How Do We Include Environmental, Social and Governance Issues in Financial Markets and into the Capital Market Conversation?

Oct. 20, 2020

Associate Professor Michael Halling joined SSE in the summer of 2012 after spending five years at the University of Utah. His research ranges from empirical asset pricing to corporate finance and has been published in the top journals in finance. To shed light on the issue on how to include sustainability in financial markets and into the capital market conversation we invited Mr. Halling to share his insights.

According to Mr. Halling, incorporating environmental, social and governance issues is already happening to a substantial extent, both in industry as well as in academia. The growth rates in terms of research related to sustainability and in terms of assets related to sustainable investments are enormous showing that the topic overall is getting a lot of attention. To that end however there are two important challenges that, in the Professor’s opinion, need to be addressed rather sooner than later to make sure that we continue to move forward in an efficient way.

 

Availability of Good Quality Data on Sustainability Dimensions

To the Professor, the most important problem right now is the availability of good quality data on sustainability dimensions. The emphasis here is on “good quality” since there is no lack of data floating around in the discussion. Good quality thus means data which covers a large cross-section of firms and a large time-series dimension (i.e. data that also goes back in time because without that we cannot really evaluate or test any financial models in the area of sustainable finance). Good quality also means that the data has to be objective or at least validated in a way similar to accounting data, Mr. Halling adds. Today much of the ESG data is self-reported and that makes it very difficult to work with as it potentially creates severe biases in the data.

 

Focus on Fact-Based and Less Agenda-Driven

Next, another related problem is that the discussion of sustainability needs to become more fact-based and less agenda driven. Obviously, Mr. Halling understands that things need to change and become more sustainable --- thus, the overall direction is predetermined --- but we need to get the facts right first and we need to also accept unpopular results such as, for example, that investors might have to give up returns when investing in a sustainable way. And we also need to carefully think about the underlying mechanisms of how sustainability can affect, for example, corporate performance or performance of financial investments. This also reinforces that the area of sustainable finance is part of the area of finance and, thus, needs to be grounded within this area. We should not abandon decades of successful and inspiring research in finance but should rather think carefully about how to build on it and use it to address the challenges and issues in sustainable finance, the Professor says.

Lastly, at the same point in time Mr. Halling highlights how sustainable finance is an area that asks for a more interdisciplinary research approach, as it also touches on issues and requires inputs from outside of economics. As an extension this means that financial economists need to think outside the box. It will thus be very important moving forward to establish frameworks and organizational setups in which we foster interdisciplinary research without --- and this is key here --- compromising on the quality of research, the Professor concludes.