By Dr Guosong Xu
The recent UN Climate Change Conference of the Parties (COP26) has once again brought climate actions to the forefront of the political agenda of major economies around the world. At the centre of the fight against climate change are the actions taken by companies. Recently, we have observed a growing demand amongst investors for corporate accountability on climate-related issues. A key instrument for achieving this goal is shareholder activism. However, activism does not always seem to be shareholders strong suit…
Reflecting investor concerns over climate change, corporate proposals on climate-related policies have been steadily increasing. However, surprisingly, these environmental proposals rarely receive sufficient support. In my recent study with Dr Eliezer Fich at Drexel University, we find that only 2.8% of such proposals were passed during shareholder meetings among U.S.-based companies between 2006 and 2020.
Why is shareholder support for environmental proposals so low? What are the implications for companies and investors? These questions inspired our study. Besides the pecuniary motives behind reluctance to endorse corporate climate policies (we know these policies can be costly), we suggest that investors’ psychology, namely, their beliefs about salient climatic risks, could play a key role.
Do investors’ beliefs matter?
To capture investors’ beliefs about the climate change, the study explores the impact of natural disasters (major hurricanes and tornadoes) that struck the headquarter locations of large institutional shareholders, such as pension or mutual funds, in the U.S. between 2006 and 2020. For instance, in 2020 hurricane Laura hit several counites in the U.S., resulting in devastating economic damage and fatalities. Due to the scale of the natural disaster and widespread media reporting, shareholders’ awareness of climate risks increased. We examined whether this led them to be more supportive towards environmental policies.
In total, over 12,000 unique funds were analysed. We examined shareholders’ voting records of their portfolio firms according to the Institutional Shareholder Services (ISS) Voting Analytics database.
We made several important findings:
Firstly, funds in areas hit by a hurricane were significantly more likely to vote in favour of an environmental proposal in the immediate aftermath of the event. Comparing shareholder support for the same proposal, we found that support was as much as 38% higher among the investors located in a hurricane county than from investors in unaffected counties. This increase is substantial given the average support rate for such proposals is 25%.
Secondly, the impact on shareholder actions depended on shareholders’ characteristics. When an institution had a higher ownership stake in the portfolio company, the reaction to the proposal became stronger. Moreover, the sensitivity towards perceived climate risk was also higher when the portfolio firm was operating in a high pollution industry, such as petroleum and natural gas, construction, and chemicals, or when the firm was physically closer to a hurricane disaster area.
However, this more environmentally conscious outlook was, for many, temporary. Most investors returned to their previous stances and reversed their support for such schemes within just three years – something which will do little to encourage long-term change.
Interestingly, other fund characteristics such as size, performance, flows, general attitudes towards environmental, social, and corporate governance (ESG) issues were found to have very little impact on our research findings.
What are the implications?
There were positives to be gained from our investigations. Increased support from hurricane-affected investors was seen to have crucial implications for corporate environmental policies. Foremost, it raises the overall approval rates during a shareholder meeting – we found that firms with a greater number of hurricane-affected shareholders saw an overall greater level of support for the environment from their shareholders, and had a 39% higher chance of passing an environmental proposal during the shareholder meetings as a result.
Certainly, we do not need (or wish) natural disasters to teach us climate risks, but their impact serves as an important wake-up call – one which we should not forget. One key takeaway from our study is that investors’ psychology, and their beliefs about the climate change in particular, have the power to shape the future of corporate environmental policies. Fortunately, academics, governments, and the business community as a whole still have time to challenge investors’ and managers’ beliefs about the climate. Education, policy support, and media can all help in this effort. Of course, changing people’s beliefs is not an easy goal, but making the effort to do so is vital if our industries are to be able to contribute to a long-standing effort to tackle climate change, and not just engage in temporary hype.
Dr Guosong Xu is an Assistant Professor of Finance at Rotterdam School of Management, Erasmus University (RSM) and co-author of “Do Salient Climatic Risks Affect Shareholder Voting?” alongside Eliezer M. Fich of Drexel University. The paper is available at SSRN: https://ssrn.com/abstract=3895071