Institutional Theory: Understanding the Dynamics of ESG Investments in a Shifting Landscape

Abstract Institutional factors have the power to shape an industry and influence business operations of all included organizations. Coercive, normative, and cultural-cognitive elements can implement trends within the economy. The financial industry is experiencing significant change over the last years. Main topic hereby is the trend of environmental, social, and governance (ESG) investing. The growth of ESG investing was steadily increasing in the past five years, but in 2023, the growth rate decreased. There is a strong correlation between the development of institutional frameworks and ESG in the financial industry. This dissertation is focusing on analysing the intertwining between ESG investing and institutional factors. The development of ESG is being investigated. Furthermore, this work looks at what role institutional factors played and how the current state of the institutional framework and ESG landscape is shaped. The three main pillars of institutional theory, regulations and rules, industry standards and norms, and social pressures get researched to find out the connection and influence of them regarding the development of ESG investing. Furthermore, this work discusses macroeconomic and global trends which influence investment behaviour, challenges and barriers of implementation, strategies and adaptions, and future directions of ESG development in the financial industry. Goal of this work is to find out what the predominant institutional factors are that contribute to the recent slowdown of the ESG investing growth rate. First, a literature review and theoretical foundation give a deep understanding of the topic. To gather relevant and reliable data, qualitative interviews with industry experts from the financial industry in Switzerland, Liechtenstein, Germany, and India are being carried out. After that, the empirical results get compared with the literature and conclusions are drawn. Macroeconomic trends, such as the current global economic instability and shifts in market dynamics, have led to a cautious investment approach. Many investors favour traditional investment options due to their perceived stability and reliability. Less social pressure on the development of ESG cause a slowdown of implemented regulations and industry standards. These institutional factors are now less forceful, which contributes to the observed slowdown. Keywords: Institutional Theory; ESG Investing; Institutional Landscape; Financial Industry