Published: April 13, 2023 By

image that displays the meaning behind ESG

Most large investors take the approach of influencing firm behavior through one-on-one meetings and private messages.

These tactics are both invisible to the public and labor-intensive to enact. 

Large investors have more efficient options for getting firms to do what they want, according to research from Andrea Pawliczek, assistant professor of accounting at Leeds. Her recent studies within the field of corporate governance have focused on ways that investors try to influence a firm’s ESG (environmental, social and governance) performance, and the effectiveness of those tactics.

“Investors can have a voice without necessarily having those individual meetings. They have the ability to influence firm behavior by setting policies, and firms are following those policies,” Pawliczek said. “From an investor’s perspective, this is much more efficient.”

BlackRock’s Dear CEO Letters influence firm behavior

Pawliczek studied the impact of BlackRock CEO Larry Fink’s “Dear CEO” Letters by looking at their impact on disclosures like press releases and quarterly reports from portfolio firms. She published these findings in the paper A New Take on Voice: The Influence of BlackRock’s “Dear CEO” Letters, which won CESR’s 2022 Best Paper Award, co-authored with Nikki Skinner from the University of Georgia, who will join the Leeds faculty in the fall, and Laura Wellman from Pennsylvania State University.

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“The more important piece we see is that for those firms that adopt ESG contracting, we do see improvement in ESG scores and performance,”

- says Pawliczek


“In the ESG space, people have differing perspectives on how things will impact profitability,” Pawliczek said. “BlackRock didn’t think that firms were factoring in climate change appropriately in their business models. Their perspective is that climate change will impact profitability in the future, and that future profitability should impact stock prices now.”

Pawliczek and her co-authors hypothesized that if firms were listening to these letters, their subsequent disclosures would include the same topics as the letters. They found that firms were more likely to address the ESG-related topics that Larry Fink identified as relevant in his “Dear CEO” Letters in the months after they came out, and this impact was larger in firms where BlackRock had a larger ownership stake. 

BlackRock paid attention to whether or not firms responded to these preferences as well. BlackRock was more likely to vote against management in shareholder meetings for firms that did not include the topics from the “Dear CEO” Letters in their disclosures, the study found.

“It’s just another signal to managers that shareholders are watching, and if you’re not understanding and responding to their preferences, that can have consequences,” Pawliczek said. “It can lead to a lower share price or even management turnover in more extreme cases.”

ESG contracting and “Say on Pay” laws

Countries and states are increasingly passing “Say on Pay” laws that allow investors to vote yes or no on executive compensation. In another study, Pawliczek analyzed whether or not ESG contracting, the practice of basing part of an executive’s bonus on performance related to ESG metrics like achieving diversity outcomes or reducing greenhouse gas emissions, is an effective method for improving ESG performance.

“There’s a lot of questions as to how effective that is for a variety of reasons,” Pawliczek said. “One, it’s only a small portion of the compensation. There’s also some concern that firms that were already planning on doing good ESG stuff and already had the priorities in place just add this in as a showpiece.” 

When “Say on Pay” laws are implemented there tends to be an increase in ESG contracting, which indicates that on average investors support this tactic, according to the findings of Pawliczek and her co-authors Mary Ellen Carter at Boston College, and Rong (Irene) Zhong at the University of Illinois at Chicago. These findings are outlined in their paper Say on ESG: The Adoption of Say-on-Pay Laws and Firm ESG Performance.

“The more important piece we see is that for those firms that adopt ESG contracting, we do see improvement in ESG scores and performance,” Pawliczek said. “So we see that when you are paying an executive to prioritize ESG performance, we do see those outcomes.”

Aligning investor and firm beliefs for effective relationships

Pawliczek noted that investors and firms are likely to be most satisfied if they have shared beliefs about topics such as climate change. For example, if a firm wants to build a plant on the Gulf Coast, investors who are concerned about climate change will think that plant is going to be off-line in the future as hurricane frequency increases, so they won’t see that investment as profitable. Investors who don’t assess climate change to be serious might see that as a profitable investment. 

“Even beyond beliefs, what you think about climate change can affect your cash flow forecasts, which is what business is all about,” Pawliczek said. “That’s how you make investment decisions, that’s what we teach our students: you invest in positive-NPV (net present value) projects. But if I’m trying to forecast what cash flows a project is going to generate 20 years out, in a lot of instances my views on something like climate change are going to impact those forecasts.”

Going back to the Gulf Coast plant example, the manager who sees the impacts of climate change as serious is not going to invest in that plant. If an investor doesn’t agree with the assessment of those impacts, they may see not investing as a bad decision and won’t be satisfied with decision-making at the firm. 

Pawliczek noted that simply screening investments based on ESG performance may not be an effective way to create change. This is true because those screens only include firms that are already performing well on ESG, and firms care more about the opinions of shareholders than non-shareholders. One alternative perspective to aligning values of investors and firm managers, is that the way to influence firm behavior is by becoming a shareholder and voting, to create change from the inside. Regardless of the strategy for change behind its deployment, money is more impactful when moving in groups.

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“The money in the ESG mutual funds is growing, so putting more money there does make the voice come together and have more of an impact,”

- says Pawliczek

“Investing in funds and managers that are in alignment with your values gives those managers more voice on the margin, because that gives them more ownership,” Pawliczek said. “The money in the ESG mutual funds is growing, so putting more money there does make the voice come together and have more of an impact.” In the current environment investor perspectives on ESG are becoming more polarized on both sides, meaning the pricing signals for marginally better or worse ESG performance are less clear. Interest is increasing in pro-ESG funds at the same time as anti-ESG Republicans are working to outlaw ESG considerations in the investment of public pension funds and divesting from investment managers like BlackRock.

Politicization and anti-ESG sentiment

The way that some states are choosing to penalize BlackRock for their ESG investing decisions indicates a paradigm shift to Pawliczek. 

“I didn’t view BlackRock’s positions as too pro ESG, but rather a reasonably balanced approach,” Pawliczek said. “They were saying that climate change is important, and they did some activism with the other Big 3 Investors (State Street and Vanguard) in terms of board diversity. In my view, I didn't see anything BlackRock was doing as extreme, so to see a backlash against them is a shift.”

Previously two perspectives existed, those who thought that ESG factors were important in investment decisions, and those who had a purely financial focus and thought ESG factors weren’t relevant. Now, some investors and politicians see considering ESG performance in investment decisions as actively negative. This means it will be harder for firms to stay neutral.

“I’m very interested in the anti-ESG space [for future research], and seeing the continuum of how firms navigate through increasing controversy, especially firms that have wide sets of investors and wide sets of consumers,” Pawliczek said. “It seems easy to stake out a space if you’re REI and seeking to attract people who are very concerned with the environment, but it’s less tenable to choose a side as a firm like Target selling to everyone.”

Pawliczek is curious to see what will happen with this polarization, both what next steps anti-ESG politicians will take and how firms will respond.

  • Learn more about ESG research from Leeds faculty, including topics like DEI, ethical leadership and environmental sustainability in these related articles.