Seize the Opportunity to Research the Collective Impact of ESG Factors

By Vit Henisz, with comment from Anita McGahan

(Note: this post was originally published on the Collective Impact Virtual Salon site sponsored by the Mack Institute in April 2023. Reposting here to facilitate discussion and subscriptions.)

For many years, despite increasing globalization of the economy and business education, doctoral students and junior scholars were advised not to study international topics or international samples. Why? Because such studies were perceived to have poor quality or suspect data and reviewers and editors were unfamiliar with such contexts. As a result, publication prospects were low. Pick up any of the top journals in any field of business today and the number of papers examining cross-border or non-US samples of firms, workers, customers, suppliers or policies (and their impacts) is substantial. The scholars who made the seemingly risky investments early were well poised to seize the opportunities provided by the wave of interest in, and acceptance of, global research.

We are at a similar point in the risk – opportunity tradeoff in the study of Environmental, Social and Governance (ESG). Research questions have moved from niche topics in the study of non-profit management or development finance to the mainstream practitioner conversations that permeate board meetings, investment committees, pitch meetings, sourcing decisions, hiring practices and policy discussions. The demand exists. A group of finance professors in elite schools offered an online “Climate Finance” doctoral seminar and 184 students enrolled far exceeding their expectations and the typical enrollment of 5-10 in a doctoral seminar. Special issues of top journals and professional association workshops are now dedicated to Climate Finance, Grand Challenges of Management, ESG Accounting, Human Rights in the Supply Chain and Sustainable Brands.

As interest has grown so has criticism at ESG for the inadequate and suspect nature of ESG ratings which exhibit low correlation with each other, follow inconsistent methodology and are easily influenced by firms who report voluntarily and for their own benefit. While criticism is fair, over time, the use of these ratings as a primary measure of firm’s ESG performance and impacts will decline in both academia and practice.

New approaches to the measurement error problem including using multiple ratings as instruments for unobserved ESG performance now exist. Papers published and in process by scholars at the ESG Initiative of the Wharton School will analyze the correlates of ESG ratings and a wide range of alternative datasets that collectively cast light on the complex relationships between what a firm says, how its stakeholders perceive it, and what it actually does on ESG issues with organizational and societal outcomes. Such analysis may include firms’ own representations from analyst earnings calls and in annual reports, or press releases, (social) media and legal filings. Third party representations from (social) media as well as investigative reports also provide critical insight. Beyond the information provided by firms, researchers may also consider objective third-party data on actual inputs, outputs or outcomes as reported to government regulatory agencies, third party monitoring data from satellites or other sources, and upstream or downstream impacts assembled through the analysis of supply chain networks.

Data imputation will also play an important role. Scholars who are sufficiently versed in data imputation, natural language parsing and other advanced techniques, and are motivated to explore the impact of ESG factors on performance or firms’ impact on ESG factors or both, can develop research streams to ride the wave of current interest in these questions with an aim of collective impact. We welcome proposals from Wharton doctoral students, scholars and faculty, as well as prospective visiting doctoral students, postdoctoral scholars and faculty, to explore these questions using our data with an aim towards advancing the frontier of academically rigorous research that can inform policy and practice. Specific topics of interest include:

• Climate Center

  • How climate risk impacts business strategy, financial performance, financial markets and the valuation of businesses, assets and financial securities across the full spectrum of asset classes;

  • How environmental policies and markets transform the energy and transportation sectors across countries at different stages of economic development;

  • Climate and environmental ethics.

• Impact Investing Research Lab

  • Drawing on a unique proprietary survey currently representing $46.3b of Assets Under Management in Impact Investing, what combination of impact measurement practices, legal governance, organizational climate, contribute to scalable impact solutions that also earn perform relatively well financially.

• Political Risk and Identity Lab

  • Drawing on a growing multi-layer micro-geospatial dataset capturing the (social) media-reported sentiment of stakeholders towards firms (and each other) on a wide variety of themes, how does such sentiment impact performance? What can firms do to influence such sentiment, particularly in contexts with pre-existing grievances among identity groups?

  • How do businesses manage the increasing tensions between the economic benefits of immigrant labor and the political tensions surrounding immigrants?

• Zicklin Center for Governance and Business Ethics

  • How do managers, firms and policymakers meet ethical, governance and compliance challenges arising in complex business challenges particularly as they relate to corporate misconduct, human rights, financial regulation or corporate political activity?

Comment from Anita McGahan, July 2023:

I’m writing to applaud this critical initiative that Professor Henisz is leading at Wharton on ESG. Bravo. I’m particularly hopeful about the progress that we can immediately make on measures, data, and constructs on climate and environment as the transition to electrification is so central to sustainability. I’m also hopeful and optimistic that this initiative can lead us to quick progress on governance issues, although these are complicated theoretically and practically because they involve multiple sectors and new types of enforcement challenges. Where I’m most concerned is on the social agenda. What does the “S” in “ESG” really stand for? I don’t think there’s consensus on the answer to that question, but I am hopeful that the ESG Initiative at Wharton can structure a conversation that leads to greater agreement on the responsibilities of corporations on a range of issues that fall into this category.