Understanding the Effects of Environment, Social, and Governance Conduct on Financial Performance: Arguments for a Process and Integrated Modelling Approach

Current studies do not question the environmental (E), social (S) and governance (G) weightings assigned by rating agencies.  Research findings on ESG conduct and financial performance of companies are inconclusive because they depend on relatively under-explored model specifications.  Nor has research identified or explained the underlying mechanisms behind this relationship.  This paper argues for a process and integrated approach for modeling causality between ESG conduct and financial performance variables and suggests methods to analyze the models.  It also discusses how incorporating "greenwashing" variables in a process and integrated model may explain the ESG conduct and any financial performance linkage.