ESG Information, ESG Investing Strategies and the Impact on Asset Prices

This paper explores the extent to which the availability of more and better quality ESG information could impact asset prices, ushering the emergence of ‘sustainable financial markets’. The paper first reviews how the production of information contributes to the informativeness of prices on financial markets, it being understood that to date, prices are informative of an asset’s estimated fundamental value expressed in terms of future cash flows. After exploring the nature of ESG information, the paper examines how the advent of ESG investing could incorporate ESG preferences into asset prices. If certain requirements such as investor homogeneity are met, prices would be informative of an asset’s estimated value expressed in terms of a risk-adjusted trade-off between the asset’s ESG impact and its future cash flows. Finally, the paper reviews the nature and role of ESG data and ratings on capital markets. Regulating the quality of ESG data and ratings could potentially accelerate the consolidation of the ESG data and ratings industry, thereby driving the homogenisation of ESG investor preferences along with common issues associated with market power concentration.

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