Week 9 - ESG and Capital Markets

Question 1

Do shareholders care about ESG?

Answer 1

Shareholders have different taste. Pecuniary (financial) or Non-pecuniary (social) views.

Question 2

Shareholder influence on ESG/CSR

Answer 2

Institutional ownership is positively associated with ESG scores

Question 3

What was the Willingness to pay (WTP) test? What did it measure?

Answer 3

Measured how much investors actually care about ESG.

Evidence showed that investors knowingly accept lower returns in exchange for non-pecuniary benefits.

Question 4

What factors affected WTP

Answer 4

Geography
Investor type
Impact category
No impact vs Material Impact

Question 5

What are investors WTP data

Answer 5

Data used US mutual funds, showing index investors are willing to pay 20bps more per annum to invest in ESG funds - typical charges are 5bps higher

Question 6

What stat shows that investors accept lower returns in exchange for non-pecuniary benefits

Answer 6

Investors knowingly accept lower returns in exchange for non-pecuniary benefits - 4.7% lower IRRs among VC funds

Question 7

How does CSR improve shareholder value

Answer 7

Attracting socially conscious investors - leads to higher share price, and lower return volatility.

Attracting new customers and increasing brand loyalty

Increased employee loyalty and efficiency

Question 8

What does (Edmans 2020) mean by ‘Growing the Pie’

Answer 8

Responsible business seeks to create profit through creating value for society, with socially responsible investing using ESG factors to pursue a combination of socio-economic goals

Question 9

How can shareholders enforce ESG

Answer 9

Voice (communicate with management, proportional voting rights)

Exit (voting with your feet - threaten to sell your shares

Stewardship, Stewardship is the responsible allocation, management, and oversight of management to create long term value for clients and beneficiaries.

Investor Stewardship Group (ISG) - framework for “basic investment stewardship and corporate governance”

Question 10

Why do Shareholders care about ESG

Answer 10

• Win-win, long-term perspective, looking to maximise intertemporal profits
• Delegated philanthropy, firms utilised as a vehicle for expressing citizens values
• Insider initiated corporate philanthropy - sees CSR destroying shareholder value through principal agent problems.

Question 11

How does CSR improve shareholder value?

Answer 11

• attracting socially conscious investors, leads to higher share prices, and lower return volatility
• attracting new customers and increasing brand loyalty