Responsible investment: Institutional shareholders and ESG performance

Abstract

This study examines the impact of institutional investors on firms' environmental, social, and governance (ESG) performance and the possible channels through which this impact occurs. Using a large, balanced set of panel data from 3881 companies in China from 2009 to 2021, we uncover the following significant associations. (i) A positive relationship exists between institutional investors and ESG performance, which holds after considering potential endogeneity problems and conducting a series of robustness tests. (ii) Specifically, institutional investors affect firms' ESG performance by enhancing their ESG strengths, improving their ESG weaknesses, and encouraging them to be more green. (iii) Institutional investors also influence firms' ESG performance positively through voicing and exit threats, although they may have a negative influence in the presence of collusion; however, we find no support for the soft activism mechanism by site visiting. (iv) The positive effect of institutional investors on ESG performance is more pronounced for stable and independent institutional investors, firms whose industries are not heavy polluters, and firms with worse corporate governance than for their counterparts. (v) Finally, financial returns motivate institutional investors to improve firms' ESG performance.