Do institutional investors impact firms’ ESG performance? Evidence from the United States over the last decade

I investigate whether institutional ownership influences firms’ ESG performance in the United States from 2015-2022. I conjecture that institutional owners’ or investors’ effect on a firm’s ESG performance depends on an ESG outcome’s profitability. If only an outcome is value-enhancing to the firm, the investors will invest in it. I hypothesize that overall ESG, environmental and social outcomes decrease firm profitability while governance increases firm profitability. Therefore, institutional owners may decrease overall ESG, environmental, and social outcomes and increase the governance of a firm to ensure their return potential. Based on Bloomberg’s ESG ratings, Thomson Reuters Institutional ownership data, and CRSP/ Compustat earnings, I applied ordinary least squares regression to see the impact. Firm earnings are examined in line with an increase in ESG outcomes. I find that institutional owners decrease overall ESG, environmental, and social and increase governance to ensure firm profitability. Firms with higher institutional ownership also do this. Additional layers are added to see if this role of institutional ownership on ESG holds in Democratic state-based firms and Republican state-based firms. In firms in Democratic states, institutional ownership reduces environmental and social and increases governance while there is no such significance for firms in Republican states. I also investigate the relationship in the case of firms with male and female CEOs. In both firms, institutional ownership increases governance, while in female-led firms, the effect is greater. The interplay between institutional ownership and ESG shows the significance of institutional ownership. The significance lies in keeping the manager agency problems in check by optimizing the sustainability efforts and increasing the firms’ corporate governance.