Climate change and sustainability are on everyone’s lips despite the current headwinds. Many people are wondering how companies can be persuaded to operate in a more environmentally friendly and socially responsible way, or how latecomers can be convinced to actively improve. How can we achieve this? One way is for investors, such as investment or fund companies, to exert pressure on the companies they invest in. To initiate or accelerate change, this can be done through the use of voting rights and/or via direct company dialogues (i.e. engagement). But does this really have an effect? Do companies actually do more for the environment and society?

To answer these questions, we looked at three recent studies. How does the scientific community currently assess this topic? One study analyses the sustainability reports of companies,trying to find out whether companies that promise a lot actually do do more than other companies. Another study scrutinises whether shareholder motions with concrete suggestions, e.g. on climate protection, lead to companies improving in these areas. The third study tests whether companies set themselves more ambitious environmental targets when a major index provider directly asks them to do so.

The core questions:

• Can companies be persuaded to become more sustainable and protect the climate?
• Do companies just talk, or do they really put their money where their mouth is?
• What strategies work best?

We explore these questions below. First, we will briefly present the three studies, then we compare their findings. Finally, we will discuss what this means for investors and companies and what further research is needed.

An overview of the three studies

The three studies analyse in different ways how investors influence companies. Together, they provide a more comprehensive picture.

The first study by Bingler and colleagues examines the sustainability reports of large companies from 2010 to 2020, using a special computer programme to search for passages where companies are making non-binding promises, referred to as “cheap talk” in the study. It analyses whether companies that provide rather superficial information also do less for the climate and the environment.

The study by Levasseur and Mazza analyses the impact of shareholder motions with concrete suggestions, e.g. for the increased use of renewable energies, which were put forward at annual general meetings. Here, 475 shareholder motions from 210 companies included in the S&P 500 or Stoxx Europe 600 index were analysed over the period from 2010 to 2020 to find out whether the motions improved the financial and non-financial (ESG) performance of the companies.

The third study by Kölbel and Heeb uses a field experiment to analyse whether the commitment of an index provider influences the climate goals of companies. In this case, the researchers worked with an index provider that calculates and provides indices that fulfil the minimum standards for EU climate transition benchmarks and EU Paris-aligned benchmarks. They sent letters to 300 randomly selected companies from a total of 1,227 companies in which said companies were asked by the index provider to set scientifically sound climate targets in order to remain in the index. This was followed by the analysis of how many companies complied with the request.

Comparison of results

While the studies examine the topic from different perspectives and using different methods, they come to similar core conclusions.

Bingler and Co. conclude that companies that tend to present non-binding activities in their reports often do less for the climate and the environment. They are also more often the target of NGOs and the media. Non-binding initiatives therefore tend to point in the direction of “appearance over reality”.

Levasseur and Mazza find that shareholder motions with concrete suggestions often result in improved non-financial performance, i.e. environmental and social performance of companies, but this can also come with a negative impact on company earnings.

In their experiment, Heeb and Kölbel show that a provider of climate indices that directly calls on companies to take action encourages them to set more frequent and more ambitious climate targets.

Overall, the studies suggest that corporate dialogues (i.e. engagement) and voting can certainly encourage companies to become more sustainable. However, these activities must be concrete and exert pressure. Just words are not enough.

Conclusions and open questions

So, what do the results mean? Engagement has to be strategically planned and consistently implemented. Vague appeals are of limited use. Instead, clear demands must be made, and their implementation has to be closely monitored. Co-operation with other investors increases the pressure in doing so.

And what about the companies? They should take the signals seriously. Instead of saturating sustainability reports with phrases, they should describe their goals and successes honestly and concisely. Companies that take a credible lead can score points. They improve their image and avoid trouble.

But not all questions have been answered yet. How long will the effects last – are the companies doing more for the climate and the environment in the long term? Do the results also apply to smaller companies and other countries? What investor tactics are most effective?

Here, more research is needed. Experts need to investigate the correlations further and identify the best approaches. But the studies already show: investors can play an important role in making the economy more environmentally friendly and socially responsible. Let’s tackle it together!