The Roles of Finance in ESG Management

Abstract

AbstractAs shareholder capitalism has revealed its limitations since the outbreak of Covid‐19, there has been a growing demand for a shift toward stakeholder capitalism. Environmental, social, and governance (ESG) management seeks an optimal way to allocate resources to both financial and social values in order to enhance stakeholder utility. Given the various legal, theoretical, and empirical limitations of pluralistic stakeholder capitalism, it is necessary to focus on achieving instrumental stakeholder capitalism. In this regard, we present three roles that finance should play in promoting more firms to adopt ESG management. First, infrastructure needs to be established to measure and assess ESG value in a fair and objective manner. Financial firms should make efforts to develop a non‐financial disclosure and certification system, create an ESG index, expand research and investment in this area, and improve credit ratings. Second, there is a need to boost the intermediation of ESG‐linked finance in order to enhance utility for firms, investors, and governments. Third, it is crucial to facilitate the trading of ESG value in the market, as this could provide incentives for firms and help them cover the costs associated with ESG investments.