Applying Economics to ESG: A Rational Approach

Green Finance Advisor of Friends of the Earth (HK)


The article “Applying Economics—Not Gut Feel—to ESG” by Alex Edmans explores the application of economic principles to environmental, social, and governance (ESG) issues. While the importance of ESG has gained significant attention, the author argues that decisions in this field should be based on careful analysis rather than gut feelings. By drawing on insights from mainstream economics, Edmans challenges common myths surrounding ESG and highlights the need for a rational approach.

ESG and Mainstream Economics:

Edmans emphasizes that ESG investments should be treated like any other long-term investment with financial and social returns. He points out that conventional economic theories, such as corporate finance, asset pricing, welfare economics, optimal contracting, and agency theory, provide valuable frameworks for understanding and evaluating ESG initiatives. By applying these economic principles, the author aims to debunk several misconceptions about ESG.

Challenging ESG Myths:

The article addresses ten common ESG myths and presents alternative perspectives based on economic analysis.

1. Shareholder Value is Short-Termist:

Contrary to popular belief, shareholder value is a long-term concept. It encompasses the present value of all future cash flows and takes into account both financial and social returns. Therefore, maximizing shareholder value can support ESG projects that yield positive future cash flows, even if they have short-term negative impacts.

2. Shareholder Primacy Leads to an Exclusive Focus on Shareholder Value:

Shareholders have objectives beyond financial returns. They may also consider social and environmental impacts. Thus, shareholder primacy does not necessarily exclude a broader focus on stakeholder value.

3. Sustainability Risks Increase the Cost of Capital:

Sustainability risks, such as environmental or social risks, do not always raise the cost of capital. If these risks are idiosyncratic, they may not significantly affect a company’s expected cash flows and, therefore, the cost of capital.

4. Sustainable Stocks Earn Higher Returns:

While sustainable stocks may align with certain investors’ preferences, they do not necessarily generate higher returns. The market may already price in sustainability factors, leading to lower returns for these stocks.

5. Climate Risk Is Investment Risk:

Climate risk is an unpriced externality, meaning it is not fully reflected in investment risk. Therefore, considering climate risk separately is essential to make informed investment decisions.

6. A Company’s ESG Metrics Capture Its Impact on Society:

ESG metrics provide a partial view of a company’s impact on society. However, a comprehensive understanding requires considering the broader economic equilibrium and the interdependencies between different stakeholders.

7. More ESG Is Always Better:

ESG initiatives exhibit diminishing returns. It is important to strike a balance and recognize trade-offs between different ESG dimensions.

8. More Investor Engagement Is Always Better:

Increased investor engagement does not always lead to improved ESG performance. Investors may lack information or undermine managerial initiatives, highlighting the need for thoughtful engagement strategies.

9. You Improve ESG Performance By Paying For ESG Performance:

Paying for specific ESG dimensions may cause firms to neglect other important aspects. A holistic approach that considers multiple dimensions of ESG is crucial for sustainable performance improvement.

10. Market Failures Justify Regulatory Intervention:

Regulatory intervention is only justified when market failures outweigh potential failures resulting from regulation. A careful assessment of the costs and benefits is necessary in determining the appropriate level of intervention.


The article emphasizes the importance of applying economic principles to ESG decision-making. It argues against relying solely on gut feelings and urges for a rational analysis that considers long-term financial and social returns. By debunking common ESG myths, the author encourages a balanced and informed approach to ESG initiatives. While acknowledging the need for further research, the article highlights the value of existing finance and economics literature in guiding ESG practices.


  • Edmans, A. (2023), Applying Economics – Not Gut Feel – to ESG, Financial Analysts Journal vol. 79, 2023 Issue 4



水資源管理正受到政府和各州的關注。 最新的《2023 年生態威脅報告》強調,水風險是重大生態威脅之一,全球約有 20 億人無法定期獲得安全飲用水[1]。世界經濟論壇《2023 年全球風險報告》中確定的未來十年十大風險中的許多風險都與水密切相關。

人們和企業並未有意識地用水。一般來說,政府會對水資源進行補貼,以確保公平取得水資源。但水價補貼正是導致水資源浪費的關鍵問題之一。包括國際貨幣基金組織[2]在內的許多機構都對水定價問題提出了警告,但幾乎沒有採取任何行動。 再加上氣候變遷和全球暖化(或在可預見的未來全球暖化)的影響,水危機只會變得更加嚴重,因為有近一半的人口居住在高水街地區。




[1] Ecological Threat Report 2023, Institute of Economics & Peace, 1 November 2023

[2] The case for reforming the price of water, IMF, 16 March 2016

Water is a finite resource, please conserve

Green Finance Advisor of Friends of the Earth (HK)

Water stewardship is gaining traction in governments and among states. Water risk is among the significant ecological threats highlighted in the latest Ecological Threat Report 2023[1] with approximately two billion people in the world with no regular access to safe drinking water. Many of the top 10 risks over the next decade identified in the 2023 Global Risk Report of the World Economic Forum are highly connected with water.

Water has not been mindfully consumed by people and businesses. In general, water has been subsidized by government to ensure equity of access. But the subsidized pricing of water is one of the key issues leading to the waste of water. The problem of pricing of water has been alerted by many including the IMF[2] but little process has been made. Compounding with the impact of climate change and global warming (or global heating in the foreseeable future), the water crisis will only get worse with closer to half of the population living in area with high water street.

There are pressing needs to address the water crisis, which has to be tackled with other environmental challenges we are facing. Cooperation and partnership are needed among countries[3]. In Asia, the two most populated countries India and China are both having water threats and the economic implications due to the lack of water are substantial. The sharing of important water sources among countries has consistently involved geopolitics and thus some of the solution of water crisis requires diplomatic effort.

Hong Kong used to have water rationing in the very old days. But following the completion of water infrastructure and the secure of the water supply from Guangdong, we did not have water rationing since 1982. We have more than enough clean water supply and the water tariff is low. In fact, Hong Kong’s water charge is the lowest among the world’s major cities. But the status quo should be challenged.

Noticeably, Guangdong province has been encountering its own water challenges such as drought in 2022. Warmer climate is almost for certain making the future outlook of water supply in the Pearl River Delta region more complicated and less predictable. Other issues that the public may be less aware of including water leakage and water theft. All these issues together costed about one-third of loss of our water production. The Hong Kong government has been improving the public infrastructure to reduce water leakage and increase water catchment. This succeeded in bringing down the leakage rate of the government mains to 14% in 2022 from 25% in 2000. The government has set a target loss rate of less than 10% by 2030. On the other hand, the private sector has been slow in fixing the leakage problem.

Lack of awareness of the above issues and high water subsidies have led to excessive water use in Hong Kong. To dispel the illusion that we have unlimited water and practice responsible water use, we need to increase public awareness of climate change and water risks and reform water billing.

[1] Ecological Threat Report 2023, Institute of Economics & Peace, 1 November 2023

[2] The case for reforming the price of water, IMF, 16 March 2016

[3] Flagship UN report extolls win-win water partnerships to avert global crisis, United Nations, 21 March 2023

Do you think carbon insetting may lead to a new avenue of greenwashing?

Mostafa Monira Firdouse. Green Finance Advisor, Friends of the Earth (HK)

Over one-third of the world’s largest publicly traded companies have announced net-zero targets and are set to use carbon credits to offset emissions that are hard to completely abate. Companies like; Apple to Disney, Gucci to Shell, used carbon credits for their sustainability efforts from the unregulated voluntary market, which grew to $2bn (£1.6bn) in size in 2021 and saw prices for many carbon credits rise above $20 per offset.

By 2021, the voluntary market has already topped $1 billion in and the global demand for voluntary credits is forecasted to increase by a factor of fifteen by 2030, reaching 1.5 to 2 gigatons per year.

On 18 January 2023, the Guardian published an explosive article accusing Verra—the world’s premier certifier of carbon credits—of grossly overstating the emissions reductions associated with its “avoided deforestation” credits. Study found some offsetting could make global heating worse.

In contrary, there is no single and universally-accepted definition of insetting, but the term generally refers to a company offsetting emissions through carbon reduction or removal projects along its own supply chain. Insetting is most commonly used by corporations with a large land footprint and involves protecting nature. Unlike offsets, insetting projects do not currently require verification against globally agreed standards.

The worry is, insetting may lead to a new avenue of Greenwash, as well as double claiming of carbon credits.

What can be done?

Ensure accountability of market actors to set the prices. Certification does have an important role to play, but it cannot work unless it is supported by a broader governance framework. Just as we would never leave, say, food or pharmaceuticals to be governed exclusively through voluntary, certification-based systems, we should not do so for CO2 emissions.

Establish minimum price floors, in order to crowd out poor-quality offsets/inset and actors, and to advance more equitable outcomes, especially for the Global South, indigenous peoples, and local communities. The carbon prices have to grow in the long term to drive investments at the necessary scale and pace. To keep global warming below 2°C, prices must reach $50/tCO2 to $100/tCO2 by 2030.

Finally, international governance arrangements must be upgraded. Principles and guidelines are not enough to ensure the exclusion of poor-quality products, inequitable deals, rogue traders, and, more broadly, markets that do not comply with minimum agreed standards.

應對極端天氣 香港需要訂立KPI

【ESG分析師洞見分享】Gary Lau, CESGA




面對氣候危機,政府有必要在各項應對氣候變化的範疇中設定明確的目標並確立相應的關鍵績效指標(KPI),以加快推進相關項目。以新加坡為例,當地政府在《氣候行動計劃》中訂立了種植100萬棵樹的「One Million Trees」行動目標,並計劃在2035年前增加1,000公頃的綠化空間,還預計到2030年有八成的建築達到綠色建築標準。紐約也有類似的做法,例如在2026年前每年種植36,000萬棵樹,五年內增加500個水浸感應系統以應對暴雨等目標,並根據這些目標來評估相關工作的進展情況,推動氣候應對措施的實施。反觀香港,《香港氣候行動藍圖2050》雖然明確了減碳目標,卻未就各項措施的成效設定具體目標,例如市區綠化、防洪工作和運輸減排等方面,都缺乏明確的數字目標和實現時間表。




# 本文章由 EFFAS 環境、社會及管治分析師 (CESGA) 所撰寫。CESGA在歐洲以及全球都具有高度認受性,全球報名人數持續上升。有志報讀的人士,請參閱: