* Presidential Address: Sustainable Finance and ESG Issues—Value versus Values Starks L.T., 2023

Question 1

CONTEXT

Answer 1

• differences across investor and manager motivations for considering sustainable finance—value
  versus values motivations—and how these differences contribute to misunderstandings about
  environmental, social, and governance investment approaches
• It would be possible to clear up misunderstandings through suggested additional research
• There is no clear consensus on the meaning of sustainable finance or the acronyms associated with
  it—ESG (environmental, social, and governance), SRI (socially or sustainably responsible
  investing), and CSR (corporate social responsibility). The lack of clarity on the meaning of these
  terms leads to misunderstandings about how they affect investors, corporations, and asset markets,
  which can make it difficult to interpret evidence on investment behavior and to design related
  regulations.
• The author argues that these misunderstandings arise from diferences in investors’ and
  managers’ motivations. (Value vs Values)
• Relatively little is spent on governance in this paper

Question 2

THREE MAIN TYPES OF INVESTORS

Answer 2

Example:
SRI Investors: Main interest is to avoid investing in companies that do not reflect the investors’ values. They remove bad
companies from their portfolios
ESG Investors: Classic form of sustainability investing. Can use financial and ethical judgements to make an investment.
Depends on the investors’ value vs values orientation. This type of investment basically means considering the ESG aspects of
the firm to mitigate risks and enhance returns
Traditional Investing: interest is on risk and return alone. Maximizing value.

Question 3

MOTIVATIONS FOR ESG INVESTING

Answer 3

Over the last decade, there has been substantial growth in interest in the concept of ESG. Firms that have a high ESG
score are also more likely to be managed more by an asset fund.
Although conventional mutual funds hold a larger fraction of shares in lowESG companies throughout the period, there is a clear trend of increasing
ownership in the high-ESG firms relative to the low-ESG firms.
Primary motivation for investors to hold SRI funds arises from social
preferences and social signaling, and that financial motivations, are of
more limited importance to these investors.
Value investors consider ESG factors because of the perspective they provide on risks and return opportunities.
These investors have a general expectation that incorporating ESG issues in their investment decisions will result in
lower risk or higher returns, whether through portfolio selection or firm engagement
* Bauer, Ruof, and Smeets (2021) find that a majority of the participants think that their pension
fund should engage in more responsible investing activities based on the participants’ social
preferences rather than their financial motivations.
* Hoepner, Majoch, and Zhou (2021) contribute to our understanding of investor motivation by
empirically showing that one of the factors affecting the decision to sign on to the Principles of
Responsible Investment (PRI) relates to home-country cultural norms.

Question 4

CULTURAL DIFFERENCES

Answer 4

European market is by far the largest market for ESG mutual funds. While they’ve been growing in
both the U.S. and the EU, due to both increased flows and increased returns, the differences in the
geographic locations of the relative amount of ESG versus non-ESG investment are very large.
IMPORTANT:
A country’s legal origin is the strongest predictor of firms’ CSR adoption and performance.

Question 5

PERFORMANCE AND OUTCOMES

Answer 5

One of the main concerns of ESG investing is the question of expected vs. realized investment
performance. This has been a very long debate previously.
* A values approach, relying on negative screening, can limit investment opportunities, possibly
resulting in constrained optimization and a lower likelihood of outperforming conventional
portfolios.
* Firms with poor environmental performance, or high carbon emissions, that are affected by
heightened expected regulatory risk face downside risk effects.
* There is a need for a nuanced understanding of how firms’ ESG processes and outcomes are
assessed and valued by different types of investors.

Question 6

WHY SHAREHOLDERS HAVE DIRECT
IMPACT…

Answer 6

• The early shareholder proposals related to environmental and social issues argued that shareholders should
  vote in favor of the proposal based on ethical, moral, and/or social reasons.
  But the proponents’ arguments shifted over time as they began to argue that shareholders should vote in
  favor of the proposal based on arguments that an economic rationale exists because CSR can affect
  company performance
• Shareholder activism and firm engagement can affect management decisions with managers changing the
  firm’s environmental and social policies as a result of the shareholder proposals and direct engagement.
• Turning to values investors’ considerations, these investors may be unwilling to provide capital to, or
  receive profits from, companies that contribute to climate change or that are considered to do social harm
  through their products or actions. Similar mentions by a paper from Anete.
• Yet, other value investors may divest in an effort to force the company to change its business model to
  eliminate or at least mitigate negative externalities. These investors argue that divesting puts pressure on
  the company’s cost of capital, driving it higher, and thus, gives managers incentives to take corrective
  actions.

Question 7

TWO IMPLICATIONS

Answer 7

First implication:
Anti-ESG individuals think investors shouldn’t base decisions on their own values, suggesting they
shouldn’t pick investments that align with personal or religious beliefs. There’s debate over whether
people should be limited in investing according to their values, even though some are prepared to
accept lower returns for this freedom.
Second implication:
Anti-ESG proponents oppose the idea of investors using ESG information to judge a company’s risk
and profit potential. They suggest that pension funds should ignore ESG risks, which challenges
the funds’ responsibility to manage financial risks prudently.

Question 8

SOCIAL AND GOVERNANCE ISSUES

Answer 8

• Evidence suggests that overall, firms that use environmental and social metrics in their executive
  compensation contracts have better business performance as well as environmental and social
  performance
• Despite the extensive body of research on corporate governance issues, there still exists much that
  we can learn about governance. i.e. we do not understand how and how much racial, ethnic, and
  gender diversity contributes to corporate leadership, including the board of directors, and firm
  performance.

Question 9

STILL WORK TO DO IN THIS FIELD.

Answer 9

• «We need more analysis on the differences across the value versus values motivations of both
  shareholder proposal sponsors and voters.» p.25
• «What has not been established by the prior studies on divestment are differences between the
  motivations of value and values investors in the exclusion decision.» p.27
• «We need more research on whether and how demographics and future demographic shifts affect
  corporate focus on ESG issues.» p.29

Question 10

REMARKS

Answer 10

ESG Ambiguity and Investor Confusion: The paper discusses how a lack of clarity around ESG,
SRI, and CSR terms leads to misunderstandings affecting investment behavior and regulation,
emphasizing the need for more precise finance research to dispel these ambiguities.
Investor Motivations - Value vs. Values: Starks highlights the differences between investors driven
by financial considerations (value) and those motivated by ethical or personal beliefs (values), noting
that this dichotomy significantly influences investment decisions and the interpretation of ESG
impact.
Implications for Financial Markets: The paper suggests that the divergent motivations of value and
values investors not only shape individual portfolios but also have broader implications for asset
pricing and market dynamics, warranting further academic exploration to understand these effects.