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Academic Research Calls Into Question Wall Street's ESG Profitability Claims

Published March 13, 2024
2 months ago

Recent academic scrutiny, led by Andy King from Boston University, casts doubt on the long-held belief on Wall Street that Environmental, Social, and Governance (ESG) efforts translate into higher company profits. This comes against the backdrop of a significant surge in sustainability funds and ESG's incorporation into corporate strategies over the past five years.

King, alongside several other researchers from top institutions including Columbia University and UC Berkeley, has identified methodological flaws in influential studies that support the financial merits of ESG investments. These errors have potentially misled investors, policymakers, and the public regarding the profitability of sustainable business practices.

The academic criticism examines a variety of studies — one of the most notable being a 2015 paper by Mozaffar Khan, George Serafeim, and Aaron Yoon that established a correlation between robust ESG ratings and stock performance. This paper has been extremely influential, cited by financial giants and in policy-making circles. However, King and Luca Berchicci of Erasmus University Rotterdam revisited this research and found that, in a vast majority of cases, there was no link between ESG ratings and stock performance after applying extensive statistical analysis.

Adding to King's findings, a paper by researchers at UC Berkeley including Panos Patatoukas pointed out that Khan and his co-authors had perhaps mistaken correlation for causation. Larger, older, and more profitable companies are in a better position to improve their ESG scores, but their market success is not necessarily driven by those scores.

King has tirelessly investigated numerous high-profile papers, finding similar issues in other studies that claim beneficial outcomes from ESG-compliance, such as improved access to financing for socially responsible companies. His persistent efforts highlight the necessity for critical voices and transparent, accurate research in the realm of corporate sustainability.

This academic rigor arrives at a time when ESG is under political fire from certain U.S. politicians, who perceive the shift towards environmental and social governance as a threat to traditional capitalism. Nevertheless, King and his colleagues believe companies should continue to endeavor to minimize their environmental impact, separate from the profit motive.

For now, while King acknowledges little might change with the contested papers unlikely to be retracted, he continues to advocate for an honest appraisal of ESG initiatives and research, as well as hope for reforms in academic and corporate practices related to sustainability studies.

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