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Most large investors take the approach of influencing firm behavior through one-on-one meetings and private messages.

These tactics are both invisible to the public and labor-intensive to enact. 

Large investors have more efficient options for getting firms to do what they want, according to research from Andrea Pawliczek, assistant professor of accounting at Leeds. Her recent studies within the field of corporate governance have focused on ways that investors try to influence a firm’s ESG (environmental, social and governance) performance, and the effectiveness of those tactics.

“Investors can have a voice without necessarily having those individual meetings. They have the ability to influence firm behavior by setting policies, and firms are following those policies,” Pawliczek said. “From an investor’s perspective, this is much more efficient.”

BlackRock’s Dear CEO Letters influence firm behavior

Pawliczek studied the impact of BlackRock CEO Larry Fink’s “Dear CEO” Letters by looking at their impact on disclosures like press releases and quarterly reports from portfolio firms. She published these findings in the paper , which won CESR’s 2022 Best Paper Award, co-authored with Nikki Skinner from the University of Georgia, who will join the Leeds faculty in the fall, and Laura Wellman from Pennsylvania State University.

“The more important piece we see is that for those firms that adopt ESG contracting, we do see improvement in ESG scores and performance,”

- says Pawliczek

“In the ESG space, people have differing perspectives on how things will impact profitability,” Pawliczek said. “BlackRock didn’t think that firms were factoring in climate change appropriately in their business models. Their perspective is that climate change will impact profitability in the future, and that future profitability should impact stock prices now.”

Pawliczek and her co-authors hypothesized that if firms were listening to these letters, their subsequent disclosures would include the same topics as the letters. They found that firms were more likely to address the ESG-related topics that Larry Fink identified as relevant in his “Dear CEO” Letters in the months after they came out, and this impact was larger in firms where BlackRock had a larger ownership stake. 

BlackRock paid attention to whether or not firms responded to these preferences as well. BlackRock was more likely to vote against management in shareholder meetings for firms that did not include the topics from the “Dear CEO” Letters in their disclosures, the study found.

“It’s just another signal to managers that shareholders are watching, and if you’re not understanding and responding to their preferences, that can have consequences,” Pawliczek said. “It can lead to a lower share price or even management turnover in more extreme cases.”

Aligning investor and firm beliefs for effective relationships

Pawliczek noted that investors and firms are likely to be most satisfied if they have shared beliefs about topics such as climate change. For example, if a firm wants to build a plant on the Gulf Coast, investors who are concerned about climate change will think that plant is going to be off-line in the future as hurricane frequency increases, so they won’t see that investment as profitable. Investors who don’t assess climate change to be serious might see that as a profitable investment. 

“Even beyond beliefs, what you think about climate change can affect your cash flow forecasts, which is what business is all about,” Pawliczek said. “That’s how you make investment decisions, that’s what we teach our students: you invest in positive-NPV (net present value) projects. But if I’m trying to forecast what cash flows a project is going to generate 20 years out, in a lot of instances my views on something like climate change are going to impact those forecasts.”

Going back to the Gulf Coast plant example, the manager who sees the impacts of climate change as serious is not going to invest in that plant. If an investor doesn’t agree with the assessment of those impacts, they may see not investing as a bad decision and won’t be satisfied with decision-making at the firm. 

Pawliczek noted that simply screening investments based on ESG performance may not be an effective way to create change. This is true because those screens only include firms that are already performing well on ESG, and firms care more about the opinions of shareholders than non-shareholders. One alternative perspective to aligning values of investors and firm managers, is that the way to influence firm behavior is by becoming a shareholder and voting, to create change from the inside. Regardless of the strategy for change behind its deployment, money is more impactful when moving in groups.

“The money in the ESG mutual funds is growing, so putting more money there does make the voice come together and have more of an impact,”

- says Pawliczek

“Investing in funds and managers that are in alignment with your values gives those managers more voice on the margin, because that gives them more ownership,” Pawliczek said. “The money in the ESG mutual funds is growing, so putting more money there does make the voice come together and have more of an impact.” In the current environment investor perspectives on ESG are becoming more polarized on both sides, meaning the pricing signals for marginally better or worse ESG performance are less clear. Interest is increasing in pro-ESG funds at the same time as anti-ESG Republicans are working to outlaw ESG considerations in the investment of public pension funds and divesting from investment managers like BlackRock.

• Learn more about ESG research from Leeds faculty, including topics like DEI, ethical leadership and environmental sustainability in these related articles.