ESG, Sustainability Disclosure, and Institutional Investor Stewardship

Abstract

This article sheds new light on the link between sustainability disclosure and institutional investors' stewardship activities aimed at promoting improvements in the ESG performance of investee companies. Sustainability disclosure, on the one hand, is one of the elements of information that may be relevant to institutional investor stewardship policymaking; on the other hand, improving the quality of sustainability reports is often the very goal of such initiatives. The role of climate and social disclosure is problematic in both perspectives. First, institutional investors and particularly those with widely diversified portfolios are unable, given the very high costs involved, to use sustainability information directly and rely on ESG ratings and indices for the purposes of their investment and stewardship strategies. In addition to the fact that the regulatory framework still appears to be fragmented and there are differences between different sets of sustainability disclosures, European legislation therefore shows that providing climate and social disclosure requirements is not enough and that regulation of ESG ratings and indices is essential to make them more transparent and reliable. Secondly, the choice of nonactivist institutional investors to focus part of their engagement initiatives on sustainability disclosure, requiring, for example, a higher degree of transparency or the adoption of a certain set of reporting, appears to be dictated by a desire to avoid more incisive initiatives (perceived as more aggressive) aimed directly at encouraging change in the environmental strategies or policies of the companies concerned.

Keywords: Institutional investors, corporate governance, stewardship, ESG, sustainability, ESG disclosure

JEL Classification: K 22