EVALUATING THE EFFECTIVENESS OF ESG INVESTING: A REVIEW OF FINANCIAL PERFORMANCE, REAL-WORLD IMPACT, AND MEASUREMENT CHALLENGES
Keywords:
Key words: ESG Investing, financial performance, real-world impact, ESG ratings, rating divergence, sustainable financeAbstract
Abstract
Environmental, Social, and Governance (ESG) investing has become a central
feature of modern financial markets, yet its effectiveness remains the subject of intense
academic debate. This review synthesizes key findings from influential studies across
three core dimensions of ESG effectiveness: financial performance, real-world impact,
and measurement quality. The evidence on financial performance reveals a divide
between empirical studies reporting neutral-to-positive risk-adjusted returns and
theoretical models suggesting that strong investor demand may lower future expected
returns. Real-world impact literature shows that active ownership can influence
corporate behavior, whereas ESG fund flows exert limited effects on firms’ cost of
capital or environmental outcomes. Finally, research on ESG measurement highlights
significant rating divergence and methodological inconsistencies, raising concerns
about the reliability of ESG metrics used for capital allocation. By focusing on the most
impactful contributions, this review clarifies the major points of convergence and
contradiction within the ESG literature and provides a concise foundation for future
research and policy discussion.
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