Research Handbook of Finance and Sustainability
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Research Handbook of Finance and Sustainability

Edited by Sabri Boubaker, Douglas Cumming and Duc K. Nguyen

The severe consequences of the global financial crisis 2008-2009 and numerous accounting frauds and financial scandals over the last fifteen years have let to calls for more ethical and responsible actions in all economic activities including consumption, investing, governance and regulation. Despite the fact that ethics in business and corporate social responsibility rules have been adopted in various countries, more efforts have to be devoted to motivate and empower more actors to integrate ethical behavior and rules in making business and managerial decisions. The Research Handbook of Finance and Sustainability will provide the readers but particularly investors, managers, and policymakers with comprehensive coverage of the issues at the crossroads of finance, ethics and sustainable development as well as proposed solutions, while focusing on three different levels: corporations, investment funds, and financial markets.
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Chapter 18: Understanding ESG ratings and ESG indexes

Michael S. Pagano, Graham Sinclair and Tina Yang

Abstract

Every investment needs a benchmark. For environmental, social and governance (ESG) investment, this requirement seems to be particularly great given the proliferation of ESG ratings and ESG indexes in recent years. In view of the exponential growth in ESG investing and the strategic role of ESG ratings and ESG indexes, this chapter provides the general reader with a basic understanding of the current state of ESG ratings and ESG indexes and their role in the investment and business value chain. Specifically, the chapter surveys the major ESG ratings providers that have emerged through the series of consolidations in the past two decades, discusses the prevailing practices in ESG ratings methodologies and their strengths and idiosyncrasies, identifies the limitations of the present ESG ratings and indexes, and highlights the challenges as well as the opportunities for the role of ESG ratings and indexes in sustainable and impactful investing. The chapter also assesses the effect of ESG ratings and indexes, and more broadly the ESG movement, on investors, corporations, and corporate managers.

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