Dramatic images showing icebergs melting, global warming-related avalanches, and destructive landslides and wildfires caused by extreme weather events are now commonplace in news broadcasts. It is no surprise then that climate change-related corporate proposals have increased steadily in recent years, reflecting growing investor demand for corporate accountability around this issue. Given such a stance, what is surprising is that environmental proposals rarely receive wide support: from 2006 to 2020, only 2.8% of such proposals passed during shareholder meetings. We argue that this lack of shareholder support for environmental proposals stems from their perception that climate risks are a concern in faraway regions but not locally. We test this conjecture in our paper titled “Do salient climatic risks affect shareholder voting?” Specifically, we study whether shareholders’ support for environmental proposals changes after a local extreme weather event alters their beliefs about climate risk.
Beliefs and support
Behavioral theories posit that salient risks can lead individuals to overweigh a tail event and distort their beliefs about their true probability of occurrence. In the context of our study, these theories imply that when an extreme weather event strikes the shareholders’ location (i.e., becomes salient to shareholders), they would turn more supportive towards firm’s environmental policies. The challenge, however, is that measuring shareholders’ beliefs about climate change is notoriously difficult. To circumvent this issue, we identify whether the headquarter location of institutional shareholders (e.g., pension or mutual funds) was recently hit by a hurricane. We conjecture that experiencing such a weather-related disaster increases these investors’ subjective assessment of the climate risks faced by their portfolio firms. Yet, hurricane strikes are unlikely to alter the actual climate-related risk of a given portfolio company (particularly if it is located outside the hurricane area). Hence, our experiment captures investors’ pure beliefs about climate risk rather than their portfolio firm’s actual risk. We examine whether during shareholder meetings that occur right after the hurricane event, hurricane-affected shareholders are more supportive towards environmental proposals than unaffected shareholders.
We find that heterogeneity in climate risk perceptions across investors translates into differences in revealed voting behavior. Facing the same environmental proposal, institutional shareholders in areas hit by a hurricane are significantly more likely to support it immediately after the strike. This result holds in the subset of institutions located in hurricane-afflicted counties (i.e., counties with at least one hurricane strike) and institutions that previously have never supported an environmental proposal. The likelihood of support by institutional shareholders with a recent hurricane event is about 38% higher than the support by other institutions. As a benchmark, the average support rate for these proposals is about 25% in our sample. Importantly, we do not find that the “hurricane-afflicted institutions” increase their support for non-climate proposals during the same meeting.
We also examine how institution/firm characteristics affect the support rate for environmental proposals. The results show that an institution’s overreaction to perceived climate risks increases with its stake in the portfolio company. Moreover, we also find that the sensitivity towards perceived climate risk is higher for portfolio firms in high pollution sectors, such as petroleum and natural gas, construction, and chemicals, and for firms closer to a hurricane disaster area.
Notably, we observe that institutional investors affected by a hurricane reverse their support for environmental initiatives about three years after the strike. This finding is consistent with existing work showing that climate-related overreactions subside as attention to this issue dissipates.
Implications
The increased support from hurricane-affected institutions has important implications for corporate environmental policies as it raises their overall approval rates during a shareholder meeting. According to our estimates, increasing the hurricane institutions’ share of supportive votes by one standard deviation is associated with a 7 percent increase in the proposal’s overall approval rate. The increase in the approval rate is materially important because it improves the odds that the proposal receives enough votes to pass during the shareholder meeting.
Finally, our paper addresses one of the most controversial issues in the debate on whether ESG initiatives in general—and climate-change related proposals in particular—create firm value. To do so, we use an identification strategy that lets us to determine the plausibly causal impact of environmental proposals. The results show that abnormal returns on the voting date are 3.7% lower for firms that pass a climate proposal than for firms for which a similar proposal fails. Companies that approve environmental proposals also exhibit lower long-term stock returns and accounting underperformance. These findings point to the high costs of implementing climate-related policies.
Summary
We empirically study the association between shareholders’ beliefs about climate risk and their support for environmental proposals. We also consider whether these proposals affect firm value. Our results indicate that institutional investors in areas hit by a hurricane are significantly more likely to endorse a climate-related environmental proposal immediately after the strike. This increased support leads to a higher chance that an environmental proposal passes in the shareholder meeting. We find that environmental proposals adversely affect shareholder wealth in the firms that approve them as stock market returns on the voting date are markedly lower for these firms. Consistent with this short-term stock return evidence, we also find that companies that pass environmental proposals earn lower long-term stock and accounting returns.
Our findings should be of interest to regulators, academics, investors, and other groups debating the role of corporations in environmental protection. While our tests indicate that corporate climate-related initiatives harm shareholder wealth, we do not assess their impact on the welfare of society at large. We hope that our work motivates other researchers to explore this important piece of the puzzle.
Eliezer Fich is a Dean’s Term Chair Professor at the Drexel University LeBow College of Business.
Guosong Xu is an Assistant Professor of Finance at the Erasmus University Rotterdam School of Management
This post is based on their paper, “Do salient climatic risks affect shareholder voting?”, available on SSRN.
