Responsible Investments and Subsidiary-Level Regulation on Sustainable Performance

Abstract

We examine how a mechanism of private tax scrutiny jointly with influential responsible institutional ownership affects sustainable business practices performance captured by ESG scores. We leverage the experience of the 2016 UK private Country-by-Country Reporting (CbCR) regulation dedicated to increase tax transparency and demotivate income shifting at subsidiary-level. Then we focus our attention on the institutional ownership endorsed by the Principles for Responsible Investment (PRI) launched by UN in 2006. We find that the effect of CbCR mandate on ESG performance is overall positive and significant only when there is a high percentage of PRI ownership. Alternatively, this effect varies with lower levels of PRI investors following a salience bias approach on social and governance agenda as urged by the same CbCR rules. This study highlights how a regulatory approach could lead investors to exert more effective engagement on corporate sustainable business practices, object of long-term investments.

Keywords: Sustainable performance, UN PRI investors, Private UK Country-by-Country Reporting regulation, UK multinational corporations JEL Classification: G20, G23: G38, G39, H20, H25