Takeaway: Shareholders often worry that environmental, social, and governance (ESG) investments will destroy value in the firm. This study finds that successful ESG engagements consistently produce high returns on share price, and that even unsuccessful engagements have no negative impact on share price.
Suggested Audience: Investor relations managers, corporate citizenship managers
This research examines the effect of engagement on ESG practices on share price in publicly traded US companies. Researchers analyzed the database of a large institutional socially responsible investor (SRI) The SRI uses its influence as one of the world’s largest shareholders to promote the adoption of good environmental, social, and governance (ESG) practices. It engages with more than 3,000 target companies around the world via letters, emails, telephone conversations, and direct dialogue with senior management. It also exercises voting rights at the shareholders’ meetings on behalf of its clients or by screening out irresponsible companies from its investment portfolios.
Researchers tracked 2,152 CSR engagement events with 613 public U.S. firms between 1999 and 2009. Engagements address environmental, social, and governance concerns. The study finds that successful ESG engagement consistently produces high abnormal returns. On average, successful ESG engagements produce a positive abnormal return of 4.4 percent. For certain types of ESG engagements, returns are even higher:
- Successful engagements on issues of corporate governance produce an average one-year abnormal return of 7.1 percent
- Successful engagements on issues of climate change produce an average one-year abnormal return of 10.6 percent
In all instances of successful engagement, the high returns gradually start to flatten out after one year from initial engagement. The study also found that target firms of successful engagement experience demonstrable improvements in their operating performance, profitability, efficiency, shareholding, and governance.
The success rate for engagements in the study’s sample was 18 percent, and on average it took two to three engagements to achieve success. Companies with significant reputational concerns and greater capacity to implement ESG initiatives (often larger firms that can benefit from economies of scale, as well as well managed firms) were more likely to be the targets of engagement, and more likely to achieve successful engagements. However, the study found that even unsuccessful engagements had no negative impact on the company’s share price.
If citing, please refer to the original article, “Active Ownership”, Social Science Research Network, 30 September 2012, Elroy Dimson, London Business School, United Kingdom and Oguzhan Karakas, Carroll School of Management, Boston College, and Xi Li, Temple University