Shareholder Engagement on Environmental, Social, and Governance Performance

Journal of Business Ethics, forthcoming

CentER Discussion Paper Series No. 2017-040

European Corporate Governance Institute (ECGI) - Finance Working Paper No. 509/2017

TILEC Discussion Paper No. DP 2017-021

69 Pages Posted: 31 May 2017 Last revised: 12 Jul 2021

See all articles by Tamas Barko

Tamas Barko

Prime Capital AG

Martijn Cremers

University of Notre Dame; ECGI

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Abstract

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.

Keywords: activism; corporate social responsibility; socially responsible investing (SRI); engagement; environmental, social and governance (ESG)

JEL Classification: G15, G23, G32, G34, G39

Suggested Citation

Barko, Tamas and Cremers, K. J. Martijn and Renneboog, Luc, Shareholder Engagement on Environmental, Social, and Governance Performance. Journal of Business Ethics, forthcoming, CentER Discussion Paper Series No. 2017-040, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 509/2017 , TILEC Discussion Paper No. DP 2017-021, Available at SSRN: https://ssrn.com/abstract=2977219 or http://dx.doi.org/10.2139/ssrn.2977219

Tamas Barko

Prime Capital AG ( email )

Frankfurt
Germany

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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