* Do Institutional Investors Drive Corporate Social Responsibility? International Evidence Dyck, Alexander, Karl V. Lins, Lukas Roth, and Hannes F. Wagner, 2019 Flashcards
An assessment of whether shareholders drive the environmental and social (E&S) performance of firms around the globe
BACKGROUND
When considering investments, nowadays shareholders are asked to assess and track measures of a
firm’s financial performance and metrics covering a firm’s environmental and social (E&S)
performance, the latter being two of the components of corporate social responsibility (CSR).
Whether E&S performance is beneficial to the average shareholder remains controversial, but it is
clear that outsiders with no financial stake do not bear the costs of E&S activities and will press for
improvements.
RESEARCH
The paper tests the relation of E&S performance to shareholders, more specifically - share
ownership and firms’ E&S performance, the possible hypothesis being that E&S investments are
beneficial to shareholders if they are a driving force behind firms’ E&S choices. However, there
needs to be testing for whether it is the shareholders that press for this change in E&S
performance for firms around the world as pressure for E&S improvement is a truly global
phenomenon. The paper specifically investigates institutional investors because these shareholders
own and vote the bulk of the world’s equity capital.
For testing, a firm-level environmental and social performance measures are created (covering
such areas as CO2 emissions, renewable energy use, human rights violations, and employment
quality) from several E&S data providers, as well as these providers’ E&S scores. These measures
of firms’ E&S performance are combined with the institutional ownership data and financial data
to build a sample.
Institutional INVESTORS
Independent institutional investors (e.g., mutual funds):
They have to face a competition for capital, while a worse performance will affect fund flows,
which will increase the importance of financial returns. However, their exposure to social norms
is non-negligible, as they need to network and raise capital locally and they are (at least to some
extent) mindful of local E&S social norms.
The tests in the article show that, for independent institutional investors, no impact is evident when
considering the firm’s E&S performance if the investor is from a country where E&S social norms
are relatively weak (such as the US). This inverse is applicable for countries with high social norms
(such as the Netherlands).
An example of an exception
There is an exception, where no matter the country there is an element that is capable of
influencing firm’s E&S performance- pension plans. Pension plans consistently influence firms to
strengthen E&S performance no matter the country they’re in.
THE TWO SETTINGS
The authors look at two settings in which institutional owners could have a greater impact on firms’
E&S performance within the sample:
1. An investor becomes a signatory to the UN Principles for Responsible Investment. Being a
signatory requires that investors incorporate ESG issues into their investment analysis and
decision making, and that they are active owners, individually and collectively, regarding these
goals. Therefore, a larger impact is expected in the case of UN PRI signatories.
2. The firm has greater scope for E&S improvement. To capture this scope, the sample was split
into firms with low (below median) and high (equal or above median) E&S performance at the
time they enter the sample. Greater effects were expected in the firms with low initial E&S
performance.
= Research finds support for enhanced institutional investor impact in both settings.
MECHANISMS USED FOR DEMANDING
CHANGE
Exit and selection (use negative screening to exclude poor E&S performers or positive screening to
buy only firms above certain E&S thresholds). It remains unclear how popular this method is among
investors, however, the authors find that this method does not account for broad, large-scale
changes.
Voice (voicing their concerns to the management). As exit and selection has not been prevalent, the
authors state their assumption that voice will prevail as the more important mechanism for
demanding change. The research finds that it is not the dominant mechanism, as shareholder
proposals are rather scarce and the shareholder proposals are rarely voted on.
THE MAIN FINDINGS
To test whether demands for E&S performance are motivated by a desire to align that performance
with the investor’s E&S ideals, the differences among investors are researched to construct countrylevel norms regarding environmental and social issues.
After researching this, it was concluded that investors are motivated by social returns, and foreign
institutional investors impact firms’ E&S performance only when these investors are from
countries where social norms reveal a greater demand (above median demand) for E&S
performance, there is an improvement in the firm’s ESG performance.
It is notable that, when researching investors by their geographic locations, only European
institutional investors were shown to impact firms’ E&S performance, as European countries
occupy the top 17 positions in E&S rankings of countries. No other region investors having an impact
on the firm’s E&S performance.
REMARKS
The social norm tests, combined with the financial crisis tests, show that investors around the
world are motivated by both financial and social returns when they address firms’ E&S
performance.
Strong enough social norms can overcome market pressures to focus primarily on financial
returns – social norms matter when considering E&S developments in companies globally, but the
strength of the norms matters greatly.
Evidence for social motivations - investors from countries that rank high on measures of E&S social
norms affect firms’ E&S performance, and investors from countries that are relatively unsupportive
toward E&S issues do not drive firms’ E&S performance.
