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The role of institutional investors in driving environmental and social change

December 3, 2018

Organizations are stepping up because their investors are demanding it.

Alexander DyckThose concerned about the environment and social causes might be able to rest a bit easier. There could be hope from an unexpected place — investors.

In a forthcoming paper, to be published in the Journal of Financial Economics, Finance Professor and Manulife Financial Chair in Financial Services Alexander Dyck investigated whether institutional investors — such as banks, investment firms and pension funds — played a role in driving corporate social responsibility.

“There is a long-held and outdated view among some organizations that they need not consider their environmental and social footprint,” explains Dyck. “But our work shows why firms can’t afford to think this way any longer. Investors are speaking up and demanding that firms focus on their environmental and social performance.”

Dyck, who previously sat on the board for the International Centre for Pension Management, was initially inspired to take on this research project after speaking with numerous investors.

“The types of discussions held during these board meetings were surprising. There were investment managers, who were responsible for billions of dollars in assets, speaking about environmental impacts of private organizations and how their portfolios could be adjusted to reflect these concerns,” describes Dyck.

“Organizations are stepping up because their investors are demanding it.”

—Alexander Dyck, Professor of Finance

“At the same time, there was a huge difference in perspectives and it really seemed to depend on where these investors were based geographically.”

In this current work, Dyck and his colleagues took a closer look at the influence institutional investors, a group that manages the bulk of the world’s equity capital, had on driving environmental and social improvements within organizations.

By looking at public activism data and shareholder proposals, the researchers confirmed that institutional investors seemed to push firms to adopt more environmentally and socially responsible business practices, including reducing emissions and offering diversity and opportunity programs.

Additionally, the researchers reported that the investors’ culture and social beliefs played a prominent role in driving these changes. Foreign institutional investors from European countries like the Netherlands, which value commitments to the environment and equality, tended to be more proactive in demanding action from firms.

“Our work demonstrates how social and cultural factors can influence corporate choices,” says Dyck. “Given that we live in a world where capital frequently flows across borders, it’s worth paying attention to where investors are coming from.”

The researchers also observed another pattern: institutional investors who operate over the long term — such as pension funds — tended to prioritize environmental and social performance in firms they had holdings in, compared to investors that managed short-term investments, like hedge funds.

Considering all these findings together, this means that investors are indeed playing a role in a firm’s choice to improve environmental and social performance, says Dyck.

“Organizations are stepping up because their investors are demanding it.”

Written by Rebecca Cheung | More Rotman Insights »

Meet the

Alexander Dyck

Professor of Finance and Economic Analysis and Policy
Manulife Financial Chair in Financial Services

Read his full biography ยป