Theoretical Frameworks for Integrating Sustainability Factors into Institutional Investment Decision-Making

TL;DR

This paper reviews key theoretical frameworks that explain how institutional investors incorporate sustainability factors, such as ESG, into their decision-making processes to balance financial returns with societal goals.

Contribution

It provides a comprehensive analysis of multiple theories explaining the integration of sustainability into investment decisions, highlighting their implications for practice.

Findings

Behavioral Finance explains investor biases towards ESG

Modern Portfolio Theory is extended to include ESG factors

Risk Management Theory emphasizes sustainability as a risk mitigation tool

Abstract

This paper explores key theoretical frameworks instrumental in understanding the relationship between sustainability and institutional investment decisions. The study identifies and analyzes various theories, including Behavioral Finance Theory, Modern Portfolio Theory, Risk Management Theory, and others, to explain how sustainability considerations increasingly influence investment choices. By examining these frameworks, the paper highlights how investors integrate Environmental, Social, and Governance (ESG) factors to optimize financial outcomes and align with broader societal goals.