Do Responsible Investment Indices Improve Corporate Social Responsibility? FTSE4Good's Impact on Environmental Management

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: This study investigates the impact of a responsible investment index on environmental management practices. Firms that were included in the FTSE4Good index but failed to meet enhanced requirements were subject to both engagement by FTSE and the threat of expulsion from the index. We examine the combined effect of these actions, estimate the contribution of both elements separately, and the influence of concentrated equity ownership, corporate governance, and the institutional environment. We also evaluate whether the effect is persistent or transitory. Research Findings/Insights: For a sample of 1,029 firms from 21 countries, our findings demonstrate that engagement combined with the threat of expulsion from the FTSE4Good index doubles the probability that a firm failing to meet the environmental management criteria in 2002 would comply by 2005. The higher compliance rate for the firms receiving engagement persists until the end of our study in 2010. We also find that compliance is positively associated with low levels of concentrated ownership and with firms based in coordinated rather than liberal market economies. Theoretical/Academic Implications: Our results contribute to the understanding of the complexities of governance, where decision makers are constrained or influenced by equity holders, the firm's governance system, institutional arrangements, and collective engagement by institutional equity holders. Our findings are consistent with both institutional and agency issues impacting on decision making. Practitioner/Policy Implications: Our study suggests that engagement via a responsible investment index reinforced by the threat of public expulsion from the index provides an effective route for large-scale collaborative investor engagement on corporate social responsibility issues targeting large and internationally diverse firms. It also demonstrates why regulators may wish to encourage engagement of this type to achieve social benefits.

Carrot and Stick? The Role of Financial Market Intermediaries in Corporate Social Performance

“…Twice a year the FTSE4Good Policy Committee convenes to review the Index CSP criteria and include or exclude companies. The FTSE4Good Index has the dual objective to serve investors interested in RI, and to incentivise companies to improve their CSP through raising the bar for Index inclusion (FTSE, 2010;Slager et al, 2012;Mackenzie, Rees, & Rodionova, 2013). Additional inclusion criteria have been introduced throughout the years since the Index was launched, on topics as diverse as climate change, supply chain labour standards and anti-bribery practices.…”

Can environmental, social, and governance rating agencies favor business models that promote a more sustainable development?

“…More specifically, ESG rating agencies have emerged as relevant market actors for CSP assessment and, consequently, for companies' management. Only a few previous studies have analyzed the relationship between ESG rating agencies and corporate sustainability practices (Collison et al, 2009;Mackenzie et al, 2013;Slager, 2015); however, the results are inconclusive. However, little research has been done on whether raters measure corporate sustainability accurately and how they do it (Delmas, Etzion, & Nairn-Birch, 2013;Escrig-Olmedo, Muñoz-Torres, & Fernandez-Izquierdo, 2010).…”

“…Although knowledge is limited on how ESG rating agencies and indices are used within companies to produce organizational change (Slager, 2015), several studies show that sustainability index membership influences the behavior of companies (Collison, Cobb, Power, & Stevenson, 2009;Mackenzie, Rees, & Rodionova, 2013;Pätäri, Jantunen, Kyläheiko, & Sandström, 2012). Although knowledge is limited on how ESG rating agencies and indices are used within companies to produce organizational change (Slager, 2015), several studies show that sustainability index membership influences the behavior of companies (Collison, Cobb, Power, & Stevenson, 2009;Mackenzie, Rees, & Rodionova, 2013;Pätäri, Jantunen, Kyläheiko, & Sandström, 2012).…”

“…3. Although knowledge is limited on how ESG rating agencies and indices are used within companies to produce organizational change (Slager, 2015), several studies show that sustainability index membership influences the behavior of companies (Collison, Cobb, Power, & Stevenson, 2009;Mackenzie, Rees, & Rodionova, 2013;Pätäri, Jantunen, Kyläheiko, & Sandström, 2012).…”

Exploring the research fronts and main paths of literature: a case study of shareholder activism research

“…Williams and Crawford (2011) analyzed how S&P 500 firms choose to influence climate change policy and indicated that those firms tend to adopt constituency-building rather than financial incentive tactics. Mackenzie et al (2013) examined the impacts of a responsible investment index on environment management practices. Rehbein and Logsdon (2013) investigated how corporations respond to social-policy related shareholder resolutions and noted that corporate managers are more likely to communicate with shareholder activists when the firms are larger and have a lower percentage of institutional investors.…”