Sustainable Investing: An incentive for firms to do “good” and attract the “right” investors?

By | December 15, 2021

In our recent paper[1], we robustly document that firms have strong incentives to do good by serving a social purpose, as they not only perform well financially, but they also attract financially sophisticated investors with long-term orientation. What is important, however, is not only to do good by engaging in environmental, social, and governance (“ESG”) activities, but also to look good by becoming visible to investors and other stakeholders though external rating of firms’ ESG activities. 

Focusing our analysis on a seminal event in firm’s corporate life—the initial public offering (“IPO”)—we bring evidence from a sample of 1,856 US companies’ IPOs between 2007 and 2018. Our findings show that firms with available ESG information prior to the IPO exhibit higher market feedback at the IPO, linked to superior post-IPO performance, as well as good pre-IPO management compared to their peers whose ESG information is not available. Our findings are robust and pertain even when we exclude the peculiar years of the global financial crisis from our sample.

Searching for potential explanations of the market’s positive reaction to equity issuers with available ESG information prior to their IPO, we perform a pre-IPO analysis. From this, we show that firms’ ESG risk management performance was most probably induced by good governance that aligns a firm’s interests with those of society and investors’, and not by managers self-served motives. 

We also perform a post-IPO analysis, showing that equity issuers with ESG information, prior to the IPO, exhibit significantly higher operational performance and market value compared to their peers for which there is no ESG information before go public. Finally, we find that the former issuers are more likely to attract institutional investors with long-term orientation.

Together, these findings point toward the conclusion that knowledge about a firm’s ESG management performance is not just an additional piece of information, and investors do not attach higher sentimental value to ESG-minded companies just because of affection bias. Under market scrutiny, firms are somehow obliged to further conform with sustainable practices so they can get the “social” license to operate.

Based on our findings, we can draw some important policy implications. Our results support the importance of initiatives—undertaken by international organizations such as the United Nations—for responsible investment and sustainable growth. These initiatives were undertaken to develop practices and strategies that incorporate ESG risk in firms’ investment and ownership decisions.

Further, recent developments in climate conditions and the pandemic have brought various issues, such as carbon footprints, labor policies, and board makeup—just to name a few—to the attention of stakeholders and shareholders. In the aftermath of such events, investors and shareholders would demand companies reevaluate their ESG risk management and rebuild internal policies and procedures to anticipate future black swan events. Strong legislation making ESG disclosure mandatory in the US could not only contribute to inclusive cultures within companies, but also, as our results have shown, help achieve firm economic objectives, and ultimately increase shareholder wealth without harming stakeholder values and well-being. 

Finally, an additional implication is that companies looking to attract investors with longer-term orientations could do so by improving their ESG performance and becoming visible to the market through their ESG rating. To the extent that having a longer-term oriented shareholder base is desirable, companies may have strong incentives to invest in ESG independent of legislation. The long-term nature of institutional investors could further support corporate innovations and investments and bring social benefits for financial markets and the economy. 

Professor Claire Economidou, Department of Economics, University of Piraeus

Professor Dimitrios Gounopoulos, School of Management, University of Bath

Dr Dimitrios Konstantios, Department of Economics, University of Piraeus 

Professor Emmanouil Tsiritakis Department of Banking and Finance, University of Piraeus

This post is adapted from their paper, “CSR and Firm Survival: Evidence from the Climate and Pandemic Crises” available on SSRN.


[1] Economidou, Claire and Gounopoulos, Dimitrios and Konstantios, Dimitris and Tsiritakis, Emmanuel D., Does Sustainable Investing Matter to the Market? (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=3965134 or http://dx.doi.org/10.2139/ssrn.3965134

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