Editor’s Letter

To open this issue, Horan, Dimson, Emery, Blay, and Yelton provide an overview of the current state of ESG investing, highlighting the key challenges ESG investors and portfolio managers face when implementing ESG investment mandates. They recommend an issuer reporting framework that supports portfolio reporting and evaluation and an ESG product template that focuses on non-financial investment objectives, process elements, and measurable outcomes. Shrimali discusses the goals, issues, and guiding principles for transition bonds. The article first argues that a comprehensive transition bonds framework must align with appropriate climate transitions. It then provides a simple transition bond rating framework based on the stringencies of climate targets and transition pathways.

As we continue the issue, Harris and Staal’s commentary explores the evolution of ESG engagement and passive investing. It demonstrates that sustainability index design can lead to scalable, efficient, and impactful corporate engagement across entire markets. They discuss using such indexes to steer investment flows, provide clear incentives for companies to improve sustainability performance, and deliver outcomes sought by asset owners and society. Amenc, Goltz, and Liu identify greenwashing risks in climate investing and define requirements for strategies to influence firms to reduce their greenhouse gas emissions. The stylized equity strategies constructed using firm-level emissions data show that commonly-used portfolio construction mechanisms fail to deliver consistency with impact objectives. Frambo and Kok correlate stock valuation and stock performance during the 2020 stock market crash with the ESG score and its component Environment (E), Social S), and Governance (G) scores. They report that the impact of the ESG risk score and its component risk scores on stock performance and stock valuation was small compared to the total variation in the dataset.

Next, Tirodkar evaluates anti-polluter sentiment, investor ESG preferences, and security analyst behavioral biases and finds evidence of systematic pessimism in analyst forecasts for polluting firms. The author also finds that biases toward polluters are sticky, consistent with the conservatism bias.

To conclude this issue, Milonas, Rompotis, and Moutzouris study the returns of 80 European and 64 US funds and attempt to identify whether those that invest in companies that follow the ESG principles differ from conventional ones in terms of performance. The empirical findings do not reveal any statistically significant difference between ESG and non-ESG funds, although the former have slightly higher returns than the latter.

As always, we welcome your submissions. We value your comments and suggestions, so please email us at journals{at}investmentresearch.org.

Brian Bruce

Editor-in-Chief

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