While shareholder activism can play an important role in helping to ‘clean up’ corporate environmental damage, this can come at a financial cost for investors, research from London Business School (LBS) has suggested.
The research, which was undertaken by Lakshmi Naaraayanan, assistant professor of finance at LBS, and researchers Kunal Sachdeva and Varun Sharma, was first published in 2020 and updated in August of this year.
Climate activism
It examined the effect of climate activism on corporates in the United States, incorporating data from the Boardroom Accountability Project (BAP), a campaign launched in 2014 by the New York Comptroller and the New York City Pension Scheme.
As the study noted, the companies targeted by the BAP campaign represented a significant share of US corporate emissions. Following shareholder activism, said firms subsequently reduced toxic chemical discharges, greenhouse gas emissions and carcinogenic pollutants by 13%.
The affected companies also implemented changes to their operations, including process and equipment modifications, as well as updates to operating practices. All increased capital expenditure to address such issues, with these investments supported by disclosures made by the companies in their sustainability reporting.
Effective influence
According to Naaraayanan, the findings show that investors can more effectively influence corporate environmental performance by retaining their holdings and engaging with companies, rather than simply selling shares in businesses with poor environmental records.
“We took a lot of care and spent a lot of time thinking about this issue from different perspectives,” he said. “Our focus was, can existing investors effect change? There is a debate over whether to just exit – I can either vote with my feet by saying I no longer hold the company, or I can hold the company and try and make the change. If I own a pound of flesh in the firm, can I make meaningful change?”
In it for the long term
However, the research also highlights a financial trade-off, with the level of investment required to make environmental improvements often impacting financial performance.
According to Naaraayanan, this makes the continued involvement of long-term investors, including pension funds, particularly important, as these investors can push for longer-term changes, rather than focus on short-term goals.
“Climate activism is costly, and the mode through which it can have an impact is important,” he added. “Having long-term investors like pension funds participating in this activism is crucial.” Read more here.
