Money Talks-Institutional Investors' Ability to Affect Their Holdings Using Norm Based Exclusions and Dialogues

Abstract: Institutional investors hold unique power, as they can use SRI-strategies to change the behavior of companies not contributing to a sustainable development. While most studies that are investigating investors' usage of SRI-strategies are focused on the financial implications in terms of returns, this paper focus solely on the environmental performance of holdings affected by the SRI-strategies. In the Nordic region, two of the predominant SRI-strategies that are used among institutional investors are norm-based exclusions and investor dialogues. By analyzing firms' environmental data using a difference-in-difference specification applied to a fixed-effect panel data regression, no evidence supporting that norm-based exclusions positively impact the environmental practices of affected holdings is found. It is argued that investors' lack of consensus regarding companies being excluded and the insufficient transparency concerning the exclusion decisions, are explaining why no positive impact can be identified. The difference-in-difference methodology is also used to evaluate the impact of investor dialogues. The results show that firms that are subject to the dialogue initiative, which is conducted by a non-profit organisation representing global institutional investors, have lower emission intensities than companies that have not engaged in the dialogue. Even though the causality of dialogues with regards to the lowered emission intensities cannot be confirmed, it is demonstrated that investor dialogues can be used to identify companies that are most likely to improve their environmental practices.