Exit vs Voice vs Denial of (Re)Entry: Assessing Investor Impact Mechanisms on Corporate Climate Transition

29 Pages Posted: 26 Aug 2022

See all articles by Andreas G. F. Hoepner

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin; European Commission - DG FISMA

Fabiola Schneider

University College Dublin (UCD); European Commission's Platform on Sustainable Finance

Date Written: August 18, 2022

Abstract

The ongoing Voice versus Exit debate, which tries to find the most effective way for an investor to influence firm behaviour, for the vast majority of published research focuses on existing equity shareholders. This neglects debt capital, which due to its refinancing cycle represents a key lever for investors which aim to have an impact. This paper first develops a new additional mechanism, Denial of (Re)Entry, and subsequently assesses all investor impact mechanisms in terms of power of Voice, influence on cash flow, and influence on security price across the two asset classes: debt and equity. We distinguish between different points in the (re)financing cycle, namely pre initial issuance, post issuance and pre subsequent issuances. We find that the highest Voice power for an investor is Threat of Denial pre refinancing of debt capital. Debt Denial does have a direct cash flow effect which is particularly strong when the company needs to repay existing debt coming towards the end of its maturity. We suggest investors strategically make use of this key moment to influence by threatening to deny fresh cash unless Paris-Alignment is ensured by imposing a sustainability linked covenant with a significant penalty step up in coupon rate if failing to meet set target. Lastly, we show for the Climate Action 100+ Company universe the important role debt also plays in terms of absolute volume.

Keywords: Voice vs Exit, Engagement & Stewardship, Divestment, Investor Impact, Corporate Transition

JEL Classification: D21, D23, D64, G23, G32, G34, L22

Suggested Citation

Hoepner, Andreas G. F. and Schneider, Fabiola, Exit vs Voice vs Denial of (Re)Entry: Assessing Investor Impact Mechanisms on Corporate Climate Transition (August 18, 2022). Available at SSRN: https://ssrn.com/abstract=4193465 or http://dx.doi.org/10.2139/ssrn.4193465

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin ( email )

Blackrock, Co. Dublin
Ireland

European Commission - DG FISMA ( email )

2 Rue de Spa
Brussels, 1000
Belgium

Fabiola Schneider (Contact Author)

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

European Commission's Platform on Sustainable Finance

2 Rue de Spa
Brussels, 1000
Belgium

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