By Massimiliano Bonacchi, April Klein, Sara Longo & Giovanni Strampelli

We study the effectiveness of institutional investor engagement on the ESG performance of a sample of UK firms listed in the FTSE 350 Index. To measure the quality of engagement, we exploit the introduction of the tiering classification system by the Financial Reporting Council (FRC) in 2016 for signatories’ reporting under the UK Stewardship Code. Using an entropy matched difference-in-differences research design, we show that the introduction of the tiering system was associated with increases in ESG performances in investee companies. Further, our results are consistent with high quality engagement investors (Tier 1) being more effective than lower quality engagement investors (No Tier) in improving ESG performance overall. Our results contribute to the growing literatures on the effectiveness of institutional investor monitoring investees’ ESG behavior, as well as the role stewardship codes play in this arena. Our findings have policy implications – from a regulatory perspective, we validate the assumption of a strong correlation between the quality of stewardship-related disclosures and the quality of engagement. Our results also suggest that disclosure-based reputational incentives are effective in influencing institutional investors preferences.

Source: SSRN