Corporate socially responsible engagements with U.S. companies produced on average an 1.8 percentage points in incremental return over a 12-month period after the initial engagement, according to findings by three academics who on Oct. 2 were named winners of the $5,000 Moskowitz Prize for their research.
“The average one-year abnormal return after initial engagement is 4.4 (percentage points) for successful engagements whereas there is no market reaction to unsuccessful ones,” according to the paper, “Active Ownership.”
The returns are after controlling for market fluctuations.
The paper is written by:
- Elroy Dimson, chairman of the strategy council for the 3.3 trillion Norwegian kroner ($577.4 billion) Norwegian Government Pension Fund Global, Oslo, and Leverhulme Emeritus Fellow at London Business School. Mr. Dimson is also fellow and visiting professor in finance at Cambridge Judge Business School and co-director of its Endowment Asset Management Program; joint program director of the Commonfund Endowment Institute at Yale School of Management and an advisory board member of Russell Investments, FTSE Group, and CFA Institute.
- Oguzhan Karakas, assistant professor, finance department, Carroll School of Management, Boston College.
- Xi Li, assistant professor of accounting , Fox School of Business, Temple University.
The three will share the prize, recognizing outstanding quantitative research in the field of sustainable, responsible and impact investing. “How we split it up is up to us,” Mr. Dimson said in an e-mail.
Their research found “positive market reaction to successful CSR engagements is most pronounced on the corporate governance and climate-change themes,” giving rise to 7.1 percentage points and 10.6 percentage points in abnormal return, respectively, over a 12-month period.
“The success rate for engagements ... is 18% and on average it takes 2-3 engagements before success,” the paper said. The remaining majority of engagements were unsuccessful.
“One view is that CSR practices allow management to take a long-term perspective,” the paper said.
“Taken together, our findings suggest that CSR activism improves social welfare, as it increases stakeholder value from various aspects when the engagements are successful and it does not destroy firm value even when engagements are unsuccessful,” they write in the paper.
Mr. Dimson in an e-mail said: “Large owners often have no choice but to engage with investee companies. Our research shows that there is no cost to such engagement in terms of gross performance. And where there is success, most notably in the corporate governance area, there is a benefit when the engagement achieves its objectives.”
“I cannot tell you whether it "pays' because you need to factor in the cost of engagement, which is non-trivial,” Mr. Dimson added in his e-mail. “The firm we examined is large, so the benefits probably outweighed the costs. We did not evaluate the cost of engagement to the investor.”
For their research, the three academics examined 2,152 engagement events for 613 U.S. companies between 1999 and 2009, using a dataset provided by a large institutional investor with a major commitment to responsible investment. The researchers identified the institutional investor only as ranking in the top 100 in the annual P&I/Towers Watson World 500 list of largest institutional investors. None of the authors would identify the institutional investor.
Engagements came in the form of e-mails, telephone conversations and direct dialogue with senior management.
Calvert Group, Neuberger Berman, Nelson Capital Management, Rockefeller and Co., Trillium Asset Management and First Affirmative Financial Network are among sponsors of the prize. The prize is managed by the Center for Responsible Business of the Haas School of Business, University of California, Berkeley.
A total of 40 papers were submitted for consideration, said Lloyd Kurtz, administrator of the prize who is chief investment officer of Nelson Capital Management and a lecturer of social investing at the Center for Responsible Business.
The prize, first awarded in 1996, is named for Milton Moskowitz, a pioneer in publishing comparisons of the financial performance of screened and unscreened portfolios.
Mr. Karakas and Ms. Li accepted the prize Oct. 2 at the SRI Conference at Mohegan Sun Conference Center, Uncasville, Conn.
