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Shareholder Engagement on Environmental, Social, and Governance Performance
We study behind-the-scenes investor activism promoting environmental, social, and governance (ESG) improvements by means of a proprietary dataset of a large international, socially responsible activist fund. We examine the activist’s target selection, forms of engagement, impact on ESG performance, drivers of success, and effects on the targets’ operations and value creation. Target firms are typically large and visible, perform well, and have high liquidity (stock turnover) and low ESG performance. Engagement induces ESG rating adjustments: firms with poor ex ante ESG ratings experience a ratings increase after complying with the activist’s demands, whereas firms with high ex ante ESG ratings experience a ratings decrease following the revelation of their ESG problems. Activism that is focused on environmental and social issues is more likely to succeed if targets are ESG-sensitive (i.e., they have a strong ex ante ESG profile). Successful engagements boost targets’ sales. Risk-adjusted excess stock returns (with four-factor adjustment and relative to a matched sample of non-engaged firms) of successful engagements outperform those of unsuccessful engagements by 2.7%. Results are especially strong for firms with low ex ante ESG scores. Specifically, targeted firms in the lowest ex ante ESG quartile outperform matched peers by 7.5% in the year after the end of the engagement. Our results thus suggest that the activism regarding corporate social responsibility generally improves ESG practices and corporate sales and is profitable to the activist. Taken together, we provide direct evidence that ethical investing and strong financial performance, both from the activist’s and the targeted firm’s perspective, can go hand-in-hand together.
Journal Article
Do Corporate Social Responsibility Engagements Lead to Real Environmental, Social, and Governance Impact?
We construct an event-based outcome measure of firm-level environmental, social, and governance (ESG) impact for public and private firms globally from 2007 to 2015 using data from RepRisk. Then we measure the societal impact of corporate social responsibility (CSR) engagements using participation in the United Nations Global Compact (UNGC) as a proxy. We demonstrate a robust and striking difference between public and private firms: whereas private firms significantly reduce their negative ESG incident levels after UNGC engagements, public firms fail to do so and are more likely to engage in decoupled CSR actions—actions with no subsequent real impact. We then conduct a series of in-depth analyses to examine possible economic mechanisms. Our results are most consistent with shareholder–stakeholder conflicts of interest being the main moderator of decoupling. The intensity of this conflict is further moderated by three factors: ownership type, proximity to final consumers on the value chain, and specific ESG incident types. Other possible mechanisms, such as selective entry into UNGC and heterogeneities in media exposure, country representation, and entry timing, do not survive our analysis. Our results suggest that existing CSR engagements and one-size-fits-all CSR policy mandates might not necessarily lead to better societal outcomes, and a multi-tiered policy targeting different ownership and industry types might be more efficient at maximizing ex post ESG benefits.
This paper was accepted by Bruno Cassiman, business strategy.
Journal Article
Institutional Investors and Corporate Environmental, Social, and Governance Policies: Evidence from Toxics Release Data
This paper studies the role of institutional investors in influencing corporate environmental, social, and governance (ESG) policies by analyzing the relation between institutional ownership and toxic release from facilities to which institutions are geographically proximate. We develop a local preference hypothesis based on the delegated philanthropy and transaction-costs theories. Consistent with the hypothesis, local institutional ownership is negatively related to facility toxic release. The negative relation is stronger for local socially responsible investing (SRI) funds, local public pension funds, and local dedicated institutions. We also find that the relation is more negative in communities that prefer more stringent environmental policies and in communities of greater collective cohesiveness. Local institutional ownership, particularly local ownerships by SRI funds and public pension funds, is positively related to the probability that an ESG proposal is either introduced or withdrawn. The paper sheds light on the drivers behind institutions’ ESG engagement and their effectiveness in influencing ESG.
This paper was accepted by Gustavo Manso, finance.
Journal Article
Climate justice and historical emissions
\"This volume investigates who can be considered responsible for historical emissions and their consequences, and how and why this should matter for the design of a just global climate policy. The authors discuss the underlying philosophical issues of responsibility for historical emissions, the unjust enrichment of the earlier developed nations, as well as questions of transitional justice. By bringing together a plurality of perspectives, both in terms of the theoretical understanding of the issues and the political perspectives on the problem, the book also presents the remaining disagreements and controversies in the debate. Providing a systematic introduction to the debate on historical emissions and climate change, this book provides an unbiased and authoritative guide for advanced students, researchers and policymakers in climate change justice and governance, and more widely, for anyone interested in the broader issues of global justice\"-- Provided by publisher.
Book
Environmental, Social and Governance (ESG) Scores and Financial Performance of Multilatinas: Moderating Effects of Geographic International Diversification and Financial Slack
This paper examines whether a firm's financial performance (FP) is associated with superior environmental, social and governance (ESG) scores in emerging markets of multinationals in Latin America. The study addresses the current research gap on this issue; it develops hypotheses and tests them by applying linear regressions with a data panel drawn from the Thomson Reuters Eikon™ database to analyse data on 104 multinationals from Brazil, Chile, Colombia, Mexico and Peru between 2011 and 2015. The results suggest that the relationship between the ESG score and FP is significantly statistically negative. Furthermore, in examining environmental, social and governance separately to accurately determine each variable's relationship to multilatinas' FP, the results reveal a negative relationship. Finally, the empirical analysis provides evidence for a moderating effect of financial slack and geographic international diversification on the relationship between ESG dimensions and firms' FP. This study furthers understanding of the relationship between ESG dimensions and FP for the Latin American business context.
Journal Article
Adapting institutions : governance, complexity, and social-ecological resilience
\"Global environmental change is occurring at a rate faster than humans have ever experienced. Climate change and the loss of ecosystem services are the two main global environmental crises facing us today. As a result, there is a need for better understanding of the specific and general resilience of networked ecosystems, cities, organisations and institutions to cope with change. In this book, an international team of experts provide cutting-edge insights into building the resilience and adaptive governance of complex social-ecological systems. Through a set of case studies, it focuses on the social science dimension of ecosystem management in the context of global change, in a move to bridge existing gaps between resilience, sustainability and social science. Using empirical examples ranging from local to global levels, views from a variety of disciplines are integrated to provide an essential resource for scholars, policy-makers and students, seeking innovative approaches to governance\"-- Provided by publisher.
Book
The Effect of Environmental, Social, and Governance (ESG) Performance and Disclosure on Cost of Debt: The Mediating Effect of Corporate Reputation
Prior studies on the relationship between ESG information and cost of debt have found mixed results. They conclude that this relationship may be affected by some characteristics or attributes of the company. In this study, we examine whether corporate reputation mediates the relationship between ESG information and cost of debt. In other words, this study explores how ESG information influences corporate reputation, and how, in turn, corporate reputation affects the cost of debt financing. Data for corporate reputation were obtained from the Fortune “World’s Most Admired Companies” List, whereas data on ESG information were extracted from two sources: ESG performance were obtained from Sustainalytics database and ESG disclosure were obtained from Bloomberg database. Data on cost of debt and other control variables were also collected from Bloomberg database. Using structural equation models, we report a positive effect of both ESG performance and disclosure on corporate reputation. We also find that a good corporate reputation reduces the cost of debt financing and mediates the relationship between ESG performance/disclosure and cost of debt. We therefore conclude that firms that manage and disclose information on ESG issues have a better reputation, which in turn reduces their debt financing costs.
Journal Article