Journal Article: "ESG Investor Behavior and Related Research Frontiers in the Context of Carbon Neutrality: Overview and Extension"

Title: ESG Investor Behavior and Related Research Frontiers in the Context of Carbon Neutrality: Overview and Extension

Authors: Di Tang, Xingye Jin

Language: Chinese

Publication: Economic Research Journal, No. 9, October 2023, 0577-9154: 190-208

English Abstract: 

    This paper proposes a new framework for understanding why investors consider environmental, social, and governance (ESG) factors within their investments processes, based on two intrinsic characteristics of investors: self-discipline and their level of social engagement. The authors believe that there are limitations to the popular view of understanding investors' ESG considerations as a social preference, or rather a pro-social action. First, the pro-social view does not explain why investors set ESG considerations as a social goal for themselves in the first place. In addition, this view sees ESG considarations as an alternative to pursuing individual interests, which underestimates the importance and urgency of the evolving ESG risks. Finally, the social preference framework does not properly capture the full characteristics of ESG investing.

    ESG consideration is essentially an agreement between members of society to reach certain social goals regarding the allocation of resources. There are two key questions involved in this relation: the first one is how these social goals are formulated; the second one is how to understand the agreement reached between members of society. Established theories have proposed that members of society have the ability to organize and govern themselves autonomously, and have proposed that members of society have social preferences that can solve the dilemma of social cooperation. However, these theories hardly address the issue of motivation and fail to recognize the great importance and influence of social goals.

    In response to the limitations of existing theories, especially the social preference framework, this paper proposes that two intrinsic characteristics of investors, self-discipline and their level of social engagement, determine their behaviors regarding ESG considerations during investment processes. Self-discipline indicates that investors, either individuals or collective actors, can proactively monitor, assess, and adjust their investment actions to meet goals and targets. The level of social engagement suggests that investors consider themselves as a part of a wider range of stakeholders and environment, and thus their behaviors can have influence and outcomes on the external world. These two characteristics together explain why investors consider and address ESG factors to fulfill their goals beyond simple financial returns, and further impact the greater society where they live.

    This paper uses data from the UN-supported Principles for Responsibile Investment (PRI) and only employs the U.S. data given the fact that ESG practices in the U.S. started earlier and the quality of related data is higher than that in other countries. After deleting the samples with missing variables, the final number of observations is 1161.

    The explained variable in this paper is the responsible investment practice of the investment institution or organization. This paper measures the level of ESG considerations through "whether or not ESG factors are taken into account when making investment decisions for internal asset management", which is denoted as ESG. The specific question is described as follows: "Select the internally managed asset classes in which you addressed ESG issues in your investment decisions and/or your active ownership practices". 

    The core explanatory variables in this paper are investors' self-discipline and the level of social engagement. For self-discipline, the paper is based on respondents' answers to the questions "Indicate if you have a responsible investment policy" and "Provide a brief description of the key elements of your responsible investment policy or, if you do not have a policy, of your overall approach to responsible investment". The paper manually reviews and scores respondents' answers and constructs the variable disciplinescore. To reflect the impact of investor self-discipline on ESG levels more intuitively, this paper constructs the variable discipline, which is assigned a value of 1 when the respondent scores 2 or 3, i.e., a higher level of self-discipline, and 0 when the opposite is true. In terms of the level of social engagement, the paper constructs the variable based on the responses to the question "Select the collaborative organization and/or initiative of which your organization is a member or in which it participated during the reporting year". The variable social is constructed and will be assigned a value of 1 if the respondent has joined any responsible investment organizations or inititiaves and 0 otherwise.

    The empirical results show that both self-discipline and the level of social engagement have a significant positive effect on the ESG level. The result remains robust after accounting for possible endogeneity issues. In addition, the mechanism design shows that the two core characteristics examined influence investors' ESG level through the channel of "voice".