Behind the Corporate Veil: How Business Groups Arbitrage ESG Disclosure Mandates

A theory of socially responsible investment

Martin Oehmke (LSE) talks to Tom Gosling about his paper A Theory of Socially Responsible Investment, co-authored with Marcus Opp of the Stockholm School of Economics. The paper develops a model of socially responsible investment anchored in the corporate finance decision faced by a firm.  With a choice between dirty and (more expensive) clean technology. Martin explains how socially responsible investors can induce the firm to pivot to the cleaner choice. To have impact socially responsible investors have to care about reducing externalities (rather than just investing in clean firms) and have to be prepared to offer something profit seeking investors do not: in effect accepting a lower than market return. The requirement for responsible investors to trade-off returns for impact is a central finding of the model. But profit seeking investors still matter, and in combination profit seeking and responsible investors may cause greater scaling of green production than responsible investors by themselves. Impact funds need to be clear about the trade-off they are making between externality reduction and returns.  Host: ⁠Tom Gosling ⁠⁠ [https://www.fmg.ac.uk/people/tom-gosling]Contributor: Martin Oehmke [https://www.fmg.ac.uk/people/martin-oehmke] Read the paper: A Theory of Socially Responsible Investment [https://www.fmg.ac.uk/publications/academic-journals/theory-socially-responsible-investment] To learn more about the Initiative in Sustainable Finance (ISF), visit ⁠ISF's website⁠ [https://www.fmg.ac.uk/isf].

Behind the Corporate Veil: How Business Groups Arbitrage ESG Disclosure Mandates

In this episode, Tom Gosling speaks with Stefano Cascino about how large business groups respond to ESG disclosure rules. When parent companies face mandatory ESG reporting, they often improve their own scores—while quietly shifting environmentally or socially harmful activities to subsidiaries, especially those operating in countries with weaker institutions. Tom and Stefano discuss how this “ESG arbitrage” works in practice, why subsidiaries see more incidents after mandates are introduced, and how corporate groups restructure—through reallocating resources or divesting risky units—to manage these pressures. The conversation highlights the unintended consequences of uneven global regulation and why coordinated ESG policy matters. Host: Tom Gosling ⁠ [https://www.fmg.ac.uk/people/tom-gosling]Contributor: Dr Stefano Cascino [https://www.lse.ac.uk/people/stefano-cascino] Read Stefano Cascino's paper, co-authored with Maria Correia [https://www.lse.ac.uk/people/maria-correia]: Behind the Corporate Veil: How Business Groups Arbitrage ESG Disclosure Mandates [https://www.fmg.ac.uk/publications/discussion-papers/behind-corporate-veil-how-business-groups-arbitrage-esg-disclosure] To learn more about the Initiative in Sustainable Finance (ISF), visit ISF's website (⁠⁠https://www.fmg.ac.uk/isf⁠⁠ [https://www.fmg.ac.uk/isf]). ⁠ [https://www.lse.ac.uk/people/alperen-gozlugol]

Credit Substitution in Sustainable Finance: An Achilles Heel?

Alperen Gözlügöl and Tom Gosling discuss the role that credit substitution plays in sustainable finance. One theory of change in sustainable finance is that directing credit allocation away from dirty firms and towards clean firms can cause the former to shrink and the latter to grow. In this interview, they discuss the ways in which credit substitution can cause this to break down. Putting pressure on bank credit can simply cause a shift to private credit. Differences in sustainable finance regulation across territories can result in shifts in financing and business activities. And even within regions, inconsistent sustainable finance regulation across different subsections of finance can create opportunities for credit substitution. Without a high level of consistency across and within regions and a holistic approach to regulation, credit substitution has significant potential to undermine sustainable finance goals. Host: ⁠Tom Gosling [https://www.fmg.ac.uk/people/tom-gosling]Contributor: Alperen Gözlügöl [https://www.lse.ac.uk/people/alperen-gozlugol] Read Alperen Gözlügöl's paper: Credit Substitution in Sustainable Finance: An Achilles Heel? [https://www.fmg.ac.uk/isf/publications/academic-journals/credit-substitution-sustainable-finance-achilles-heel] To learn more about the Initiative in Sustainable Finance (ISF), visit ISF's website (⁠https://www.fmg.ac.uk/isf⁠ [https://www.fmg.ac.uk/isf]).

The impact of green investors on stock prices

Tom Gosling talks to Dimitri Vayanos about the impact the green investors can have on stock prices by divesting from dirty firms and investing in green firms. There's a debate in the academic literature about whether the impacts are negligible or substantial. Using a theoretical model, Dimitri and his co-authors identify a significant but modest impact on cost of capital, measured in a few tens of basis points and share price impacts over a decade of around 10%. So noticeable, but not transformative in the context of the green transition.   Host: ⁠⁠Tom Gosling⁠ [https://www.fmg.ac.uk/people/tom-gosling] Contributor: Dimitri Vayanos [https://www.fmg.ac.uk/people/dimitri-vayanos] Read Dimitri Vayanos's paper, The Impact of Green Investors on Stock Prices [https://www.fmg.ac.uk/publications/discussion-papers/impact-green-investors-stock-prices], co-authored with Gong Cheng, Eric Jondeau and Benoît Mojon. To learn more about the Initiative in Sustainable Finance (ISF), visit ISF's website (⁠⁠https://www.fmg.ac.uk/isf⁠⁠ [https://www.fmg.ac.uk/isf]).

When private firms provide public goods: the allocation of CSR spending

Tom Gosling interviews Kim Fe Cramer, Assistant Professor of Finance on the compulsory CSR spending mandated for large Indian firms. They discuss how firms choose their CSR priorities and where they spend the money. CSR spending is focussed on a firm’s area of competitive advantage so is efficient, but is focussed in their home region, which often means that richer regions benefit from higher CSR spending, raising questions about equity. Host: ⁠Tom Gosling [https://www.fmg.ac.uk/people/tom-gosling] Contributor: Kim Fe Cramer [https://www.lse.ac.uk/finance/people/faculty/Cramer] Read Kim Fe Cramer's paper, When private firms provide public goods: the allocation of CSR spending [https://www.fmg.ac.uk/publications/discussion-papers/when-private-firms-provide-public-goods-allocation-csr-spending], co-authored with Lucie Gadenne and Noémie Pinardon-Touati. To learn more about the Initiative in Sustainable Finance (ISF), visit ISF's website (⁠https://www.fmg.ac.uk/isf⁠ [https://www.fmg.ac.uk/isf]).