ESG and Socially Responsible Investment: A Critical Review

Abstract

We review the literature on ESG and Socially Responsible Investment with a special focus on fixed-income investments. Most of the academic research is focused on the link between corporate CSR and ESG activities, investors’ SR engagement and stock returns and firm value. Very few studies examine the link between firm ESG policies and bond prices, risks and returns, and the performance of SR FI funds. The studies linking CSR to firm value suggest that higher CSR leads to higher corporate value, higher equity returns, and lower risk, enhancing the general collateral value of the firm. The FI income studies provide mixed evidence about the link between issuer ESG scores and bond prices and return characteristics: the bonds of issuers with both excellent and very poor ESG behavior tend to underperform the bonds of issuers with neither very strong nor very poor ESG scores. Lastly, while issuers’ ESG excellence may have led to both their equity and debt outperforming those of poorer ESG issuers in the 1990s, this out-performance halved in the first part of the 2000s and completely disappeared after the financial crisis. Markets seem now to largely price ESG performance into equity and bond prices.