Do Baltic investors care about environmental, social and governance (ESG)?

Abstract

As the environmental, social and governance (ESG) adoption practices in large and developed economies are becoming more sophisticated, in the still developing economies the non-financial information disclosure practices are gradually evolving. This article aims to capture the ESG implementation practices and challenges of the financial investors and banks operating in the Baltic countries -Lithuania, Latvia and Estonia. By analyzing survey data of 37 financial market players, the results reveal that around 81% of the respondents already use ESG data when evaluating their investments, which can partly be explained by the regulatory drivers coming from the large share of private equity and venture funds managing local and international public funding. Moreover, a substantial average weight of 0.39 is found to be attributed to the sustainability factors in the investment evaluation process, which is rather high given the general perception of the ESG being a recent addition to the investment evaluation tools. While 51% of the respondents admitted that Covid-19 pandemic has made no changes in their ESG practices, there are other common challenges named by the investors e.g. lack of general and quantifiable ESG data from the side of the companies and struggles to find matching benchmarks for the large share of the small and midsized companies dominating the Baltic investment market. By addressing the obstacles highlighted by this research, the policy makers can explore the ways how to foster a wider adoption of ESG policies in the Baltic investment universe.

Higher expected returns for investors in the energy sector in Europe using an ESG strategy

“…One of the difficulties that has surfaced as the need for ESG data develops in tandem with the frequency of responsible investing is the disparity in ESG scores among various organisations. This is hardly surprising, considering the intangible nature of sustainability in general and the inclusion of a variety of subjective scoring criteria (Zumente and Bistrova, 2021).…”

“…Berg et al (2022) compared the ESG ratings of five marketleading ESG rating agencies (KLD, Vigeo-Eiris, Sustainanalytics, RobecoSAM and Asset4) and found an average correlation coefficient of 0.61, which is significantly lower than the 0.99 correlation coefficient found among commonly compared credit ratings such as S&P and Moody's. The discrepancies were mostly explained by three main factors: firstly, scope divergence, which refers to the different sets of attributes used by each agency, Secondly, weight divergence, which refers to attribute weighting in the calculation of scores, and lastly, measurement divergence, which refers to cases where agencies use different proxies to measure the same attributes (Zumente and Bistrova, 2021).…”

“…Asset managers and banks, on the other hand, can encourage businesses to enhance their sustainability standards by requiring a particular level of ESG performance before lending or investing (Zumente and Bistrova, 2021). In this sense, corporations are put under indirect pressure to strengthen their sustainability efforts and, as a result, their financial resilience (OECD, 2020).…”

“…According to an S&P poll of 194 credit risk experts working in banks and other financial institutions, 86 percent of respondents believe that rising investor demand is driving the integration of ESG factors into credit risk assessments. 83 percent of those polled agree that environmental, social, and governance (ESG) factors play an important role in credit risk assessment (S&P Global Market Intelligence, 2020;Zumente and Bistrova, 2021).…”

The possibilities and consequences of investment decisions by stepwise optimization

“…Examples of such criteria are liquidity (Al Janabi et al, 2019;Jana et al, 2009;Li & Zhang, 2021), skewness (Kerstens et al, 2008;Konno & Yamamoto, 2005;Pahade & Jha, 2021;Saborido et al, 2016), conditional value at risk (CVaR) (Aboulaich et al, 2010;Najafi & Mushakhian, 2015;Strub et al, 2019). Other scientists also broadly analysed various aspects of stock market and investment (Ogiugo et al, 2020, Dvorsky et al, 2020Masood et al, 2020;Giacomella, 2021;Becheikh, 2021;Zumente & Bistrova, 2021;Sl avik et al, 2021;Kasperovica & Lace, 2021;Nassar & Tvaronavi cien_ e 2021;Mura & Hajduov a, 2021), thus, these topics get proper attention.…”