Environmental, social and governance (ESG) investing is associated with lower shareholder value, according to a new study by Tracie Woidtke, head of the finance department at the University of Tennessee’s Haslam College of Business.
While examining the role of state and municipal pension funds as activist investors, Woidtke found the S&P 500 index firms targeted with social-issue proposals by the New York state pension fund had a 21 percent lower firm value, and a 91 percent lower industry-adjusted firm value, than all other firm-years in her sample.
“Shareholders see little benefit from focus on issues like political spending, employment rights or environmental sustainability within a company,” said Woidtke. “This has become a really hot topic with the current focus on ESG investing.”
The Manhattan Institute and the Center for Competitive Capital Markets (part of the U.S. Chamber of Commerce) invited Woidtke to present her research at recent meetings. Both entities are monitoring the potential negative consequences of ESG shareholder activism to taxpayers, public pension fund beneficiaries and firms.
Woidtke’s research demonstrates an overall negative relationship between a firm’s value and shareholder activism on social policy issues. The data also confirms a previous study of Woidtke’s that demonstrates shareholder activism relating to corporate governance is not associated with decreased value. Firms that undergo shareholder activism focusing on poor firm performance generally have higher value.
“Shareholder activists encouraging their fellow shareholders to withhold votes toward a director’s election expresses dissatisfaction with management performance and helps support the vitality of a business,” said Woidtke.
However, when public pension funds lobby companies as government entities with political motivations instead of shareholders advocating corporate profitability, a firm’s value is lower in the stock market.
Woidtke’s paper was released during the Manhattan Institute’s fifth annual Proxy Monitor conference, at which she was one of two featured panelists. Woidtke is the David E. Sharp/Home Federal Bank of Tennessee Professor in Banking and Finance at the Haslam College of Business.
Firms targeted with social-issue proposals have 21% lower value
Political shareholder activism hurts public pension fund beneficiaries