Julie Gorte: Linking Investor Engagement with Financial Value, July 2019.

Julie Gorte
Senior Vice President for Sustainable Investing, Impax Asset Management

Goldman Sachs’ equity research report “Shareholder Engagement in the Age of Transparency” says: “We believe shareholder resolutions can offer additional insight into emerging material risks and externalities for issues, as well as management responsiveness.”[1] The report also notes that support for environmental and social shareholder proposals has been rising for several years, with nearly 30 percent of votes going in favor of shareholder proposals. Considering that insider ownership for U.S. companies averages about 13.6 percent,[2] it is quite possible that the support for these proposals among outside shareholders is significantly higher.

A recent study [3] that looked at 847 engagements with 660 companies around the globe over a decade (2004-2014) found that successful engagements — those that did improve ESG performance — were correlated with higher sales growth without changing profitability. Moreover, a portfolio of firms that were engaged by shareholders outperformed a matched portfolio of companies that were not engaged by 4.7 percent. Another study,[4] which examined 2,152 ESG engagements at 613 publicly traded firms over a decade (1999–-2009), also found that the companies that were the subjects of these engagements had higher abnormal returns of around 1.8 percent during the year following the engagement, and the successful engagements were associated with higher abnormal returns of 4.4 percent over the following year (and zero for the unsuccessful ones).Results such as these help to explain why the votes in support of these proposals have gone up: They are about things that can and do affect financial performance. For example, of the proposals that did receive majority votes of support in 2018,[5] the engagements included topics that absolutely had financial relevance: the opioid crisis, coal ash risks, climate change and greenhouse gas emissions. Consider that one drugmaker’s stock price lost 80 percent of its value[6] after it was indicted for misleading doctors and public health officials about the effects of its opioid addiction treatment, and one of the major manufacturers of opioids, Purdue Pharmaceuticals, is reportedly looking into declaring bankruptcy in the face of expanding litigation.[7] On the climate change front, 2019 witnessed what The Wall Street Journal described as the world’s first climate change bankruptcy,[8] after PG&E declared Chapter 11 as its liabilities and penalties for destructive wildfires skyrocketed.

Bankruptcies and stock price collapses happen all the time, of course; is there any evidence that proactive work to be more sustainable might lessen them? Yes, plenty. Several recent papers have focused on what we often call tail risk — highly impactful events that can have major implications for value but that are relatively rare historically. One recent paper [9] provides quantitative evidence that investors see strong ESG practices as a hedge against what we call a left-tail risk, or large drop in value. This could be because better sustainability practice reduces firms’ vulnerability to litigation and environmental disasters, both of which can make noticeable dents in companies’ reputational value. Another recent article noted that ESG, while not a traditional style factor, was known to reduce risk in portfolios. [10] A 2018 report from MSCI [11] sheds additional light on that idea, noting that investors are interested in how ESG integration changes both systematic and stock-specific risks in portfolios over multiple time periods. Portfolios with higher ESG ratings had better risk-adjusted returns than their parent indexes.

Climate change, which is one of the main topics in shareholder proposals, is another good example of the connection with financial value. If not addressed, climate change could cost us perhaps five percent of gross domestic product annually in perpetuity,[12] and investors see it as a material source of several kinds of risk and opportunity. One recent paper [13] constructed a portfolio that had long positions in more carbon-efficient firms and short ones in carbon-inefficient firms, and that portfolio generated abnormal returns of 3.5–5.4 percent per year. Another study showed that low-carbon indexes have generally outperformed mainstream benchmarks.[14]


  1. Derek R. Bingham, Tristyn Martin, Sharmini Chetwode, Christopher Vilburn, Evan Tylenda and SoYoung Lee, “Shareholder Engagement in the Age of Transparency,” Goldman Sachs Equity Research, June 12, 2019.

  2. “Insider and Institutional Holdings by Sector (US),” Damodoran Online, Stern Business School, New York University, Jan. 2019.

  3. Tamas Barko, Martijn Cremers, Luc Renneboog, “Shareholder Engagement on Environmental, Social, and Governance Performance,” European Corporate Governance Institute, May 31, 2017.

  4. Elroy Dimson, Oguzhan Karakas, Xi Li, “Active Ownership,” The Review of Financial Studies, Aug. 12, 2015.

  5. Heidi Welsh, “Proxy Season Review: Social, Environmental & Sustainable Governance Shareholder Proposals in 2018,” Sustainable Investments Institute, Nov. 9, 2018.

  6. Theron Mohamed, “A UK Drugmaker’s Stock Crashed 80% After It Was Indicted for a ‘Truly Shameful’ Opioid-Addiction Scheme, Markets Insider, April 10, 2019.

  7. Berkeley Lovelace Jr., “OxyContin-maker Purdue Pharma Reportedly Exploring Bankruptcy Amid Litigation Over Opioids,” CNBC, March 4, 2019.

  8. Russell Gold, “PG&E: The First Climate-Change Bankruptcy, Probably Not the Last,” The Wall Street Journal, Jan. 18, 2019.

  9. Michael Shafer and Edward Szado, “Environmental, Social, and Governance Practices and Perceived Tail Risk,” July 26, 2018.

  10. Carlo Svaluto Moreolo, “ESG: The Sustainability Factor,” Investments & Pensions Europe, April 2018.

  11. Guido Giese, Linda-Eling Lee, Dimitris Melas, Zoltan Nagy, Laura Nishikawa, “Foundations of ESG Investing,” MSCI, May 2018.

  12. Nicolas Stern, “The Stern Review: The Economics of Climate Change,” Cambridge University Press, March 2014.

  13. Soh Young In, Ki Young Park, Ashby H.B. Monk, “Is ‘Being Green’ Rewarded in the Market?: An Empirical Investigation of Decarbonization and Stock Returns,” Stanford Global Projects Center, April 19, 2019.

  14. Oliver Oehri, Christoph Dreher, Christoph Jochum, “Climate-friendly Investment Strategies and Performance,” Center for Social and Sustainable Products and South Pole Carbon Asset Management Ltd., Nov. 7, 2016.

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