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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Social responsible investment in the case of pension funds - The effectiveness of concepts with a focus on engagement
Organization Unit
Authors
  • Sophia Lammer
Supervisors
  • Thorsten Hens
Language
  • English
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Number of Pages 66
Date 2015
Zusammenfassung One common way how institutional owners choose to motivate their invested companies to improve corporate social performance is through engagement, with private dialogues and direct intervention being a popular engagement strategy. The main question examined in this thesis, whether engagement through mainly private dialogues with the targeted company leads to an improvement in environmental, social and governance (ESG) matters, is therefore of great interest. Two effects potentially triggered by engagement through dialogue are analyzed. Firstly, the completion of an engagement should cause a direct improvement in the corporate social performance of the targeted firm. Secondly, being targeted by an engagement could motivate companies to put more focus on corporate social responsibility and improve ESG issues voluntarily, which are not in the scope of the engagement. If the second effect can be verified, it might not even be necessary to complete an engagement successfully to achieve an improvement in corporate social performance. With this in mind, I further investigate which steps in the engagement process, so-called milestones, need to be reached to inspire the targeted firm to improve ESG matters. For an engagement to be considered completed, four milestones have to be accomplished. To measure the standing each company has in regard to ESG matters or corporate social performance, I use ESG ratings from investment research firm Sustainalytics. This data is complemented by information, from engagement service provider Hermes EOS, on the success and the completion date of individual engagements and milestones. The described effects of engagement are evaluated by employing two methods. Firstly, they are examined with a methodology inspired by the event study method. This methodology allows me to investigate the issues of interest from a long-term perspective. Secondly, to complement the findings of the event study inspired method, I perform a cross-sectional regression analysis. More specifically, a logit regression is conducted. With this second methodology I take on a more short-term perspective and analyze whether changes in corporate social performance are actually caused by an engagement. The results of both methods indicate that the ratings of targeted companies generally increase during an engagement. The cause for this appears to be the contact with Hermes, and the completion of milestones within an engagement. It can motivate companies to put more focus on corporate social responsibility and to implement measures which improve corporate social performance. As such increases are already observable for milestones other than milestone 4, the completion of an engagement does not seem necessary to improve the corporate social performance of a targeted company. Regarding the question which milestone needs to be completed to induce an increase in the ratings, the findings of the two methods enable different conclusions. While no clear statement is possible based on the evidence of the event study inspired method since the answer seems to depend on company and engagement specific features, the findings in the regression analysis allow for more explicit inferences. In most cases the completion of milestone 2 already appears to lead to an increase in corporate social performance. Within the engagement process, achieving milestone 2 signifies that the targeted company acknowledges the ESG problem raised by Hermes EOS. Finally, the findings related to the completion of an engagement vary as well between the two methods. While evidence developed with the event study inspired method indicates that the completion of an engagement causes a direct increase in the target's rating, this cannot be confirmed in the cross-sectional regression. As the considered time windows are very short in the regression analysis, the differing results can signify that the initiated increase is only observable at a later point in time. Yet, it might also be possible that the completion of an engagement does not lead to a direct increase in the target's rating. Or in other words, the completion may not trigger an increase in corporate social performance observable for third parties.
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