Dilemma of ESG Development: Investors Perspectives

Abstract

Rising concerns around environmental and social issues have led to a heightened investor focus on the ESG performance of corporations. This attention underscores the increasing relevance of ESG considerations in the decision-making processes of investors. However, as ESG investments have risen in popularity, there has also been an increase in contradictory voices. The purpose of this article is to analyze the intricate landscape of ESG investments from the perspective of investors. It aims to shed light on the implications of corporate ESG responses and how investors incorporate ESG parameters into their investment portfolios. The study reveals specific challenges namely: (1) Corporations incurring short-term costs for making transformations affecting their stability, consequently leading to possible reductions in investors' short-term returns; (2) Corporations potentially misleading investors through greenwashing strategies to enhance their ESG portrayal; (3) Requiring investors to possess comprehensive industry knowledge when incorporating ESG in risk assessment thereby adding to time constraints; (4) Existing discrepancies in ESG disclosure standards leading to inconsistencies in ESG ratings given by different agencies; (5) Tracing corporate ESG performance being complicated by its strong links to both the size and financial performance of the corporation; (6) Incorporating ESG factors into investment portfolios could introduce tracking errors and potentially compromise portfolio diversification. Therefore, it is necessary to advocate stricter regulations around ESG disclosures, refining reporting standards to enhance transparency and comparability. Additionally, there is a call for further research to better comprehend the intricate relationship between ESG and financial performance.