The Sustainability Footprint of Institutional Investors
Institutional Investors are currently the dominant category of shareholders in stock markets and have attracted considerable attention by academics. Yet, there is relatively little evidence on the environmental and social characteristics of institutional investors’ portfolio holdings and knowledge on the motivations underlying institutional investors’ concerns for corporate social responsibility (CSR) and sustainability is at best emerging.
A recent study titled “The sustainability footprint of institutional investors”, by Rajna Gibson Brandon and Philipp Krueger, both at the University of Geneva attempts to fill these gaps by pursuing two main objectives.
First, the authors propose a novel way of measuring the environmental, social, and aggregate sustainability footprint (or “impact”) at the institutional investor stock portfolio-level. The measure they develop is based on a combination of (i) institutional investor equity holdings data as reported in their quarterly 13F filings to the SEC and (ii) average stock-level environmental, social and sustainability scores collected from two ESG data providers, namely Thomson Reuters (formerly Asset4) and MSCI. They find that the environmental footprint of the representative investor has been improving since 2002, while the social footprint has in fact deteriorated. Further, they provide evidence that institutional investors with longer investment horizons tend to exhibit better sustainability footprints.
Second, the authors examine the relation between risk-adjusted investment performance and the sustainability footprints to distinguish between alternative hypotheses about institutional investors’ motivations to engage in sustainable portfolio allocation. They find that risk-adjusted returns are generally higher for investors with better environmental footprints. The results on the relation between risk-adjusted performance and the social footprint are less systematic in that they are either not significant or slightly negative. They also find a strong negative relation between measures of portfolio risk and both the social and the environmental footprint, highlighting the fact that sustainability analysis operates as a risk management device and allows institutional investors to effectively reduce their portfolio risk.
To argue for a causal interpretation of the relation between risk-adjusted performance and sustainability footprints, the authors use an identification strategy that isolates exogenous variation in institutional investor-level sustainability by using the occurrence of natural disasters in the US. The idea behind this identification strategy is that the occurrence of natural disasters close to the institutional investors’ headquarters provides exogenous shocks to the institutional investors’ sustainability preferences. They find that, following the natural disaster treatment, sustainability footprints improve. More importantly, the analysis also shows that their measures of portfolio performance are positively related to sustainability footprints for treated institutions. This evidence suggests that the relation between risk-adjusted performance and sustainability footprints is likely to be causal.
Taken together, the empirical evidence suggests that it is probably a mix between risk-adjusted performance considerations and stakeholder driven normative motivations that lead institutional investors to adopt sustainable investment practices.