Responsibly Active: How Institutional Activism through ESG-engagements Affect Firm Performance and Investor Returns

Andreas Åström & Robin Gaastra

Student thesis: Master thesis


Based on a private data set of active engagements on topics around Environmental, Social and Governance, this thesis identifies that certain ESG-engagements have higher likelihood of being successful both in terms of completion and of value creation but that there generally is a negative to neutral effect of a firm being engaged in terms of improved Excess return, ROA, Tobin’s Q and Sales per employee. With the data set provided by Schroder Investment Management, this paper takes an exploratory approach to investigate how active ownership on ESG-issues is received by the target firm and how it affects operational performance measure and stock market reactions in the time period 2005-2016. By first assessing objective engagements, the paper finds that there are great differences between ESG-components, sectors, topics, regions and more and how likely it is that the objective is achieved by the firm. With less than half of the objective engagements being achieved, this finding is of large practical importance as it indicates that certain engagement specifications are more successful and deemed more important than others, and that the differences are unneglectable. By investigating the process one level deeper than most existing research, the finding that there are no significant relations between ESG-engagements and the corporate performance measures ROA, Tobin’s Q and Sales per employee, adds value to the discussion about causality between ESG-initiatives and corporate performance. The lack of significance is discussed and it is implied that practitioners need to relate the engagement objectives more closely to observable and measurable areas in order for the efforts to be priced appropriately. Lastly, the paper investigates if the goal of the active owner is met, i.e. to generate excess returns. A negative to neutral excess return is found which indicates that the efforts are not currently translatable to increased shareholder returns. Importantly, the model finds that the market reactions improve when only the achieved objective engagements are analyzed, further strengthening the importance of more specific, detailed and cohesive engagements efforts that are likely to be achieved, measurable and valuable. Taken together, the paper complements existing research in analyzing the value chain of active ownership on ESG-issues but also offers insights for practitioners that can allow for more accurate engagements going forward.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages136