Integration of ESG Criteria in Financial Education

Abstract

The article highlights the absence of ESG criteria in financial education, risking economic, and ethical implications by neglecting future well-being. The bibliometric situation regarding financial education and ESG is assessed. Within this framework, the need to incorporate ESG factors in profitability evaluation is emphasized, particularly in adjusting discount rates to account for their impact. Moreover, it is possible to incorporate available data from Refinitiv to work with empirical material in academic processes. Including ESG variables in cash flow evaluation is crucial for comprehensive assessment. The article concludes by advocating for corporate governance standards that reflect the long-term sustainability impacts and the full integration of ESG factors into financial education.

1. Introduction

International financial education generally overlooks the integration of environmental, social, and governance (ESG) criteria [1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11]. These criteria are not incorporated into most profitability evaluations of various economic activities unless national legislation mandates their inclusion [9, 12]. This can be evidenced by the scant scientific production on the subject.

To provide a more detailed examination of specific case studies demonstrating ESG integration, an analysis was conducted on the Web of Science (WOS) platform. Using the Boolean search formula ALL = (Financial Education AND ESG), the result yields an insufficient 227 results, indicating a small number of scientific articles. This scientific productivity is described below using bibliometric indicators.

Table 1 shows that document-level productivity is highest in China, with 68 documents to date. China also leads the citation index with 617 citations, followed by countries like Canada and England at a considerable distance. Additionally, Figure 1 illustrates that China leads in citations and collaborative works in terms of co-authorship, establishing itself as the most significant cluster.

Country	Documents	Citations
China	68	617
Canada	23	209
England	22	408
Italy	20	327
Malaysia	19	304
Spain	16	140
Russia	15	86
Japan	14	572
USA	13	166
Australia	10	316
Brazil	9	58
France	8	165

Table 1.

Scientific productivity in financial education and ESG.

Source: Own elaboration based on Web of Science.

Figure 1.

Scientific productivity by country and co-authorship between countries. Source: Own elaboration using VOSviewer.

Table 2 highlights the most influential authors based on citation indicators, showing that Managi leads the list with 398 citations, followed by Fujii with 357, Nozawa with 357, Xie with 357, Yagi with 357, and Choo with 229, among other authors. This can also be represented in terms of co-authorships in Figure 2.

Authors	Documents	Citations
Managi, S.	2	398
Fujii, H.	1	357
Nozawa, W.	1	357
Xie, J.	1	357
Yagi, M.	1	357
Choo, Esg.	4	229
Xue, J.	4	229
Tang, X.	2	162
Kang, J.	2	151
Guo, Y.	1	151
Li, D.	1	151
Wu, M.	1	151

Table 2.

Author influence based on citations.

Source: Own elaboration based on Web of Science.

Figure 2.

Co-authorship based on citation influence. Source: Own elaboration using VOSviewer.

Table 3 shows the most relevant institutions in scientific productivity regarding Financial Education and ESG. The University of Quebec Montreal leads with six documents, followed by Sapienza University of Rome with five documents, Universiti Teknologi Malaysia with five documents, CEPR with five documents, and Peter the Great St. Petersburg Polytechnic University with five documents. This is also reflected in institutional co-authorship in Figure 3, led by the University of Quebec Montreal.

Institutions	Documents	Citations
Univ. Quebec Montreal	6	55
Sapienza Univ. Rome	5	179
Univ. Teknol Malaysia	5	96
CEPR	5	58
Peter Great St. Petersburg Polytech Univ.	5	19
Kobe Univ.	4	413
Natl Univ. Singapore.	4	229
Capital Univ. Econ & Business.	4	76
Minist Educ & Higher Educ.	4	69
Univ. Teknol Mara.	4	45
Hong Kong Polytech Univ.	4	19
King Faisal Univ.	4	11

Table 3.

Documentary scientific productivity of institutions.

Source: Own elaboration based on Web of Science.

Figure 3.

Co-authorship of the documentary scientific productivity of institutions. Source: Own elaboration using VOSviewer.

This lack of scientific productivity could be related to the difficulty in accessing relevant, valid, and reliable ESG data from organizations. This problem could be resolved by using the Refinitiv platform to access ESG data and integrate it into financial education and scientific research. The Refinitiv ESG data application is a powerful and versatile tool, ideal for those looking to integrate sustainable and responsible practices into financial education and scientific research.

With access to detailed information on the ESG performance of over 14,000 publicly listed companies, the application covers approximately 80% of global market capitalization, providing a solid data foundation for analysis and informed decision-making. To access this data, a search must be performed in Workspace by entering the company’s name or code followed by a space and the word “ESG,” generating a Sustainability Data Panel. The Sustainability Panel is a window into the extensive range of sustainability data offered by LSEG. Here, students and scientists can explore customizable thematic cards covering topics from sustainable finance to greenhouse gas emissions. Each card can be exported and used in academic presentations or research reports, facilitating comparative analysis between different companies and sectors.

Additionally, the ESG Statement tab is essential for those seeking a deep understanding of a company’s ESG performance. Here, both reported and standardized data are presented, along with detailed scores at the metric, category, pillar, and summary levels. The audit functions allow access to source documents, which is invaluable for validating data and ensuring transparency in scientific research. The ESG data sheet is a flexible tool for creating personalized reports. Educators can use this section to teach students how to select comparable peers, define relevant ESG topics, and add critical commentary. Generated reports can be saved and published, providing a practical resource for class projects and academic publications.

For a comprehensive view of a company’s ESG score components, the ESG Score Profile tab is fundamental. It allows for the identification of specific strengths and weaknesses and breaks down the scores into pillars, categories, and individual metrics. This visualization capability is particularly useful in scientific research to determine areas for improvement and analyze trends in sustainable practices. In this context, the ESG Peer Analysis tab facilitates comparison between a company and its competitors. Using this tool in financial education allows students to apply customized filters, add additional data, and use pre-existing templates or create new ones for comparative analysis. This is essential for understanding how companies position themselves within their industry in terms of sustainability.

The Sustainable Finance Disclosure Regulation (SFDR) tab provides ESG disclosure standards, detailing the closest peers by market capitalization. This section is crucial for assessing a company’s performance and accessing original data, offering a solid basis for academic research and teaching sustainable financial regulations. The FTSE Russell Green Revenues tab shows companies’ performance concerning ESG scores, used for investment decisions and dialog with portfolio companies. The scores also determine the constituents of the FTSE Blossom Japan and FTSE4Good indexes, information that can be used in case studies in financial education.

The EU Taxonomy tab helps understand the alignment of business activities with European regulations for sustainable activities. Students can analyze how a company’s revenues are distributed by segments and its compliance with environmental objectives, providing a practical approach to teaching environmental regulations and their impact on business operations. ESG scores are relative indicators that evaluate a company’s performance at multiple levels. Refinitiv Datastream offers access to over 600 ESG measures, facilitating detailed analysis. The Diversity and Inclusion (D&I) scores measure workplace diversity and inclusion performance, based on pillars like diversity, inclusion, people development, and controversies. This information is vital for research aimed at promoting equitable and diverse work environments.

ESG bonds are debt instruments aimed at specific environmental, social, or governance purposes. Types include equality bonds, impact bonds, pandemic bonds, social bonds, sustainability bonds, vaccine bonds, project bonds, and transition bonds, offering a wide range of options for financing sustainable projects. These bonds are a central topic in modern financial education, providing practical examples of how investments can align with ESG objectives.

Thus, the Refinitiv ESG application is an essential tool for both financial education and scientific research. It offers a wide range of data and analyses that allow users to make informed decisions, promote sustainable practices, and contribute to the development of a more responsible and transparent financial market.

On the Refinitiv platform, various calculations can be performed with ESG data. To illustrate the methods used to evaluate the impact of ESG factors on profitability, the following calculations could be performed by downloading ESG data from Refinitiv, which offers one of the most comprehensive databases, covering more than 80% of global market capitalization, with over 700 different ESG metrics and a significant historical record. Data can be downloaded in various formats such as CSV, JSON, PDF, Python, SQL, Text, and XML.

The types of calculations that can be performed with ESG data include:

1. ESG scores: Refinitiv offers ESG scores that transparently and objectively measure a company’s performance, engagement, and effectiveness in ESG across 10 main themes. These scores are designed to integrate and represent industry relevance and company size biases. You can use these scores to compare the ESG performance of different companies.

2. Trend analysis: You can analyze the trends over time of a company’s or a group of companies’ ESG scores, identifying which companies are improving their ESG performance.

3. Comparison between companies: You can compare the ESG scores of different companies within the same industry to identify leaders and laggards.

4. Correlation analysis: You can analyze the correlation between ESG scores and other financial indicators to see if there is any relationship.

5. Regression analysis: You can use ESG scores as independent variables in a regression model to investigate their impact on different dependent variables, such as stock performance or stock price volatility.

6. Time series analysis: With Refinitiv ESG data going back to 2002, you can perform time series analysis to examine how companies’ ESG scores have evolved over time and how these trends correlate with other financial indicators.

7. Panel analysis: With ESG data covering more than 88% of global market capitalization, you can perform panel analysis to investigate the fixed and random effects of ESG scores on companies.

8. Prediction models: You can use ESG scores as predictors in machine learning models to predict future financial performance, risks, etc.

The Refinitiv platform and its ESG data enable the development of practical steps and strategies for educators and institutions to integrate ESG factors into their curricula. In this context of financial education [5, 10, 13], there is often an emphasis on applying widely accepted general formulas found in specialized literature. These formulas are applicable to different economic realities worldwide [2, 3, 8, 14, 15, 16]. However, it is evident that communities and social environments increasingly demand the inclusion of environmental and social considerations in the evaluation of economic activities [4, 12, 17]. Additionally, a governance approach is required to compel the consideration of these impacts [1, 8, 12, 16, 18, 19, 20, 21, 22]. Externalities, indirect effects not reflected through price mechanisms, are defined by economic theory as factors causing private prices to differ from social prices [3, 6, 16, 23, 24]. The lack of legislation mandating the valuation of these indirect effects in environmental and social terms leads to the omission of these collateral effects when evaluating the private profitability of an investment [12]. Consequently, negative aspects may be considered as social costs, often justified by the positive benefits of economic activity, such as job creation and higher incomes [1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 20]. However, this classification as profitable and the promotion of these activities as socially contributory may lack solid foundations [8, 13]. Figure 4 below represents the negative externality represented by these social costs:

Figure 4.

Negative externality. Source: Own elaboration.

In this context, the question arises as to whether omitting the consideration of environmental, social, and governance (ESG) variables constitutes an adequate strategy [3, 6, 9, 16, 23, 25]. From a reductionist and short-term oriented perspective, it might be perceived as such; however, from the viewpoint of a society whose primary imperative is its long-term survival and therefore the guarantee of its sustainability, evaluating economic activities based on their contribution to sustainability becomes a crucial aspect [16, 26, 27, 28, 29, 30]. This article addresses the exclusion of ESG variables in the evaluation and execution of economic activities, which raises the possibility that current generations may give greater weight to their own well-being than that of future generations [9, 16, 21, 22]. This phenomenon constitutes a matter of ethical relevance, in the understanding that ethics, from the perspective of sustainability, implies justice in terms of intergenerational equity in access to essential goods and services for life on the planet [31, 32, 33, 34]. Consequently, the omission of considering ESG variables not only poses challenges from an economic standpoint but also presents substantial ethical implications regarding equity and responsibility toward future generations [1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 16, 21, 22, 28, 30, 35].

2. Environmental context

Currently, significant impacts of climate change affecting our planet are evident, manifesting, for example, through unprecedented floods [8, 16, 22]. These destructive events ravage everything in their path, affecting homes, agriculture, and causing considerable environmental damage. The recovery from such effects entails substantial costs for those affected. Additionally, large-scale wildfires have been witnessed, not only in inhabited areas but also in forest reserves and agricultural areas, with significant economic consequences, including impoverishment and displacement of affected local populations [8, 16, 21, 22].

Moreover, every year we experience extremely cold temperatures in winter, requiring considerable investments in heating, and unusually high temperatures in summer, demanding investments in air conditioning. These circumstances lead to the conclusion that activities that have contributed to environmental damage and climate change have been underestimated in terms of their real profitability. This is due to the omission in the evaluation of these negative impacts [1, 2, 3, 5, 6, 7, 8, 10, 16].

Given this landscape, it is evident that the incorporation of environmental, social, and governance considerations is imperative before authorizing the execution of productive initiatives [4, 12, 13]. Therefore, integrating concepts of financial sustainability into the academic curricula of future professionals in this field becomes an urgent need [26, 35]. This will ensure that future professionals have a comprehensive understanding of relevant variables in the process of calculating the true profitability of an investment [17]. It will also enable them to distinguish truly contributory activities in the long term from those that are only profitable under a short-sighted and limited evaluation framework, without considering sustainability, understood as a long-term survival imperative [8, 16, 21, 22].

3. Sustainable discount rate

The discount rate, used to discount the net cash flows derived from economic activities and assess their contribution to wealth generation, reflects the opportunity cost of funds used in financing such activities. However, by not incorporating environmental, social, and governance (ESG) factors into its calculation, there is a possibility of underestimating the required profitability [12, 17]. This risk is magnified when a project, although seemingly profitable under conventional analysis, generates unconsidered environmental damages or negative social effects not accounted for by governance standards regulating such activity, resulting in net negative impacts on the real and long-term financial sustainability of the project [8, 16, 21, 22, 26].

It is important to note that when calculating discount rates for a specific economic activity, risk coefficients, betas, derived from similar activities carried out in foreign countries, particularly in the United States, are often used. However, risk factors are not necessarily equivalent, as environmental regulations and governance requirements often differ significantly between developed and emerging countries. While betas from developed countries may more accurately reflect certain negative impacts, such as generic environmental ones, they do not guarantee a proper assessment of specific social impacts and other environmental factors related to indigenous flora and fauna in emerging economies. Thus, the use of external betas can distort the calculation of the true opportunity cost or sustainable discount rate in a specific national context [1, 8, 16]. Similarly, the use of betas based on internal data from the home economy, with more lenient sustainability regulations, can also lead to distortions by not properly evaluating the true risk associated with an activity. This practice carries the danger of underestimating such risk, resulting in the overvaluation of the real profitability of a specific project.

Furthermore, the traditional formula for calculating the discount rate incorporates the excess return earned by the market. Since this return does not stem from activities considering ESG factors in their evaluation, there is an additional risk of generating a second distortion. Consequently, it is evident that a discount rate calculated conventionally may underestimate the true required profitability of an activity, especially when carried out in different socio-environmental and governance contexts [8].

$$\underset{\text{Expected Return of the Asset}}{{\overline{R}}_i}=\underset{\text{Risk}‐\text{Free Rate}}{R_F}+\underset{\text{Asset Beta}}{{\text{β}}_i}\times \underset{\text{Market Risk Premium}}{\left({\overline{R}}_M-R_F\right)}$$E1

Eq. (1) illustrates how incorporating sustainability risks into betas, as well as including environmental, social, and governance (ESG) variables in the calculation of the real return of the average market, affects the required return on assets. It is evident that the less consideration given to social and environmental impact, due to more lenient corporate governance regulations, the greater the discrepancy between the required return and the true opportunity cost of the resources employed in that activity.

4. The impact of financing structure on sustainability

In the previous section, the topic of discount rates was addressed, focusing on the risk associated with the exclusion of relevant variables linked to the true risk of investment.

This risk is not fully reflected in the risk coefficients inherent to the activity and the market, as impacts not internalized by legal standards in the environment are omitted. However, it is also crucial to mention the impact of the financing structure, as debt is commonly attributed with the benefit of reducing the opportunity cost of capital [8, 36].

Nevertheless, it is important to highlight valuable contributions in the literature of sustainable corporate finance that evidence the negative impact that financing through debt can have on long-term sustainability [37]. This is due, among other reasons, to the fact that the owners of such capital often are unaware of the true environmental and social impact they might be contributing to finance, in exchange for the perception of an interest payment [8, 16, 22].

In this sense, financial leverage, while it may seemingly reduce the cost of capital, could generate negative externalities not considered by investors and lenders. The lack of complete information about the environmental and social risks associated with debt-financed projects can lead to an inadequate assessment of the true opportunity cost and, therefore, affect the long-term sustainability of investments [2, 3, 8].

This approach highlights the importance of considering not only the inherent risks of the investment itself but also the risks associated with the financing structure used. Sustainable financial management must take into account not only short-term financial profitability but also long-term impacts in terms of economic, environmental, and social sustainability [8, 35].

$$\text{WACC}=ks\left(\text{S}/\text{V}\right)+kd\left(1-\zeta c\right)\left(\text{B}/\text{V}\right)$$E2

where: WACC = weighted average cost of capital; kd = after-tax cost of debt; ks = cost of equity; ζc = corporate tax rate; S = equity; B = debt; V = S + B = enterprise value.

Eq. (2) reveals that the cost of capital, being a weighted average between the return required by equity owners and the return demanded by creditors, could be underestimated if environmental, social, and governance (ESG) considerations are omitted from its calculation. The inclusion of these considerations could result in an increase in the required return both from shareholders, due to a heightened perception of risk, and from creditors, by integrating into their analysis the valuation requirements of the real impact of the investments they are financing [3, 8].

In this context, the omission of ESG variables in the calculation of the cost of capital could lead to an incomplete assessment of the risks associated with an investment. Shareholders, by not considering relevant environmental and social factors, could underestimate the risk and demand a lower return than necessary. On the other hand, creditors may not be adequately considering the risks associated with the activities they finance, which could affect risk perception and increase the required return.

In summary, the incorporation of ESG considerations in the calculation of the cost of capital is essential to accurately reflect the real risk and impacts associated with an investment. This inclusion would not only be consistent with sustainable financial practices but also help ensure a more accurate assessment of costs and benefits over time [12, 13, 27].

5. Cash flows and sustainability

Considering that environmental, social, and governance (ESG) factors can affect the required profitability of different investments, it is crucial to highlight that cash flows are also impacted by the inclusion or exclusion of these factors in their quantification.

Historically, we have witnessed the formation of significant fortunes based on the overexploitation of non-renewable natural resources, environmental damage, and social and labor dumping practices, among others [38, 39]. These practices, which were not anticipated or sanctioned at the time, demonstrate a failure in the legal and corporate governance norms that were in place during the occurrence of these investments [37]. The consequence of these omissions is the attainment of cash flows greater than those that would have been generated if the social and environmental costs of productive activities had been properly internalized [9, 12, 17]. This results in the generation of additional wealth based on the transfer of long-term welfare and future generations’ well-being to the generations of that time, as well as from disadvantaged social groups to the beneficiaries.

In this context, it is imperative to consider the effect of ESG variables when determining the residual cash flows generated by an economic activity. This implies that residual cash flows must incorporate both total costs and benefits, not just those directly perceived by the investor or project owner [17]. The inclusion of ESG factors in the quantification of cash flows ensures a more holistic and accurate assessment of the social and environmental impacts associated with an investment, thus enabling a more informed and ethical decision-making process. Furthermore, this consideration helps to avoid the attainment of benefits at the expense of negative externalities transferred to society and the environment.

6. Discussion

The true sustainability of a company is manifested when its net present value is positive, considering the incorporation of all environmental and social effects in the total calculation of long-term cash flows, discounted at a rate of return that reflects the effects of the financing structure and the total risk, both private and social, associated with that activity [40, 41, 42].

In other words, it is proposed that the intertemporal viability for society, considering job creation, services, and products, must be positive for a particular economic activity to be genuinely sustainable. This implies that legal standards play a fundamental role in contributing to making this approach effective, by generating the appropriate incentives for private agents [17, 29]. The replacement of private initiative is not proposed, but rather the implementation of correct incentives through legal regulations and corporate governance [37]. The goal is to align short-term private interests with the long-term survival interest of society.

It is essential to highlight that, in the absence of appropriate incentives, individual optimization tends to prevail, where each actor seeks to maximize their particular profitability within the rules that govern them [9]. However, it is evident that the optimization of parts leads to the suboptimization of the whole. In this context, the general welfare and long-term sustainability of society are threatened by short-sighted practices and permissive standards that do not impose the consideration of the indirect effects of economic activities on other agents, other activities, or future generations. The need for adequate incentives and standards that promote the comprehensive consideration of social and environmental impacts is fundamental to ensuring genuine sustainability in economic decision-making [41, 42].

The omission of environmental, social, and governance (ESG) considerations in evaluating the real contribution of various economic activities to financial sustainability underscores the fundamental importance of defining corporate governance standards that regulate such activities [29, 37].

If the standards do not reflect medium and long-term impacts and do not require their inclusion, speaking of financial sustainability becomes a concept more desirable than feasible [17]. However, the high cost that the omission of environmental and social impact is having on communities makes a paradigm shift imperative, moving from simple growth to truly sustainable growth.

The evolution of finance education has followed a different direction, where the application of increasingly sophisticated mathematical and statistical models tends to obscure or overlook a deeper assessment of what is becoming increasingly evident. Education must incorporate concepts of social and environmental cost and benefit, intrinsically linked to intergenerational ethics. Concepts of circular economy, reuse, and recycling must be integrated, all fundamental to financial sustainability, which should be the primary goal to maintain the long-term viability of communities [26, 35, 37].

Real-world problems require tangible solutions. When not all aspects associated with the impact of economic activity are addressed, we encounter highly sophisticated explanatory models that, however, cannot predict anything due to the omission of relevant variables present in the real world and that have not been incorporated into the analysis because there is no explicit obligation to consider them [29]. The dilemma lies in continuing with intellectual and blackboard exercises or addressing real problems that must be urgently addressed. Financial education and practice must evolve to reflect the complexity and interconnectedness of the factors influencing true financial sustainability [26].

7. Conclusions

The article highlights the omission of ESG factors in current financial education and evidences the activity and scientific productivity in this field through a bibliometric analysis in Web of Science. Additionally, it examines methods for utilizing ESG factors using data provided by the Refinitiv platform, suggesting statistical and econometric analyses to support financial analyses with ESG criteria.

Thus, it is observed how ESG data is reported and utilized on the Refinitiv platform, with the development of an introductory guide for its use and integration into financial education. This guide proposes incorporating ESG factors into educational curricula and developing new lines of research using this integrated database.

Up to this point, we have examined the proper evaluation of the profitability of an economic activity and the factors that should be considered in this process, breaking down the relevant components. However, the purpose of this document is to provide a basic framework to serve as a guide when evaluating the impact of an economic activity on sustainability [37].

It is crucial to highlight that each activity has its own characteristics, and the contribution of this document lies in clarifying which components or variables of the evaluation process should receive special attention and incorporating environmental, social, and governance (ESG) criteria in the assessment.

The evolution of communications and the globalization of the economy have contributed to raising awareness in society about the impact of ignoring the effects not internalized in the production process. There is a growing social consensus that sustainability is paramount, and therefore, it is essential to consider the various rights involved in carrying out economic activities [26]. In simple terms, it is becoming increasingly evident that omitting the consideration of stakeholders will no longer be a viable option in the near future [8, 11, 43, 44, 45, 46, 47].