, there are groups that are developing models that integrate the cost of carbon into EBITDA, or consider the positive correlation between improved ESG scores on deal multiples. Others look at how ESG risks connect to broader strategic issues, such as the cost of energy, and ability to access lower-cost renewable energy sources. That means thinking about ESG, not just in terms of it being an opportunity or cost, but also in the context of deal underwriting. It will be amazing to observe how this evolves over time.

Q. How can PE firms ensure success with ESG value creation?

Brown: The first 100 days are crucial, as with any value creation process. It is important for PE firms to focus on some key ESG themes such as operating model mobilization, decarbonization strategies, supply chain challenges and – especially in the US – DE&I and pay equity. Establishing a process needs to be front of mind. ESG capabilities within the portfolio company should be formalized and the right governance structures need to be in place, to ensure the company will collect, monitor and report on their ESG data.

PE firms also need to consider that portfolio companies have different levels of maturity when it comes to ESG and therefore be prepared to help the portfolio company understand these ESG requirements – which may be quite new to them. What we have found in speaking with both PE firms and management teams, is that it helps to take the time to walk the company through why ESG is a priority and how it can help to create value. If the companies don’t understand why ESG matters, then they are never going to be fully onboard. Working alongside them and bringing them on the journey goes a long way.

Q. In terms of ESG reporting, what are the key considerations for GPs?

Rhode: Reporting is a key aspect of how a PE firm engages with its stakeholders. LPs want to know what PE firms stand for when it comes to ESG. They may want to split their investments to cover different elements of ESG, so it’s important for them to be able to understand what a PE firm is driving at from a value-creation point of view.

LPs also want to see clear frameworks and policies to protect against greenwashing and reputational risk. When it comes to demonstrating performance, there is a move toward reporting sector-specific ESG KPIs. That means, instead of looking at overall ESG scores or ratings, the PE firm helps companies within a specific sector to work toward KPIs that are most materially relevant.

Reliable data is key to help a PE firm ensure it has good provenance on the metrics that are being monitored and measured. As ESG increasingly becomes core to the value creation narrative, ESG indicators will have to be of the same veracity as financial figures if they’re going to deliver on their promised value. GPs therefore need to make sure on the quality of the data that is being gathered for ongoing reporting purposes.

Also, standards are evolving and becoming more detailed over time, so it makes sense to have a scalable approach on reporting against the most important ESG themes. There are multiple standards that require, for example, carbon performance data. You don’t want to have to reinvent the wheel on every report, so operationalizing reporting capacity according to theme needs to be the focus.

Q. What are the main challenges in collecting ESG data?

Brown: Understanding the type of data that needs to collected is critical. Are you focused on absolute data, like absolute emissions data or hazardous waste generated? Or is comparable data, like emissions intensity, for peer comparisons more relevant? Maybe specialized data, with forecasts and adherence to industry standards, is the most important lens. Broadly, what are the metrics and KPIs that you are going to report on and what is the equity story that you are looking to tell? These are the baseline considerations.

A portfolio company also needs to have people that are trained and understand what they are looking for, so they can get the data in a timely and consistent manner and guarantee its quality and integrity. That can be a challenge when there is a lack of experience and bandwidth in the portfolio companies. So, to operationalize good data collection, the PE firm should assess whether the portfolio companies have the scale, people, processes and necessary technology solutions in place.

Q. To what extent is it possible to benefit from an ESG premium on exit?

Brown: EY did a PE divestment study and found that nearly three-quarters of PE firms expect to capture an ESG premium in the businesses they are selling. The big question is where that ESG value uplift is going to come from and how it is going to be measured. You can do great things on ESG, but if you are not measuring it, reporting it, and talking about it, you are not going to get the credit for it. Firms need to be smart about how they crystallize the premium and ultimately increase shareholder value.

Because the hold periods are short, it is especially important for PE firms to get up and running quickly and to be clear on how they present their ESG value-creation strategy. Firms need to be able to capture both the tangible and the intangible benefits of their approach to ESG. If they have focused on climate change, for example, they need to be able to explain how helping emission-intensive assets to adopt a path toward decarbonization is going to return higher multiples. Data is also going to be key – when you are on the receiving end of ESG due diligence at exit, you want to be able to make sure you can demonstrate your achievements.

Q. Given that ESG is becoming more widely practiced, is it still possible for firms to differentiate themselves with their approach to ESG?

Rhode: PE is on a journey when it comes to ESG; and while it’s not yet fully integrated into the investment process for many firms, we think that PE is differentiated as a financial services actor compared with other financial services firms. 

They’re in a position to influence and steward the transition to a sustainable future and they have a broad range of options when it comes to deploying capital. This gives them an advantage versus other types of financial services firms that are more limited in the types of financing they provide and for what purpose. PE is able to direct capital in a focused way towards a specific ESG objective and with more control over the outcomes.

From a product perspective, PE firms can establish a reputation for managing thematic and impact funds that can create lasting change. Especially around impact, they have the ability to grow companies that will meet the needs of the sustainable future, such as those that enable the “brown-to-green” journey.

It’s an exciting time in PE, where firms are embracing the opportunity to create shared value with society. But in order to achieve that vision, transparent frameworks and policies have to be in place. Firms must be able to demonstrate they have the ability to systematically collect reliable data, so that everyone is confident in how the firm is investing, and that the value creation potential of ESG – in all its forms – is fully realized.

Having greater transparency and adopting a standardized ESG process can help private equity firms ensure success with ESG value creation.

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Reporting by Simon Jessop in London, Ross Kerber in London and Isla Binnie in New York Editing by Greg Roumeliotis and Jane Merriman

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Simon leads a team tracking how the financial system and companies more broadly are responding to the challenges posed by climate change, nature loss and other environmental, social and governance (ESG) issues including diversity and inclusion.

Ross Kerber is U.S. Sustainable Business Correspondent for Reuters News, a beat he created to cover investors’ growing concern for environmental, social and governance (ESG) issues, and the response from executives and policymakers. Ross joined Reuters in 2009 after a decade at The Boston Globe and has written on topics including proxy voting by the largest asset managers, the corporate response to social movements like Black Lives Matter, and the backlash to ESG efforts by conservatives. He writes the weekly Reuters Sustainable Finance Newsletter.

Isla Binnie is Reuters's New York-based Sustainable Finance Correspondent, reporting on how the worlds of business and finance are affected by and respond to environmental, social and governance issues. Isla previously covered a broad range of business, politics and general news in Spain and Italy, where she also moderated events. She trained with Reuters in London and covered emerging markets debt for the International Financing Review (IFR).

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