Passive Investors and Corporate Social Responsibility: a Risk-Management Perspective

Abstract

This paper develops a risk-management view of CSR by arguing that CSR provides insurance-like effects in adverse corporate events. Since passive investors have diversified away most idiosyncratic risks, we predict that they demand less CSR as a strategic approach to manage risks. Using the annual Russell 1000/2000 index reconstitution as an instrument for passive investor ownership, we find that firms with higher passive fund ownership exhibit significantly lower CSR engagement. The effects are more pronounced among better-diversified passive investors and firms that are not in CSR-sensitive industries. We further show that passive investors hold back CSR activities through the channel of voice by reducing the number of socially responsible investment (SRI) proposals and they do not negatively screen socially irresponsible “sin” stocks. Overall, the findings shed light on the risk-management function of CSR and provide original evidence that passive investors imprint their preference on firm policy.