Study argues that government policies drive ESG investing (2024)

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June 11, 2024

A new study by two business professors at Troy University argues that “government policies, rather than investor preferences, primarily fuel ESG.” The researchers—Allen Mendenhall and Daniel Sutter—also summarized their argument in a shorter article for the American Institute for Economic Research:

“

Governments worldwide have imposed numerous ESG-related regulations, with many more in progress or under consideration. In fact, governments activate the surge in ESG as forward-looking investors aim to divest from soon-to-be penalized sectors such as oil, natural gas, or firearms. In a level playing field, ESG-weighted portfolios struggle against market-tracking index funds, which provide better diversification and risk reduction. Government regulations mandating climate-related disclosures benefit ESG funds by reducing investor options, making securities in ESG portfolios more attractive than they would be under (more) perfect competition. … We document the diverse government measures pushing ESG integration within financial markets. Governments are unleashing an entire policy arsenal, including mandates, regulations, taxes, and subsidies.

”

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