„Do Institutional Investors Drive Corporate Social Responsibility? International Evidence“ Dyck, Alexander, Karl V. Lins, Lukas Roth, and Hannes F. Wagner

Question 1

What is the main idea?

Answer 1

An assessment of whether shareholders drive the environmental and social (E&S) performance of firms around the globe

Question 2

What is the methodology used?

Answer 2

Tests the relation between share ownership and firms’ E&S performance.

Firm-level environmental and social performance measures are created and combined with the institutional ownership data and financial data

Summary statistics are made of firms’ E&S performance in 2 ways
o Weigh all 10 E&S indicators together to produce aggregate E&S performance scores
o Use proprietary-weighted aggregate scores (0–100) to measure E&S performance

3277 non-US firms, 41 countries, 2004–2013
Time series and cross-sectional tests are used

Question 3

What are 2 of the components of CSR?

Answer 3

CSR = Corporate Social Responsibility

Components: Environmental & Social performance

Question 4

What increases firm’s E&S performance?

Answer 4

o Greater institutional ownership

o Private engagements (inst. inv. push firms for stronger E&S performance)

o Foreign investors (also individual institutional inv.) improve the E&S performance if they come from countries w strong E&S (only significant in Europe, US inv. don’t care)

o PENSION PLANS consistently influence firms to strengthen E&S performance no matter the country they’re in

Question 5

What are the 2 settings in which institutional owners could have a greater impact on firms’ E&S performance?

Answer 5

1. Having signed UN Principles for Responsible Investment (UN PRI) (signed investors have double the average investor impact on firm’s ESG performance
   (UN PRI requires them to include ESG issues into their investment analysis and decision making)
2. If the firm has greater scope for ESG improvement

Find support for both

Question 6

What mechanisms do institutional investors use to push for E&S changes?

Answer 6

• Exit and selection, also threat of it
  o They use neg. screening to exclude poor E&S performers and pos. to buy firms above certain E&S thresholds;
  o Exit & selection doesn’t have significant effects on firms’ E&S performance
  o Doesn’t account for large-scale changes
• Voice (voicing their concerns to management)
  o Being a signatory in UN PRI forces investors to be active in engaging w firms and improving their E&S and allows for collaboration
  o Private engagements (important)
  o E&S shareholder proposals used as a lever to enhance the effectiveness of private negotiations (not a dominant method, rarely voted on)

Question 7

What are the main findings?

Answer 7

Greater institutional ownership is associated w higher firm level E&S scores

Investors are motivated by social returns

Foreign inst. inv. improve firms’ E&S performance only when these investors are from countries with higher social norms for E&S performance

Only European institutional investors were shown to impact firms’ E&S performance.
Highest E&S scores: Europe;
Lowest: Asia & Africa

Buying into good E&S firms or selling bad E&S firms is not a driver of E&S performance change;
Investors show their preferences for improved E&S by engaging w firms they already own

Firms with greater institutional ownership will have more environmental improvements after an environmental shock