Corporate Environmental Policy and Shareholder Value: Following the Smart Money

Abstract

We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm’s exposure to environmental risk and those that enhance its perceived environmental friendliness (“greenness”). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations, as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors.

Corporate Social Responsibility Risk and Audit Opinion

“…Compared with individual investors, institutional investors are often more rational and more profitable. Fernando, Sharfman and Uysal [15] [21] found that the companies with more related party transactions are more likely to give non-standard audit opinions. Moreover, they point out that the way that auditors reduce the audit risk brought by related party transaction risks is to provide more cautious audit opinions, instead of increasing audit efforts.…”

Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows

“…27 Existing literature suggests that sustainability can help a firm because it induces warmglow feelings in consumers(Becker (1974),Andreoni (1989),Cahan et al (2015); seeSen, Du, and Bhattacharya (2016) andTrudel (2019) for reviews of additional psychological drivers of sustainable purchasing), or because corporate goodness can be used to deter harmful regulation or enforcement(Baron (2001),Hong and Liskovich (2015),Werner (2015)) or to signal good governance(Deng, Kang, and Low (2013),Dimson, Karakaş, and Li (2015),Ferrell, Liang, and Renneboog (2016)). Other papers find evidence of sustainable investments being negative for a firm (e.g., DiGiuli and Kostovetsky (2014),Dharmapala and Khanna (2016), Fernando, Sharfman, andUysal (2017)). 28 As the interest in sustainable investing grows, it seems less likely that the market will ignore or systematically underprice characteristics related to socially responsible investing.…”

Investor Rewards to Climate Responsibility: Evidence from the 2016 Climate Policy Shock

“…This allows us to identify one of the drivers of the observed changes in prices for climate-responsible firms. A number of recent studies highlight the role of institutional investor horizon and tastes on ESG investing decisions (Dyck, Lins, Roth, and Wagner, 2019, Fernando, Sharfman, and Uysal, 2017, Gibson and Krueger, 2017, Hwang, Titman, and Wang, 2017, Krueger, Sautner, and Starks, 2019, and Starks, Venkat, and Zhu, 2017. Our results show that long-term institutional investors are more likely to benefit from climate-responsible firms' ability to better cope with the tightening in regulation that will likely follow the Trump era.…”

“…Data on corporate climate-related strategies was taken from two different ESG providers, thereby strengthening the robustness of our results. First, following a large part of the finance literature on CSR, we use the MSCI KLD Research & Analytics (MSCI KLD) database (e.g., Galema, Plantinga, and Scholtens, 2008, Hong and Kostovetsky, 2012, Krueger, 2015b, and Fernando, Sharfman, and Uysal, 2017. The MSCI KLD database provides a set of binary indicators specifying, for each company, the presence of either strengths or concerns on a series of environmental, social, and governance factors.…”