Overcoming Asymmetric Information in ESG Integration

Description

This project analyzes various issues that arise in the process of integrating Environmental, Social, and Governance (ESG) factors into financial investments. The project’s main focus is the theoretical investigation of strategic interactions between corporations and outside investors, with a particular emphasis on the role of asymmetric information in the relationship between them. We analyze the impact of asymmetric information on ESG integration by developing theoretical frameworks with the following key features: (i) Firms are faced with a choice between an ESG-friendly and a non-ESG financial project. (ii) Both projects require upfront investment by an outside investor. (iii) Two groups of outside investors compete with each other to finance firms, with only one group valuing the positive externalities generated by the ESG-friendly project. (iv) Firms possess private information regarding their intrinsic motivation for ESG integration (adverse selection) as well as their eventual fulfillment of ESG pledges (moral hazard). In applying the theoretical framework to various questions on the role of information asymmetry in ESG investment, the project employs a combination of game theory and information design approaches. The list of research questions that the project aims to address is as follows: 1. Investigating the contribution of asymmetric information regarding firms’ ESG practices to the occurrence of greenwashing and other adverse consequences. 2. Exploring optimal regulatory measures to minimize the negative effects of asymmetric information related to firms’ ESG practices. 3. Examining the interplay between ESG investments and broader economic issues, such as financial stability. This project addresses these questions to deepen our understanding of the process of ESG integration in financial investments. Additionally, it seeks to provide valuable insights for policymakers and industry stakeholders, enabling them to develop effective strategies that promote sustainable and responsible investment practices. Finally, the project intends to contribute to ongoing policy debates, including the reform of ESG disclosure and rating practices.