Alex Edmans New Paper: Applying Economics – Not Gut Feel – To ESG
The urgency of ESG leads us to apply gut feel to some of the world's most pressing issues, since we can't wait for academic research to be peer reviewed and published.
This paper highlights how the insights of mainstream economics can be applied to ESG, once we realize that ESG is no different to other investments that create long-term financial and social value. A large literature on corporate finance studies how to value investments; asset pricing explores how the stock market prices risks; welfare economics investigates externalities; private benefits analyze manager and investor preferences beyond shareholder value; optimal contracting considers how to achieve multiple objectives; and agency theory examines how to ensure that managers pursue shareholder preferences, including non-financial preferences.
I identify how conventional thinking on ten key ESG issues is overturned when applying the insights of mainstream economics.