Do Institutional Investors Mitigate ESG Misbehavior?

Abstract

This paper examines institutional investors' (II) role in determining the future instances of their portfolio firms' media-reported environmental, social, and governance (ESG) related misbehaviors. Using a comprehensive sample of publicly listed firms across 34 countries from 2007 to 2021, we find that higher equity ownership of II is associated with lower levels of future media-reported ESG-related misbehavior of their investee firms. However, the strength of the inverse nexus varies with variation in II types. Relative to value-based II (those focusing on risk-return profile only, such as hedge funds), values-based II (which also prefers real ESG impact, such as pension funds) exhibit a more pronounced effect in lowering future ESGrelated misbehaviors.

Keywords: Institutional investors, ESG misbehavior, Engagement and monitoring, Investor heterogeneity

JEL Classification: G23, G41, M14, Q56