Do Salient Climatic Risks Affect Shareholder Voting?
A study by Eliezer Fich, Trustee Professor of Finance at Drexel University’s LeBow College of Business, and coauthor, shows that institutional shareholders based in areas hit by a hurricane change their perception of climate-related risks and become more likely to vote in favor of an environmental proposal even when it negatively affects stock returns.
- Salient weather events (such as hurricanes or wildfires) increase fund managers’ assessment of climate risks faced by their portfolio firms, leading to a greater support for environmental initiatives. Funds based in areas hit by a hurricane are 14 percentage points more likely to vote for an environmental proposal than are funds that have not been affected by a hurricane and are voting on the same proposal.
- Support for environmental proposals increases more than twice for firms in highly polluting industries compared to other firms. It is also higher for firms that are located closer to the hurricane-hit area, and for firms in which the fund has a larger ownership stake. Interestingly, social (non-climate) proposals also experience an increase of 14.5 percentage points in shareholders’ support immediately after a hurricane strike.
- Hurricane-induced shareholder activism improves the likelihood that an environmental proposal is ratified by 1.7 percentage points and encourages shareholders to reallocate their portfolio towards firms in which pro-climate votes can have a larger impact. However, the heightened attention to climate issues is temporary and environmental support is reversed three years after the hurricane strike. Moreover, the stocks of firms that approve environmental initiatives endorsed by hurricane-affected shareholders achieve significantly lower returns on the voting date and they underperform in the long-run.
Summary of Complete Findings
The role of corporations in environmental protection has become central to corporate governance due to the increasing rate of natural disasters associated with climate change. This study investigates how investors’ perceptions of climate risks influence their voting support for environmental proposals and, in turn, how their support affects the value of the firms in their portfolio.
The researchers build an impressive sample of almost 360,000 vote-level observations for mutual funds covered by the Institutional Shareholder Services (ISS) database from 2006 to 2020. They identify environmental proposals including those that reduce carbon emissions and those that mandate the use of renewable energies. The average support rate from shareholders of environmental proposals is 20% across the sample period, substantially below the typical 50% threshold required for approval. In contrast, the average support for non-climate shareholder-sponsored proposals during the same period is 40%. While 63% of climate proposals receive a “for” recommendation from ISS, only 3% of these proposals pass due to low shareholder support.
The study examines 20 hurricane strikes with a total damage of above $50 million each. In total, these hurricanes are responsible for over 1,790 fatalities in the US mainland and an estimated economic damage of over $431 billion. 16 out of the 20 hurricanes are independently responsible for over $1 billion in economic damages.
In their main test, the researchers compare the voting behavior of funds recently affected by a major hurricane (the treated funds) with funds that were not affected by hurricanes (the control funds) for the same climate-related proposal. Specifically, a fund is “treated” if it is headquartered in a county hit by a hurricane, or in an adjacent neighboring county, over the past 12 months running up to the shareholder meeting. The hurricane strikes in the sample affect 134 funds across 115 proposals.
The core finding is that treated funds are 14 percentage points more likely to vote for an environmental proposal than are control funds voting on the same proposal.
When restricting the analysis to funds located in a hurricane county, therefore excluding neighboring counties, and to funds in hurricane counties that have never endorsed environmental proposals before the hurricane strike, the study finds that the magnitude of the shareholders’ support is even higher. The researchers conclude that a stronger perception of climate risks induced by hurricane strikes prompt investors to increase their support for environmental initiatives.
A fund’s reaction to perceived climate risks is more than twice as large for firms in highly polluting sectors, such as Petroleum & Natural Gas, Construction, and Chemicals. It is also greater for firms that are geographically closer to hurricane-hit counties. Furthermore, investors’ sensitivity toward perceived climate risk, as measured by a fund’s voting support for environmental proposals, is higher for firms in which the fund has a larger ownership stake.
The change in investors’ perceptions has real impacts. On average, the treated funds’ share of supportive votes leads to a 1.7 percentage points increase in the likelihood that a climate-related proposal passes.
The impact of the greater support is crucial for proposals with a narrow pass/fail margin. Indeed, the researchers find that after hurricane exposure, funds reallocate their investment toward firms (defined as marginal E-firms) that faced a close-vote for an environmental proposal that did not pass in the previous year. After a hurricane hit, funds are 4% more likely to buy shares of marginal E-firms where their voice is consequential. These findings suggest that hurricane-induced shareholder activism is effective in changing corporate environmental policies, especially in situations in which an increase in voting support is decisive.
Interestingly, hurricane strikes trigger a general change in shareholders’ preferences regarding both environmental and social issues. For social proposals, shareholder support rate increases by 14.5 percentage points immediately after a hurricane strike. In contrast, hurricane strikes have no significant impact on the support for other, non-climate and non-social, issues.
Nevertheless, the voting support is temporary as hurricane-afflicted shareholders reverse their position about three years after the strike. The latter finding suggests that climate-related reactions subside as attention to environmental issues dissipates.
Finally, the study evaluates whether the endorsement of environmental initiatives by hurricane-afflicted funds changes shareholder wealth. While environmental activism can positively affect firm outcomes, the researchers find that when a hurricane drives a shift in shareholder preferences toward the environment, activism negatively affects shareholder wealth. In fact, the passage of environmental proposals endorsed by hurricane-stricken funds, is met with significantly lower stock returns both in the short and long terms. Furthermore, voting support for new environmental proposals increases by 20 percentage points even though the investors’ wealth decreased when a similar proposal previously passed. Therefore, firm profitability does not appear to drive shareholder’s voting behavior following a major hurricane strike. This suggests that hurricane-induced shareholder activism represents an overreaction, and does not boost firm value by improving shareholders’ awareness of climate-related risks.
In conclusion, the study indicates that changed risk preference following salient climatic events lead to increased support for environmental and social initiatives, even when proposals are not profitable for the shareholders. This is a powerful result at a time when regulators are considering the need for a bigger corporate contribution to address the dangers that climate change poses to society.
“Do salient climatic risks affect shareholder voting?” by Eliezer M. Fich (Drexel University) and Guosong Xu (Erasmus University), October 2022.