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Can Green Investments Increase Your Green? Evidence from Social Hedge Fund Activists

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“Investing in a company that doesn’t disclose its pollution is like investing in a company that doesn’t disclose its balance sheet…If governments won’t force disclosure, then investors can force it themselves.” (Chris Hohn, manager of TCI fund). “Hedge fund TCI vows to punish directors over climate change,” Financial Times, December 1, 2019.

Abstract

In our study, we examine the association between hedge fund activism and a target firm’s corporate social responsibility (CSR) activities and whether activists can promote socially responsible investments while upholding shareholders’ interests. Using different matched samples, we find a strong positive association between the target firm’s CSR in the year before it is targeted by activists and its probability of being targeted by a hedge fund. Classifying hedge fund activists into socially and non-socially responsible funds based on their objectives, we find that both give similar level of consideration to a firm’s CSR activities when initiating campaigns. Similar to DesJardine and Durand (DesJardine and Durand, Strategic Management Journal 41:1054–1082, 2020), we demonstrate that hedge funds have, on average, a negative impact on target firms’ CSR in the years following the initial investments. Complementary to DesJardine and Durand (DesJardine and Durand, Strategic Management Journal 41:1054–1082, 2020), we compare the two types of hedge funds and find an asymmetric effect of the hedge funds’ campaigns. Socially responsible hedge fund campaigns are associated with a large increase in their target’s CSR, whereas non-socially responsible hedge funds decrease this measure in their target. Finally, we find that target firms exhibit a long-term improvement in future stock returns and profitability. These findings provide evidence that certain types of activists, such as socially responsible funds, promote both stakeholder and shareholders’ long-term interests.

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Notes

  1. See Online Appendix B for a detailed explanation and examples of social vs non-social hedge fund classifications.

  2. For example, Fannie Mae, when overstating its earnings by over US$6 billion from 2001–2004, was listed as “the most ethical company in the United States” (Jennings, 2012, p. 121). Enron won a number CSR awards (including a climate protection award from EPA (the Environmental Protection Agency) and a corporate conscience award from the Council on Economic Priorities); however, it is involved with one of the largest accounting scandals in US history.

  3. We ended our sample in 2017 due to limitations in CSR data.

  4. We exclude firms if the value of the variable shrcd from CRSP is 14 (closed-end funds) or if first digit of shrcd is 3 (ADRs).

  5. MSCI ESG KLD STATS was initiated in 1991 and contains data on approximately 650 firms from 1991–2000, on 1,100 firms from 2001–2013, and on 2,400 firms since 2013.

  6. KLD data are available until 2018; therefore, for the years 2014, 2015, 2016, and 2017 we, respectively, use four-, three-, two-, and one-year windows after the intervention.

  7. When comparing our final sample to a sample of 3,471 target firms without KLD data, we find that our target firms are marginally larger and older (with a difference of 10%).

  8. We exclude the corporate governance category because corporate governance is a construct that is considered distinct from CSR (e.g., Harjoto and Laksmana, 2018; Kim et al., 2012). We include this category as a control variable in our main model.

  9. We use the following keywords: CSR, corporate social responsibility, corporate social, environment, environmentally, social, socially, socially responsible, socially responsible investment, and SRI.

  10. See https://www.bhgrp.com/esg-policy/.

  11. See Online Appendix B for detailed explanation of socially responsible versus non-socially responsible classification. To maintain the consistency of classification, multiple co-authors participated in the screening procedure and discussed each case until co-authors reached consensus.

  12. We classify the goals of hedge fund activists based on the SharkWatch database and from Schedule 13D filings.

  13. On May 25, 2022, Security and Exchange Commission proposed to enhance disclosures by certain investment advisers and investment companies about ESG investment practices. The proposed amendments seek to categorize certain types of ESG strategies and require funds and to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. https://www.sec.gov/news/press-release/2022-92.

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Authors and Affiliations

  1. Wenzhou-Kean University, 88 Daxue Rd, Ouhai, Wenzhou, 325060, Zhejiang Province, China

    Jonghyuk Bae

  2. Drexel University, 3141 Chestnut Street, Philadelphia, PA, 19104, USA

    Natalya Khimich

  3. Rutgers University, 227 Penn St, Camden, NJ, 08102, USA

    Sungsoo Kim

  4. University of Maryland, Van Munching Hall, College Park, MD, 20742, USA

    Emanuel Zur

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  1. Jonghyuk Bae
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Bae, J., Khimich, N., Kim, S. et al. Can Green Investments Increase Your Green? Evidence from Social Hedge Fund Activists. J Bus Ethics 187, 781–801 (2023). https://doi.org/10.1007/s10551-022-05230-x

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