Exploring the impact of ESG ratings and principles on investor behaviour, confidence, and decision-making

Abstract

Amid the global shift towards sustainable finance, the integration of Environmental, Social and Governance (ESG) principles in investment strategies gained significant traction. Despite this growing interest, substantial challenges persisted, particularly due to inconsistencies in data quality, lack of standardisation, and divergence in ESG ratings. These issues largely stemmed from regulatory frameworks struggling to keep up with the continuous development of this field. In this context, this thesis sought to examine the influence of ESG ratings and principles on investor behaviour, confidence and decision-making within the Maltese investment landscape. Through a mixed-method approach, insights from retail investors were gathered through questionnaires and integrated with qualitative insights from interviews with professional investors to explore the dynamics of ESG integration and the potential implications on investors. The findings revealed that while ESG awareness was rising, a significant gap existed between retail investors’ stated preferences for sustainable investments and their actual investment choices, with a sporadic application of ESG principles and short-term financial returns often prioritised. Professional investors adopted a more systematic, compliance-driven approach to ESG integration, but expressed concerns regarding the divergences and inconsistencies in ESG ratings across different rating agencies. These discrepancies in ratings coupled with limited data quality, eroded investor confidence, and led to more cautious decision-making concerning sustainable investments. Nevertheless, both groups of investors recognised the potential for long-term value creation despite concerns regarding short-term performance trade-offs. Ultimately, this study highlighted the pressing need for standardisation and transparency in ESG regulatory frameworks to empower investors with transparent and reliable data, fostering more strategic ESG integration across the Maltese investment landscape.