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ESG Criteria in Driving Investments in Renewable Energy Projects

Ahmed Ismail Alfarooque

GSEP

Friday, February 23, 2024

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Introduction

In recent years, the imperative for investment in renewable energy has intensified, driven by

growing concerns over climate change and the urgent need for environmentally sustainable

energy solutions. This shift in focus has underscored the importance of Environmental, Social,

and Governance (ESG) factors in investment decision-making processes, particularly in the

context of renewable energy projects. This comprehensive review embarks on an extensive

exploration of literature to discern the pivotal ESG criteria that guide investment flows into

renewable energy. The aim is to synthesize insights from various scholarly articles and peer-

reviewed journals, thereby providing a nuanced understanding of the interplay between ESG

factors and renewable energy investment (Liu et al., 2023). The evolving discourse on renewable

energy investment underscores the investment community's response to environmental

imperatives and societal responsibilities. ESG criteria serve as a moral compass for investment

decisions, marrying profitability with sustainability and ethical considerations in capital

allocation (Dmuchowski, 2023). By aggregating evidence from diverse sources, this review

seeks to illuminate the complex dynamics between ESG criteria and renewable energy

investments. It emphasizes the significance of environmental impact, social equity, and corporate

governance in shaping the investment landscape, paving the way for a sustainable energy future

(Busch et al., 2016). Through a critical evaluation of empirical data and theoretical perspectives,

this review aims to inform a broad audience, including academics, practitioners, and

policymakers, about the link between ESG criteria and renewable energy investments. This paper

advocates for informed decision-making and a transition towards a more resilient, equitable, and

sustainable energy system.

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Literature Review

1. Li, B. (2023).

In past few years, the international energy scene has gone from such a direction to an amazing

shift towards renewable sources stimulated by the realities of sustainability and climate change.

There is a shift happening here, and financial markets playing a leading role is an important

factor in increasing investment in renewable energy and clean technology. This review of

literature focuses on Li's (2023) work that investigates the financial markets-energy transition

relationship, describing its main methodological approach and key findings. This paper is also an

attempt to analyze the dynamics of a renewable energy investment process (Rahmani et al.

2023).

The approach of the study uses a multifaceted methodological framework combining advanced

networks complex analysis with dynamic econometric model. Global mineral trade network

analysis will show the way their growth is related to a growth of renewable energy. Through a

careful analysis of investment flows and opportunities across different sectors, the report

highlights the possibility of financial systems to act as an irreplaceable engine of the process of

transition from an unsustainable energy to a sustainable one. This study provides a

methodological synthesis that allows for complete understanding of the interaction of financial

market with the energy transition. It also illuminates the mechanisms by which renewable energy

investments flows are driven.

One of the main linings of that Li’s work is the great deal of investments into renewable energy

and green technology. The surge can be explained by a few reasons, one of which is that the

governmental agencies favor the sustainability practices and help to implement them and the
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costs of renewable energy technologies have rapidly declining. The study, however, reveals the

fact that financial markets in general are a very instrumental mechanism to channel the capital

flowing into the budding industries (Zhang & Jn 2022). Financial markets play the role of a

platform for connecting innumerable funds from all around the globe and enabling risk

management tools for enhancing the foothold of renewable energy projects in the world.

However, the study of Li looks beyond essential mineral networks as it also underscores the

interconnectedness of global essential mineral trade and the growth of renewable energy, thus

highlighting the complex network of supply chains associated with the energy transition.

Li’s work input into the overall academic conversation on the factors influencing renewable

energy investments with special reference to the Environmental Social, and Governance (ESG)

criteria framework. The first idea of the study is the centrality of financial markets that hoist the

sails of investment trends and opportunities, thereby keeping with the overall goal of uncovering

the diverse elements of sustainable finance (Ng et al. 2021). In addition, it emphasizes the

importance of policymakers and the investing community working together with industry to

mobilize financial instruments in order to catalyze the transfer to a lower carbon economy (Xie

2020). Influenced by heightened commitments of governments across the world to carbon

neutrality and climate resilience, Li’s study findings offer valuable pathways to politics of

renewable energy financing.

Li (2023) concludes the inference that the connection between financial markets and energy

transition is complicated but through an exemplary methodology the trend and possibilities in

renewable energy and clean technology industries can be understood. The figures prove that the

critical role of financial systems in boosting the investments that target sustainable energy

solutions is irreplaceable, while there is an apparent change in the regulatory environment and
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the adoption of new technology. Moreover, this area of research should be explored further so

that informed policy and investment decisions can be made to promote the international process

of energy transition contemplating resilience and sustainability as the ultimate goals (Kwilinski

et 2023).

2. Wu, H. (2023).

In the context of achieving sustainable development and curtailing climate change, thus, the

renewable energy has emerged as a key player. Scholars and policymakers alike have an active

interest in exploring how financial investments in renewable energy resources and adoption of

green finance tactics affect economic outcomes. In a recent study, the author evaluates the

interplay between renewable energy investment resources, green finance and economic growth

within OECD economies, published by Wu (2023). Humanize this sentence. The essay covers

Wu's research methodology, major results, and the broader impact of the study.

Through a detailed approach, which includes Generalized Method of Moments (GMM) and

Fixed-Effect Model (FEM), Wu determines the relationship between Renewable energy

investment resources, green finance, and economic performances in OECD economies. GMM is

particularly apt for addressing the issues of the endogeneity and providing estimates of the

parameters efficiently, whereas FEM is an effective device to control the unobserved

heterogeneity. Through the applying of these approaches, Wu achieves the credibility and the

accuracy of the results of the research.

The core of study by Wu is an affirmation of the existence of a positive link between scenario

investing resources, green Investment, Income growth and OECD economies. Such findings

indicate the crucial part that renewable energy investments play in enhancing the economic

growth of a country. The results depict a positive linkage meaning that countries that promote
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renewable energy sources and carry out green finance practices will have better economic

outcomes. The findings of this study would add to the general agreement held by academicians

and policymakers that the clean energy investments do facilitate the economic progress. Chu's

findings conform to the principle that the adoption of Environmental, Social and Governance

(ESG) criteria, such as those of the green financing, can be a mechanism to magnify and guide

renewable energy investments. This alignment embodies the fact that the economic success, the

good stewardship of the environment and the socially responsible financial practices go hand in

hand (Kaminker & Stewart 2012).

Wu's work is indeed in agreement with contemporary research that confirms the positive impact

of renewable energy investments, green finance, and economic development. Hence, the finding

contributes to the body of knowledge which describes the way those factors interact with the

reality of OECD economies. Through highlighting the positive role of renewable energy

investment resources and green finance in economic performance improvement, Vo's,

consequently, provides empirical support for the idea that sustainable energy investments are

essential to economic growth. Not only does the article follow the overall theme of the debate

regarding the use of ESG factors as the basis for investment decisions, but it also corresponds

with it. The positive correlation between green finance and economic performance shows that it

is possible to integrate environmental and social aspects into financial activities and bring out the

concrete economical rewards. This voices the trend that is sweeping the global financial market

which is characterized by increasing number of investors who choose investment opportunities

that are in-line with both environmental and social goals.

Wu study has made a long-term policy implication for politicians, investors and

environmentalists. The positive correlation found in the study implies that the governments and
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the financial institutions should consider this as top priority and should promote and encourage

investments in renewable energy (Tan & Zhu 2022). Policy-makers will employ this data in the

formulation of policies that promote green finance tenets and foster a breeding ground for

sustainable energy projects. On the opposite side, investors can put these ideas into use to make

their choices which are not only profitable to them but also aimed at the overall well-being of the

society and the environment. The study suggests that weaving ESG criteria into investment

strategies not only brings about ethical benefits but can also improve portfolio returns (Wang et

al. 2024).

In general, Wu's findings suggest that energy securities, public investment, and finance can

constrain renewable energy development in OECD countries. The positive correlation found in

this case reaffirms the significance of investments in sustainable energy compatibility with

economic growth. Such a study adds to the ongoing debate on the responsible and sustainable

finance where green finance is enhanced by the economic benefits accruing from balancing

economic benefits with the environmental and societal considerations. At a time, the world is

faced with the issue of climate change and sustainable development, Wu’s research presents

invaluable data that can guide policies and investment strategies for more prosperity and a

cleaner environment.

Wang et al. The study on Environmental, Social, and Governance (ESG) Investments conducted

by Wang et al. (2023) reveals the nature of the ESG Investments and their relationship to the

goals of the Conference of the Parties (COP-26) with an emphasis on GHG emission reduction in

China. In the present paper, the writer brings together the methodologies, findings, and

ramifications considered in the research and interprets its importance as one engaging with the

body of literature on ESG investment and environmental sustainability.

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Wang et al. (2023) significantly contribute to two primary strands of literature: ESG Investing

and COP-26goals. The paper is developed further from the notion that the ESG investments are

well recognized in the context of mitigating the emissions of GHG. They claim that the social

responsibility complements the finance aspect by incorporating the environmental qualities. ESG

investing, as it is intended to promote social capital and also serve as a responsible force for

environmental protection and sustainable development. Additionally, the study suits the themes

of the COP-26 conference that emphasize the urgency of praxis in emission reduction and in the

fight with climate change.

The researchers apply the bounds testing technique of the autoregressive distributed lag (ARDL)

model to analyze annual data from 1990 to 2021 to explore the linkage between ESG

investments and GHG emissions in China. ESG investments are considered as the dependent

variables and the explanatory variables include population size, GDP per capita, green

technology innovation index, renewable energy deployment, and GHG emissions. The paper

investigates the long-term link between ESG, or the environmental, social and governance issue,

and GHG emissions in the Chinese context by applying the unit root tests and the cointegration

analysis (Liu & Hamori 2020).

The factual data of Wang et al. (2023) reveals some impressive discoveries. In the long run, there

is a reduction of about 0.0046% in GHG emission on the Chinese financial market for every 1%

increase in the ESG investment. However, in the short term, ESG investments can lead to a

noticeable decline of GHG emissions faster with the increment of 1% producing 1.391% less

GHG emission. This also outlines the direction that ESG investments have taken in the wake of

the mandate defined in COP-26 to create a path to reduce GHG emissions, especially in the short

term.
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The research by Wang et al. (2023) provides a solid perspective on ESG investments as a

symbiosis with environmental sustainability, more so as per COP-26 goals. The research is built

upon the premise that the study of ESG investments in the reduction of GHG emissions will

emphasize the role that financial mechanisms play in the promotion of ecological activism and

sustainable development. Additionally, results point out the need of including environmental

aspects in investment strategies which can aide in achieving some financial results and, on the

other hand, can be a driver for the global environmental problems’ resolution (Gangi et al. 2021).

By this study, the need for the combined efforts from the government and organizations to

achieve a sharable and sustainable future is emphasized, whereby, ESG investments emerge as a

solid and powerful means of realizing a low-carbon economy.

In-depth Analysis

This literature review on the role of Environmental, Social, and Governance (ESG) criteria in

shaping investment decisions on renewable energy projects and technology is an attempt to

present a broader understanding of the current situation of the phenomenon, the implications it

has on our economy and society as well as the directions for the future (Cogilnceanu 2023). A

few important takeaway points vividly illustrate how investing in renewable energy is an

essential step towards achieving sustainability. First and foremost, the review stresses the

growing need for renewable energy investment if we want to change the energy system towards

sustainability. It is the first and foremost step. In line with this, Li (2023) points out the

emergence of trending growth procedures, implying a vast transition into the clean energy

alternatives. The trend is not only pointing to an environmental need but also lists the scope to

promote economic growth since financial markets are important drivers of capital allocation into

clean energy and technology industries (Li, 2023). Thus, the employment of ESG factors into
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investment decision-making processes gains particular relevance, mirroring the growing

consensus on environmental and social elements’ equal value to financial considerations.

Hence, observational data, as exemplified by the investigation of Wu (2023), advocates the

positive correlation between renewable energy investments, green finance, and economic

functioning. This inter-linkage typifies the economic advantages of sustainable energy

undertakings, therefore an EPSCR should be prioritized. In this context, ESG-informed

investment strategies are both justifiable and evidenced with hard economic data on the

profitability of sustainable energy projects. Journal articles concerning renewable energy

investments should move beyond the traditional scope and delve into wider energy-environment-

economy interactions (Brown et al., 2017). Wang et al. (2023), for example, performed a

thorough assessment of the link between ESG investments and reductions of GHG emissions in

China. The findings of this study provide useful insights about the crucial role that ESG plays for

financial actors and for environmental sustainability. Employing sophisticated methodologies

like Autoregressive Distributed Lag bounds test (ARDL) and using the entire data that transcends

to more than three decades, the study provides sound empirical evidence that ESG investments

can help in addressing COP-26 goals. The results reveal complex dynamics presenting a range of

near and long-term implications of ESG investment on greenhouse gas (GHG) emissions

reduction. In addition, by locating their research in a wider perspective of knowledge base on

ESG investing and the COP-26 goals, Wang et al. are sharpening our understanding of the

complicated interactions between financial strategies and environment outcomes. In general,

their result demonstrates the high importance of the ESP funds as the mechanism to achieve

sustainable goals and shows the possibility of finance to work as a driver of positive

environmental changes.
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Furthermore, the literature review is quite illustrative in the multi-dimensional aspects of ESG

criteria and their effects on the sustainable development. At it gives a clear in-depth discussion

about the theory, method, empirical analysis, and policy implications used in renewable energy

investments that are guided by ESG principles. Through the deep analysis of the complex

processes determining investors' preferences mentioned in the renewable sector, the review

serves as a useful resource for policy makers, investors, as well as other stakeholders. Moving

forward, future investigations in this field can consider other upcoming themes, which include

regulation of framework, technological breakthroughs, and international partnership as major

determinants in shaping the renewable energy investments driven by ESG principles.

Regulations, particularly carbon tax and renewable energy mandates, act as drivers of the

investment incentives and market dynamics. Also, the growth of renewable energy technologies

such as energy storage solutions and smart grid systems contributes to the scalability of clean

energy infrastructure and the reliability of investments; therefore, make more investments.

Moreover, interdisciplinary approaches combining financial, economic, environmental, and

policy analysis perspectives intensify our comprehension of the intricate relationship processes

that constitute the essence of sustainable energy transitions. Through the promotion of

interdisciplinary collaboration and knowledge exchange, researchers can generate a compounded

view of the various issues involving the renewable energy investments and sustainable

development and at the same time, be able to create innovative solutions that are relevant and

comprehensive. Finally, the literature review demonstrates the paramount impact that ESG

metrics have on the development of investments in the renewable energy projects and

technologies (Hussain et al. 2022). Synthesizing empirical evidence, theoretical frameworks, and

policy implications, the review becomes a valuable resource concerning the effects the energy
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transitions will have on the economic, environmental, and social dimensions. In the future, two

aspects are most important, first, interdisciplinary-research is necessary to achieve a goal, and

secondly, all should make efforts to speed up the transformation of energy system.

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