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Essays on the effects of ESG shareholder engagement on investment risks and return

Zhou, X. (2017) Essays on the effects of ESG shareholder engagement on investment risks and return. PhD thesis, University of Reading

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The link between Environmental, Social and Governance (ESG) shareholder engagement and financial risk and/or return is a very novel topic within the wider relevant literature. While prominent theoretical and empirical research has studied shareholder activism in the form of raising shareholder proposals, literature specifically pinpointing shareholder engagements, a rapidly growing alternative form of activism, is scarce. This thesis provides a quantitative analysis of a leading UK activist’s (Hermes Equity Ownership Services) ESG shareholder engagement and its impact on investment risk as well as the role of additional determining engagement factors lying behind these financial impacts. First, I investigate the issue of the ESG engagement effect on investment risk by examining the respective differences between target firms and control firms during the entire engagement period. The main finding is that ESG shareholder engagement creates a demonstrable value protection effect. The engagement targets have significantly less downside risk and Value at Risk than control firms. This result holds for subsamples of engagements related to governance theme, the combination of governance and social themes, and the combination of governance and environmental themes. However, this risk reduction effect disappears for environmental or social engagements alone. Moreover, I find that reduced risk only manifests for engagement targets that take actions/strategies to meet the investors’ requirements. Secondly, I analyse ESG engagement effects on investment returns and find little evidence of a strong association between the two. This conclusion holds for subsamples created by theme, industry or geography. I argue that ESG engagement hardly delivers any abnormal returns in the long run when the market learns the anomalies associated with ESG information. Thirdly, I further explore the financial impacts of ESG engagement and the mechanisms underlying it, focusing on the extractive industry only. I find that a successful engagement produces in average lower downside risk than a less successful engagement. Further investigating this, I show that tactics contributing to a successful engagement include targeting the higher authority levels of engaged firms, communicating via personal meetings (instead of alternative channels) and being consistent in the engagement proc

Item Type:Thesis (PhD)
Thesis Supervisor:Hoepner, A. and Oikonomou, I.
Thesis/Report Department:Henley Business School
Identification Number/DOI:
Divisions:Henley Business School
ID Code:69965
Date on Title Page:2016

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