Corporate Directors Learn from Environmental Shareholder Engagements

By | September 8, 2022

Institutional investors are increasingly worried about their portfolios’ exposure to environmental risks. For example, heat waves cause a decrease in worker productivity, resulting in lower revenues and operating income, and the regulation of externalities, such as carbon pricing, affects the value of polluting firms. A global survey indicates institutional investors believe environmental risks have financial implications for their portfolios. As a result, they use shareholder engagements, such as management discussions and shareholder proposals, to raise environmental issues at companies. Shareholders even sued Shell’s directors for failing to prepare for net-zero (i.e., a scenario in which a firm reduces its emissions as much as possible and purchases carbon offsets for the remainder).  

However, according to the PwC Corporate Directors Survey, 56% of directors say investors devote too much attention to these issues. This disconnect between investors and directors raises the question: Can directors learn from investors about the importance of corporate environmental performance? In our recent working paper, we study successful (i.e., withdrawn) shareholder proposals on environmental issues as a channel for directors to learn from investors.  

Shareholder Proposals 

When a shareholder is unsatisfied with a firm’s management of environmental risks, they can file a shareholder proposal asking for improvements. For example, in 2008, New Covenant Funds sponsored a proposal asking ConocoPhillips Company the following: 

“Shareholder request that the Board of Directors adopt quantitative goals, based on current technologies, for reducing total greenhouse gas emissions from the Company’s products and operations; and that the Company report to shareholders by September 30, 2008, on its plan to achieve these goals. (…)” 

After filing a proposal, the sponsor often starts negotiating with the target firm. When the sponsor is satisfied by the firm’s response (e.g., they promise to act), the sponsor voluntarily withdraws the proposal. If the proposal’s sponsor is unsatisfied, the proposal moves forward to a non-binding vote at the annual general meeting Even though support for environmental proposals has increased over the last few years, the environmental proposals in our 2007-2017 sample period generally do not receive high vote support (23.3% on average). Hence, withdrawn proposals are the best indicator of public engagement success.  

Research Design 

To examine whether corporate directors learn from environmental engagements, we study the environmental performance of non-targeted firms connected to the target firm through overlapping directorships (hereafter, “connected firms”). Since the proposal filing at the target firm is unrelated to connected firms, we aim to show a causal effect of engagements on directors’ decision-making. Moreover, we strengthen our research design by comparing connected firms to non-connected industry and country peer firms with similar size, ROA, tangibility, and institutional ownership.  

Main Findings 

We find that connected firms experience a 7.85% increase in their MSCI environmental score relative to peers in the five years after a proposal withdrawal at the target firm. This MSCI environmental score measures material environmental risks and opportunities facing a firm following four themes: climate change, natural capital, pollution and waste, and environmental opportunities. 

Since the environmental score measures both promises (i.e., a carbon reduction target) and performance (i.e., a firm’s total CO2e emissions), we also examine CO2e emissions separately using data from Thomson Refinitiv. We do not find a significant effect of proposal withdrawals on the total CO2e emissions nor the CO2e intensity (emissions/sales) of connected firms. Therefore, the increase in the MSCI environmental score likely reflects pledges to improve environmental performance. We confirm this by showing that connected firms are between 7.9 and 8.6 percentage points more likely to set an emission target after a proposal withdrawal at the target firm relative to peers.  

Treatment Validity 

In our working paper, we use environmental proposal withdrawals as a treatment affecting directors’ decision-making. For this treatment to be valid, two conditions need to be met: environmental proposal withdrawals should (1) be consequential for target firms and, (2) increase directors’ awareness of the environmental issues addressed in the proposal.  

We find that the treatment is associated with an 8.41% increase in the MSCI environmental score of directly targeted firms relative to their peers. Again, we do not find an effect of environmental proposal withdrawals on CO2e emissions. These results imply that the treatment influences the environmental management of target firms.  

Moreover, we examine whether director characteristics correlate with the probability that an environmental proposal is withdrawn. Our results show that the environmental knowledge of a firm’s directors, proxied by the average environmental score of connected firms, is an important predictor of proposal withdrawals. A one-point increase in the environmental knowledge score (ranging from one to ten) increases the probability of withdrawal by 9.9 percentage points on average. Overall, this finding suggests that directors are involved in the proposal withdrawal process.  

Discussion and Conclusion 

Shareholder engagement can improve corporate directors’ knowledge of, and attention to, environmental issues. This awareness affects the firms these directors serve. Our findings contribute to the discussion of sustainable corporate governance. For example, the European Union commissioned a study examining several avenues for improving sustainable governance, such as tying remuneration to sustainability goals and setting minimum standard rules to enhance long-term value creation.  

However, these proposed changes can be problematic when they lead to decision-making that aims to check the box instead of doing what is best for the company’s value. In our paper, the overlapping director has no obligation to advocate for improved environmental management at connected firms, yet we still find a significant and positive effect. Hence, shareholder engagement can be used to improve sustainable governance.  

Our work provides one of the first looks at the effect of the board of directors on corporate environmental performance. Future research can extend this work to other topics, such as diversity, labor practices, and supply chain management. Furthermore, another opportunity for future research concerns director re-elections. Over the last few years, some investors have said that they vote against the re-election of directors whenever they believe that the board does not manage environmental risks correctly. Examining the effects of such re-election votes on corporate decision-making would be helpful. When investors vote against directors because they do not support the board’s environmental and social risks management, does the board change its position and improve the firm’s management of these risks? More data is needed to answer this question. 


Rob Bauer is a Professor of Finance and the Institutional Investors Chair at the Maastricht University School of Business and Economics.  

Jeroen Derwall is an Associate Professor of Sustainable Finance at the Maastricht University School of Business and Economics and Utrecht University.  

Colin Tissen is a Ph.D. candidate at the Maastricht University School of Business and Economics.  

This post is adapted from their paper, “Corporate Directors Learn From Environmental Shareholder Engagements,” available from SSRN. 

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