Environmental, Social, and Governance (ESG) in Accounting and Capital Markets: A Literature Review on Economic Relevance, Disclosure Frictions, and Valuation Implications

In this literature review, I examine the evolving role of environmental, social, and governance (ESG) factors in accounting and capital markets. I organize the existing research into four major themes: (1) the historical development of ESG as a concept distinct from socially responsible investing (SRI) and corporate social responsibility (CSR); (2) the capital market effects of ESG disclosures and the ways investors incorporate ESG information into their decision-making processes; (3) frictions in ESG reporting, including disagreements among ESG rating agencies and evidence of greenwashing; and (4) the value relevance of ESG risk, particularly in relation to firm valuation models and carbon disclosures. I also discuss the implications of ESG standardization for emerging markets, where global comparability and local relevance can conflict. By synthesizing findings from recent empirical studies and conceptual frameworks, the aim of this manuscript is to clarify how ESG relates to economic outcomes and to identify opportunities for future research in financial reporting, assurance, and investment analysis.