Private ESG Shareholder Engagement and Risk: Clinical Study of the Extractive Industry

Abstract

The impact of private ESG shareholder engagement on firm financial performance has recently received considerable attention in the academic literature (Becht et al. 2008) and Dimson et al. 2015). Comparing with Dimson et al. study of ESG engagement effect on return across all industries in the US, we conduct analysis of the impact of ESG shareholder engagement on financial performance and further investigate the mechanisms underlying the engagement effect focusing on the extractive industry. We find that engagement target has relatively lower downside risk than its equivalent control firm. Lower partial moment LPM (0, 2) and lower partial moment LPM (0, 3) are 1.1% and 1.4% less for the engagement targets respectively. And this improved target risk performance in extractive industry does not constrain target abnormal return. With regard to the evaluation of engagement success rate effect on risk and return comparing with the controls, we find that targets with average engagement achieved milestone 3 or 4 produces in average 3.9% less downside risk than targets only achieved milestone 1 or 2 in comparison with controls. Moreover, engagement with targets chair and CSR management assists to successfully complete an engagement. In all, this paper provides clinical evidence to show that ESG shareholder engagement enhance shareholder value in a long run by controlling firm downside risk in attractive industry.