We’d all like to think companies improve their ESG records because it’s the right thing to do. But there are so many competing incentives when running a big organisation, the true drivers are not always clear.
New research, however, sheds some light on the issue, with academics concluding that corporates improve ESG performance, and especially their environmental performance, after the intervention of investors. In addition, long-term investors appear to exert the greatest influence.
The research doesn’t stop there. An observant reader might wonder whether investor influence is down to the way they vote and engage with companies, or whether they simply select good ESG stocks. The research suggests the influence comes through voting behaviour, while the evidence for picking ESG stocks is relatively slim.
The team of researchers write that investors “play a statistically and economically significant role in firms’ ESG policies, both for aggregate ESG deployment and for E, S and G dimensions individually”.
The results come from a team from ESADE Business School/Ramon Llull University in Spain, IÉSEG Business School in France, and Nova School of Business in Portugal.
They drew their conclusions after applying statistical techniques to data from 5, 311 companies, from 7, 742 different chief executives and from 7, 456 institutional investors, between 1992 and 2018.
The team concludes that institutional investors play a “predominant role in explaining corporate ESG”. Investor influence is greatest over environmental performance, and less so over “governance” performance.
They add: “Our analyses also reveal a decline in the relative influence of managers and firms on ESG since the 2008 financial crisis, while the relative importance of investors has increased.”
In for the long haul
There is more. After isolating data indicating investors’ “horizons” for investment and their “investment styles”, the team find “significant positive effects for long-term investors, but not for short-term investors”.
The team looked at whether voting and engagement explained ESG behaviour at investee companies or prudent stock selection. They did this by cutting the data to examine companies before and after 2010. The results show a “positive and statistically significant correlation between investor effects and their subsequent voting behaviour in new firms they invest in after 2010. When it comes to ESG selection, the evidence is relatively weak.”
This is not the first time a connection has been drawn between investor behaviour and corporate ESG performance, but it is some of the earliest known statistical evidence.
A report from the Investor Forum and London Business School recently concluded investors need to do more on ESG and integrating stakeholder interests into their policies.
Other reports suggest investors will be targeting ESG during this year’s AGM season, while company directors admit they struggle to integrate ESG into their strategies.
Though it has recently become a contested issue, much reliance has been placed on the concept of ESG chains, corporate policies and behaviour to tackle climate change.
Regulators increasingly see mandatory ESG reporting—or climate reporting—as the main tool for investors to lever pressure. This latest report will bolster the opinion of regulators and policymakers, and see that trend continue.