What Does ESG Investing Really Mean? Implications for Investors of Separating Financial Materiality and Social Objectives

Interest in measuring companies’ behavior along economic, social, and governance (ESG) criteria reflects two important objectives: social values and financial performance. Nevertheless, measuring these has been difficult, leading to confusion about ESG investing’s effectiveness. New data and analytical innovations have supported efforts to separate material factors driving investment risk and return from those relevant primarily to social objectives. This paper reviews evidence on the effectiveness of social value-based versus financially relevant measures and identifies financially material factors, so as to guide pension fiduciaries and other investors on using ESG factors to meet investment objectives.