An industry-guided review of responsible investing: Bridging the divide between academia and industry

Typified by the United Nations' net-zero emission initiatives, the need for corporate bodies, including financial institutions, to fulfill their social contracts has become ever critical. Many studies have analyzed the expanding literature on environmental, social and governance (ESG) from various perspectives, but only a handful of this work directly informs the decision-making of practitioners like institutional investors. We address the mismatch by conducting a review of the literature that can benefit both academia and industry. Before commencing the review, we consulted experts in the industry by contacting institutional investors from Australia and Japan with Asset Under Management of as much as US$500 billion, along with others in the finance industry. These practitioners voiced limited interest in understanding the motivations of ESG-conscious investors, an area that many academic studies have examined. The most common of the practitioners' requests relates to how portfolios that are financially viable can be constructed to incorporate investors' ESG-related preferences. We conduct a systematic literature that is based on this feedback and find that, even in an ESG-themed investment vehicle, the investor's individual ESG preferences may not align well with the fund's objective and degree of conviction. We discuss the resulting challenges and opportunities investors face when integrating ESG into their investment practices, thus providing a guide for investors who wish to re-think their ESG strategies and beliefs. Finally, the paper draws attention to alternative ESG data and the need for studies on dynamic materiality-mapping.

Automated summary

With the increasing importance of environmental, social, and governance (ESG) factors, fulfilling social contracts has become crucial for corporate bodies. While numerous academic studies have focused on ESG, only a few directly inform the decision-making of practitioners like institutional investors. This study addresses this mismatch by conducting a literature review and discussing the challenges and opportunities that investors face when integrating ESG into their investment practices, providing a guide for investors wishing to reconsider their ESG strategies and beliefs.