DAF05 – ESG investing and investor behaviour

Supervisors: Dr Devmali Perera, Dr Rodion Skovoroda and Professor Ali Ataullah (Department of Accounting and Finance, The Open University Business School, Faculty of Business and Law).

Project Description:

In recent years, Environmental, Social, and Governance (ESG) investing has gained widespread prominence among institutional and retail investors. This approach seeks to align financial returns with ethical and sustainable practices, thereby reshaping traditional portfolio management. Investors are increasingly incorporating ESG factors into their decision-making processes, seeking both financial returns and measurable non-financial impacts such as improved sustainability and ethical governance practices (Drei et al., 2019; Kräussl, Oladiran, & Stefanova, 2024; Pedersen, Fitzgibbons, & Pomorski, 2021).

By reviewing the existing literature on ESG investing, Kräussl et al. (2024) conclude that investors prefer ESG investing and attempt to create a positive social impact through engagement. These ESG investors are motivated by the increased market values and the lower cost of capital of green firms (Heinkel, Kraus, & Zechner, 2001; Pastor, Stambaugh, & Taylor, 2021). On the other hand, Starks (2023) argue that investors and managers are motivated either by values or value perspectives. According to her, value motivation is driven by the financial values (risk and returns) and values motivation is driven by nonpecuniary preferences. Despite its growth, there is no consensus in the existing literature regarding the motivations that drive ESG investment behaviour of investors and their portfolio allocation decisions. Furthermore, there is a need of additional theoretical frameworks that can explain these differences in the motivations within different ESH investor groups (Starks, 2023).

This suggests that there is a need for comprehensive academic research to explore the investor preferences for ESG investing, identify what motivates investors to consider ESG investing and evaluate how these ESG preferences are eventually reflected through the portfolio choices of investors. The researcher of this project is expected to contribute both theoretically and practically to the field of ESG investing, providing valuable insights for investors, firms and policymakers.

In this context, the research may refer to one or several diverse themes within this broad project scope, including but not limited to the following topics.

• What psychological and social factors drive retail investors' ESG preferences?
• Evaluating the effectiveness of ESG engagement strategies by institutional investors
• How do different ESG ratings affect the ESG investment decision making process of institutional investors?
• How do regulatory frameworks shape ESG investment practices in emerging markets?
• What are the financial and social outcomes of impact investing?
• What are the trade-offs between financial returns and ESG scores in constructing optimized portfolios?

Expectation:

The selected researcher is expected to identify specific research questions, develop hypothesis within the defined project scope, collect data, conduct the analysis and write the thesis. In addition, researcher is expected to develop at least three working papers that are of adequate quality to publish in peer reviewed, high ranked academic journals in finance.

Applicant Specification:

The doctorate is expected to develop specific research questions within this area and gradually develop three working papers over the period of three years that are publishable in internationally recognised academic journals.

It is hoped that the prospective candidate will demonstrate an interest in developing both a theoretical/conceptual and empirical contribution within this field.

Applicant Specification:

The candidate must express a strong interest in sustainable finance and should possess a solid knowledge on finance theories. Prior knowledge on research methodologies and experience in conducting academic research is required.

Research Methodology:

The supervisory team is open to guide this project through quantitative research methodologies including meta-analysis methodology.

Supervisory Team:

Dr Devmali Perera – Devmali has published her main research examining the different financialization aspects of agricultural commodity markets, examining the insider trading in equity markets and has conducted meta-analysis studies in finance. She has published her research in high ranked peer reviewed journals and contributes as a peer reviewer for several academic journals. Her on-going research projects are leaning towards sustainable finance, fintech and financial inclusion.

For further details on Devmali’s research interests and teaching activities, please visit Devmali’s profile on the Open University Business School website.

Dr Rodion Skovoroda – My research interests currently include novel applications of Machine Learning methods to the analysis of dynamic narratives with applications to (sustainable) finance and management. My research on Executive Pay and managerial incentives with applications to Corporate Finance and Corporate Governance emphasises the need for further improvements in the way executive pay is disclosed, measured and analysed. My other research interests include topics in International/Applied Economics such as Foreign Direct Investment and Political Risks. My research has been published in leading international journals such as Journal of International Business Studies, British Journal of Management, British Journal of Industrial Relations, Long Range Planning, Economics Letters, etc.

Professor Ali Ataullah – My research focuses on two important themes: (1) corporate finance and societal challenges (e.g. environmental justice and workers’ welfare), and (2) financial well-being of people affected by health conditions. My expertise in corporate finance will be very relevant to this PhD project. In particular, my recent published and ongoing work explores the impact of firms’ toxic waste releases on corporate financial policies.

References:

Drei, A., Le Guenedal, T., Lepetit, F., Mortier, V., Roncalli, T., & Sekine, T. (2019). ESG investing in recent years: New insights from old challenges. Available at SSRN 3683469.

Heinkel, R., Kraus, A., & Zechner, J. (2001). The effect of green investment on corporate behavior. Journal of Financial and Quantitative Analysis, 36(4), 431–449.

Kräussl, R., Oladiran, T., & Stefanova, D. (2024). A review on ESG investing: Investors’ expectations, beliefs, and perceptions. Journal of Economic Surveys, 38, 476–502.

Pastor, L., Stambaugh, R., & Taylor, I. (2021). Sustainable investing in equilibrium. Journal of Financial Economics, 142(2), 550–571.

Pedersen, L. H., Fitzgibbons, S., & Pomorski, L. (2021). Responsible investing: The ESG-efficient frontier. Journal of Financial Economics, 142, 572–597.

Starks, L. T. (2023). Presidential address: Sustainable finance and ESG issues—value versus values. The Journal of Finance, 78(4), 1837-1872.