Foundation ownership and sustainability

Borsuk M., Eugster N., Klein P., Kowalewski O.

Ginglinger E., Moreau Q.

We use firm-level data that measure forward-looking physical climate risk to examine the impact of climate risk on capital structure. We find that greater physical climate risk leads to lower leverage in the post-2015 period (i.e., after the Paris Agreement and the first step of standardization of disclosure of climate risk information). Our results hold after controlling for firm characteristics known to determine leverage, including credit ratings. Our evidence shows that the reduction in leverage related to climate risk is shared between a demand effect (the firm’s optimal leverage decreases) and a supply effect (bankers and bondholders increase spreads when lending to firms with the greatest risk). Our results are consistent with the hypothesis that physical climate risk affects leverage via larger expected distress costs and higher operating costs. This paper has been accepted by Colin Mayer for the Management Science Special Issue on Business and Climate Change. Funding: This project benefited from the financial support of the Institut Europlace de Finance (Grant EIF 2019). Q. Moreau acknowledges financial support from the French Association of Institutional Investors. The authors have received in-kind support from Carbone 4 for this project in the form of a data set of climate risk ratings. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4952 .

Hsu P., Liang H., Matos P.

In a 2010 special report, The Economist magazine termed the resurgence of state-owned, publicly listed enterprises “Leviathan Inc.” and criticized the poor governance and low efficiency of these firms. We compile a new comprehensive data set of state ownership of publicly listed firms in 44 countries over the period of 2004–2017 and show that state-owned enterprises are more responsive to environmental issues. The effect is more pronounced in economies lacking energy security and strong environmental regulation, and among firms with more local operations and higher domestic government ownership. We find a similar effect on corporate social engagement but not on governance quality. These results suggest a different role for “Leviathan Inc.,” especially in dealing with environmental externalities. This paper was accepted by Colin Mayer, Special Section of Management Science on Business and Climate Change. Funding: H. Liang acknowledges the DBS Sustainability Fellowship from Singapore Management University. P.-H. Hsu acknowledges the fellowship from the Batten Institute of Darden School of Business of the University of Virginia and the financial support from the E.SUN Academic Award and Ministry of Science and Technology and Ministry of Education in Taiwan [Grants MOST108-2410-H-007-099-MY2, MOST109-2628-H-007-001-MY4, MOST109-2634-F-002-045, MOE109J0321Q2, and MOE109L900202]. P. Matos acknowledges financial support from the Richard A. Mayo Center for Asset Management at the University of Virginia's Darden School of Business. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.4064 .

Welch K., Yoon A.

Firm managers are facing increasing external pressure to allocate firm resources to environmental, social, and governance (ESG) efforts. Given that ESG activities are frequently perceived as in opposition to shareholder value, however, managers may find it difficult to decide which projects they should select and how much they should invest. Using MSCI ESG Ratings and Glassdoor employee ratings of senior managers as signals for firm ESG efforts and high managerial ability, we find evidence that high-ability managers allocate resources to ESG in a way that enhances shareholder value. Specifically, we implement a calendar-time portfolio regression design and find that firms with highly rated managers and high ESG exhibit significantly higher future stock returns than firms with low ratings on both. The results are robust to using different fixed effect structures as well as controlling for more covariates in a panel regression. Overall the results highlight the importance of senior managers in allocating resources to ESG efforts.

Berg F., Kölbel J.F., Rigobon R.

Abstract This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: Kinder, Lydenberg, and Domini (KLD), Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated.

Azar J., Duro M., Kadach I., Ormazabal G.

This paper examines the role of the “Big Three” (i.e., BlackRock, Vanguard, and State Street Global Advisors) on the reduction of corporate carbon emissions around the world. Using novel data on engagements of the Big Three with individual firms, we find evidence that the Big Three focus their engagement effort on large firms with high CO 2 emissions in which these investors hold a significant stake. Consistent with this engagement influence being effective, we observe a strong and robust negative association between Big Three ownership and subsequent carbon emissions among MSCI index constituents, a pattern that becomes stronger in the later years of the sample period as the three institutions publicly commit to tackle Environmental, Social, and Governance (ESG) issues.

Mayer C.

This article examines the economic underpinnings of the concept of corporate purpose, which has gained increasing attention from business academics, practitioners and policymakers. It argues that there are fundamental reasons for reconceptualizing the purpose of business in the future which derive from the changing nature of business and the market failures to which it gives rise. It suggests that regulation is proving increasingly inadequate at correcting market failures, and the traditional separation between economic efficiency and distribution that underpins policy formulation is untenable. Instead, the article sets out how appropriately defined notions of corporate purpose can help to promote not only better social outcomes but also enhanced functioning of firms and markets. It describes a set of principles that provide a comprehensive framework for reforming business around credible commitments to corporate purpose. The reformulation of the corporation has profound implications for the macroeconomic performance of economies as well as the microeconomics of firms and markets.

Christensen D.M., Serafeim G., Sikochi A.

ABSTRACT Despite the rising use of environmental, social, and governance (ESG) ratings, there is substantial disagreement across rating agencies regarding what rating to give to individual firms. As what drives this disagreement is unclear, we examine whether a firm's ESG disclosure helps explain some of this disagreement. We predict and find that greater ESG disclosure actually leads to greater ESG rating disagreement. These findings hold using firm fixed effects and using a difference-in-differences design with mandatory ESG disclosure shocks. We also find that raters disagree more about ESG outcome metrics than input metrics (policies), and that disclosure appears to amplify disagreement more for outcomes. Last, we examine consequences of ESG disagreement and find that greater ESG disagreement is associated with higher return volatility, larger absolute price movements, and a lower likelihood of issuing external financing. Overall, our findings highlight that ESG disclosure generally exacerbates ESG rating disagreement rather than resolves it. Data Availability: The data used in this study are publicly available from the sources cited in the text. JEL Classifications: G24; M14; M41; Q56.

Gillan S.L., Koch A., Starks L.T.

We review the financial economics-based research on Environmental, Social, and Governance (ESG) and Corporate Social Responsibility (CSR) with an emphasis on corporate finance. In doing so we focus on the most debated and researched issues. Although a firm's ESG/CSR profile and activities are shown to be strongly related to the firm's market, leadership and owner characteristics as well its risk, performance and value, there still exist conflicting hypotheses and results that we show are not resolved, leading to continued questions and a need for more research. • • Firms ESG/CSR profiles are related to their market, leadership and ownership characteristics. • • Firms ESG/CSR profiles are associated with firm risk, performance and value

Henderson R.

Understanding the process of innovation has been a central concern of management researchers, but despite this progress, there remains much that we do not understand. Deepening our knowledge is critically important given the enormous environmental and social challenges we face as a society. Pursing incremental innovation will continue to be hugely important, but this paper argues that building a richer understanding of architectural or systemic innovation will also be crucial. This paper suggests that the study of organizational purpose may provide a particularly fruitful avenue for future research. This paper was accepted by David Simchi-Levi, Special Section of Management Science: 65th Anniversary.

Chen T., Dong H., Lin C.

This study uses two distinct quasi-natural experiments to examine the effect of institutional shareholders on corporate social responsibility (CSR). We first find that an exogenous increase in institutional holding caused by Russell Index reconstitutions improves portfolio firms’ CSR performance. We then find that firms have lower CSR ratings when shareholders are distracted due to exogenous shocks. Moreover, the effect of institutional ownership is stronger in CSR categories that are financially material. Furthermore, we show that institutional shareholders influence CSR through CSR-related proposals. Overall, our results suggest that institutional shareholders can generate real social impact.

Drempetic S., Klein C., Zwergel B.

The concept of sustainable and responsible (SR) investments expresses that every investment should be based on the SR investor’s code of ethics. To a large extent the allocation of SR investments to more sustainable companies and ethical practices is based on the environmental, social, and corporate governance (ESG) scores provided by rating agencies. However, a thorough investigation of ESG scores is a neglected topic in the literature. This paper uses Thomson Reuters ASSET4 ESG ratings to analyze the influence of firm size, a company’s available resources for providing ESG data, and the availability of a company’s ESG data on the company’s sustainability performance. We find a significant positive correlation between the stated variables, which can be explained by organizational legitimacy. The results raise the question of whether the way the ESG score measures corporate sustainability gives an advantage to larger firms with more resources while not providing SR investors with the information needed to make decisions based on their beliefs. Due to our results, SR investors and scholars should reopen the discussion about: what sustainability rating agencies measure with ESG scores, what exactly needs to be measured, and if the sustainable finance community can reach their self-imposed objectives with this measurement.

Villalonga B.

Litrico J., Besharov M.L.

To remain financially viable and continue to accomplish their social missions, nonprofits are increasingly adopting a hybrid organizational form that combines commercial and social welfare logics. While studies recognize that individual organizations vary in how they incorporate and manage hybridity, variation at the level of the organizational form remains poorly understood. Existing studies tend to treat forms as either hybrid or not, limiting our understanding of the different ways a hybrid form may combine multiple logics and how such combinations evolve over time. Analyzing 14 years of data from Canadian nonprofits seeking funding for social enterprise activities, we identify two novel dimensions along which a hybrid form may vary—the locus of integration and the scope of logics. We further find that as the commercial logic became more widespread within the nonprofit sector, variants of the hybrid form shifted from primarily emphasizing the commercial logic to more equally emphasizing both the commercial and social welfare logics and integrating the two logics in multiple ways. Drawing on these findings, we contribute a multi-dimensional conception of hybrid forms and theorize how form-level variation in hybridity can arise from organization-level cognitive challenges that actors face when combining seemingly incompatible logics. We then build on this theorizing to offer an alternative perspective on commercialization of the nonprofit sector as a contextually dependent rather than universal trend.

Achleitner A., Bazhutov D., Betzer A., Block J., Hosseini F.

Some of the largest listed firms in Western and Northern Europe are partly owned by foundations. So far, little research exists about the shareholder value effects of foundation ownership. This study aims to close this gap using an event study method. We find that equity markets show a positive reaction following the announcement by a foundation that it intends to decrease its ownership share, whereas we find no reaction when a foundation announces that it intends to increase its ownership share. The positive reaction to an announcement of an ownership share decrease is particularly strong when a foundation holds an equity stake of less than 25%. Further investigations show that our findings are specific for foundations as blockholders and do not occur with other blockholders. Overall, our study shows that equity markets are skeptical about foundations as shareholders. Future research is needed to determine whether this skepticism is due to monitoring problems of foundations, goal divergences between foundations and firms, foundations being hybrid organizations with multiple goals, or legal restrictions that come with this particular form of firm ownership.