Top

Journal of Economics and Finance

Published in:

18-03-2023

Firms’ socially responsible activities: the role of the Big Three

Author: Lukai Yang

Published in: Journal of Economics and Finance | Issue 4/2023

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This paper examines the power and corporate governance significance of the three largest index fund managers, BlackRock, Vanguard, and State Street Global Advisors, commonly referred to as the “Big Three.” I provide evidence that they play a key role in strengthening the sustainable and socially responsible activities of portfolio companies. In this paper, I find that the Big Three are positively associated with the overall ESG score, environmental subscore, and social subscore. Interestingly, greater Big Three ownership leads to a higher vote-for percentage of SRI-related proposals, implying that voting is a channel through which they exert influence. My findings highlight the Big Three’s commitment to tackling ESG-related issues, in which they believe that integration of sustainability-related information can help portfolio risk management, and their ability to steer corporate decision-making.

previous article Structural change and unbalanced economic growth in open developing economies

next article Green loans and the transformation of heavy polluters: evidence from China

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

NASDAQ.com (https://www.nasdaq.com/market-activity/stocks/aapl/institutional-holdings) provides information on companies’ institutional holdings. For Apple Inc., Vanguard Group Inc is the largest investor with holdings of 7.7%. BlackRock is the second largest with holdings of 6.2%, and State Street is the fourth largest with an average holding of 3.9%. Their combined holding is approximately 17.8%, making the Big Tree the largest institutional investor of Apple.

William McNabb, chairman and CEO of Vanguard, said in 2015 that “In the past, some have mistakenly assumed that our predominantly passive management style suggests a passive attitude with respect to corporate governance. Nothing could be further from the truth” (https://theconversation.com/these-three-firms-own-corporate-america-77072).

In State Street Global Advisor’s 2021 Proxy Voting and Engagement Guidelines, it says “As a fiduciary, State Street Global Advisors takes a comprehensive approach to engaging with our portfolio companies about material environmental and social (sustainability) issues. We use our voice and our vote through engagement, proxy voting, and thought leadership in order to communicate with issuers and educate market participants about our perspective on important sustainability topics…” Similar intent can be found in SSGA, BlackRock, and Vanguard’s previous proxy voting guidelines.

State Street has emphasized the importance of ESG for ages and has increasingly incorporated ESG factors in its existing strategies (https://www.statestreet.com/content/dam/statestreet/documents/values/2009_CSR_Overview.pdf).

Bebchuk and Hirst (2021) explain that “there are significant situations in which index fund votes could determine whether a vote passes or not, for environmental, social, and governance matters. Even where votes are not close, the outcome of votes can play an important part in influencing the behavior of corporate managers.”.

For example, in November 2006, BlackRock launched one of the first SRI ETFs, iShares MSCI KLD 400 Social ETF (https://www.ishares.com/us/products/239667/ishares-msci-kld-400-social-etf).

The Big Three believe that integrating sustainability is value-enhancing and helps achieve better long-term returns. For example, in a letter to their clients, BlackRock pointed out in the “Investment Stewardship” section that “We engage with companies regarding governance and sustainable business practices that we believe promote durable, long-term profitability”(https://www.blackrock.com/corporate/investor-relations/blackrock-client-letter). The Big Three have had ESG on their agendas in the past decades and they explicitly state the positive links between sustainability and firm performance (https://www.statestreet.com/content/dam/statestreet/documents/values/2013_CR_Report.pdf & https://www.statestreet.com/values/microsite/corporate-responsibility-overview/rons_letter.html).

In the same letter (https://www.blackrock.com/corporate/investor-relations/blackrock-client-letter), BlackRock addressed in the “Supporting Shareholder Proposals” section that voting on shareholder proposals is playing an increasingly important role in their stewardship efforts around sustainability.

Bebchuk and Hirst (2021) point out that the advocacy by California State Teachers’ Retirement System (“CalSTRS”) has received limited attention from advisors and the media, while that of the Big Three received considerable coverage and close attention far beyond what the positions of CalSTRS ever attracted.

https://www.bloomberg.com/professional/dataset/global-environmental-social-governance-data/

https://research.ftserussell.com/products/downloads/Russell-US-indexes.pdf

For example, more PPE allows firms to easily obtain funds to invest in CSR/ESG. Firms with higher leverage, however, may prevent itself from obtaining funds to invest in CSR/ESG.

39.24 (coefficient in Table 3, Column 1) × 0.072 (standard deviation of Big3% in Table 1) = 2.83.

74.01 (coefficient in Table 3, Column 3) × 0.017 (standard deviation of StateStreet% in Table 1)/17.978 (sample mean of ESG in Table 1) = 7%

57.75 (coefficient in Table 4, Column 1) × 0.072 (standard deviation of Big3% in Table 1)/15.753 (sample mean of ESG_ENV in Table 1) = 26.4%

58.38 (coefficient in Table 5, Column 1) × 0.072 (standard deviation of Big3% in Table 1)/15.618 (sample mean of ESG_SOC in Table 1) = 27%

The comparison is based on two ratios. One is the ratio of firm’s market capitalization to the cumulative market value of the Russell 3000E index. The benchmark is the ratio of the 1,000th largest stock to the cumulative market value of the Russell 3000E index. The stock is banded if the difference between these two is less than 2.5%.

Albuquerque R, Koskinen Y, Zhang C (2019) Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence. Manag Sci 65(10):4451–4469. https://doi.org/10.1287/mnsc.2018.3043CrossRef

Appel I, Gormley T, Keim D (2016) Passive investors, not passive owners. J Financ Econ 121(1):111–141. https://doi.org/10.1016/j.jfineco.2016.03.003CrossRef

Appel I, Gormley T, Keim D (2019) Standing on the shoulders of giants: The effect of passive investors on activism. Rev Financ Stud 32(7):2720–2774. https://doi.org/10.1093/rfs/hhy106CrossRef

Appel I, Gormley T, Keim D (2020) Identification using Russell 1000/2000 index assignments: A discussion of methodologies. Crit Finan Rev, Forthcoming. https://doi.org/10.2139/ssrn.2641548CrossRef

Arayssi M, Dah M, Jizi M (2016) Women on boards, sustainability reporting, and firm performance. Sust Account Manag Pol J 7(3):376–401. https://doi.org/10.1108/SAMPJ-07-2015-0055CrossRef

Azar J, Duro M, Kadach I, Ormazabal G (2021) The Big Three and corporate carbon emissions around the world. J Financ Econ 142(2):674–696. https://doi.org/10.1016/j.jfineco.2021.05.007CrossRef

Baer J, Lublin J (2017) State Street pushed 400 companies to put women on boards. Most shrugged. The Wall Street Journal, July 26. https://www.wsj.com/articles/statestreet-pushed-400-companies-to-put-women-on-boards-most-shrugged-1501100453

Bebchuk L, Hirst S (2019) The specter of the giant three. Bos U L Rev 99(3):721–741. https://doi.org/10.2139/ssrn.3385501CrossRef

Bebchuk L, Hirst S (2021) The power of the Big Three, and why it matters. Bos U L Rev 102(3):1547. https://ssrn.com/abstract=4300447

Beck C, Frost G, Jones S (2018) CSR disclosure and financial performance revisited: A cross-country analysis. Aust J Manag 43(4):517–537. https://doi.org/10.1177/0312896218771438CrossRef

Ben-David I, Franzoni F, Moussawi R, Sedunov J (2021) The Granular Nature of Large Institutional Investors. Manag Sci 67(11):6629–6659. https://doi.org/10.1287/mnsc.2020.38082021”)CrossRef

BlackRock (2017) How BlackRock Investment Stewardship Engages on Climate Risk. BlackRock Investment Institute. https://www.lawandenvironment.com/wp-content/uploads/sites/5/2017/03/Black-Rock.pdf

BlackRock (2021) Sustainability Disclosure. https://www.blackrock.com/corporate/literature/continuous-disclosure-and-important-information/blackrock-2021-sasb-disclosure.pdf

Boone A, White J (2015) The effect of institutional ownership on firm transparency and information production. J Financ Econ 117(3):508–533. https://doi.org/10.1016/j.jfineco.2015.05.008CrossRef

Buchanan B, Cao C, Chen C (2018) Corporate social responsibility, firm value, and influential institutional ownership. J Corp Finan 52:73–95. https://doi.org/10.1016/j.jcorpfin.2018.07.004CrossRef

Chen Y, Hung M, Wang Y (2018) The effect of mandatory CSR disclosure on firm profitability and social externalities: Evidence from China. J Account Econ 65(1):169–190. https://doi.org/10.1016/j.jacceco.2017.11.009CrossRef

Cho C, Michelon G, Patten D, Roberts R (2015) CSR disclosure: The more things change…? Account Audit Account J 28(1):14–35. https://doi.org/10.1108/AAAJ-12-2013-1549CrossRef

Cowan K, Guzman F (2020) How CSR reputation, sustainability signals, and country-of-origin sustainability reputation contribute to corporate brand performance: An exploratory study. J Bus Res 117:683–693. https://doi.org/10.1016/j.jbusres.2018.11.017CrossRef

Crane A, Michenaud S, Weston J (2016) The effect of institutional ownership on payout policy: Evidence from index thresholds. Rev Financ Stud 29(6):1377–1408. https://doi.org/10.1093/rfs/hhw012CrossRef

de Oliveira EM, Cunha FAF, Palazzi DS, Klotzle RB, Maçaira PM (2020) On the effects of uncertainty measures on sustainability indices: An empirical investigation in a nonlinear framework. Int Rev of Financ Anal 70:101505. https://doi.org/10.1016/j.irfa.2020.101505CrossRef

Dorfleitner G, Halbritter G, Nguyen M (2015) Measuring the level and risk of corporate responsibility—An empirical comparison of different ESG rating approaches. J Asset Manag 16(7):450–466. https://doi.org/10.1057/jam.2015.31CrossRef

Erhemjamts O, Huang K (2019) Institutional ownership horizon, corporate social responsibility, and shareholder value. J Bus Res 105:61–79. https://doi.org/10.1016/j.jbusres.2019.05.037CrossRef

Fichtner J, Heemskerk E, Garcia-Bernardo J (2017) Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk. Bus Pol 19(2):298–326. https://doi.org/10.1017/bap.2017.6CrossRef

Fisch J, Hamdani A, Solomon S (2020) The new titans of Wall Street: A theoretical framework for passive investors. U Pa L Rev 168:17–72. https://scholarship.law.upenn.edu/faculty_scholarship/1983

Flammer C (2015) Does corporate social responsibility lead to superior financial performance? A Regression Discontinuity Approach Manag Sci 61(11):2549–2568. https://doi.org/10.1287/mnsc.2014.2038CrossRef

Ghoul S, Guedhami O, Kim H, Park K (2018) Corporate Environmental Responsibility and the Cost of Capital: International Evidence. J Bus Ethics 149(2):335–361. https://doi.org/10.1007/s10551-015-3005-6CrossRef

Gillan S, Hartzell J, Koch A, Starks L (2010) Firms environmental, social and governance (ESG) choices, performance and managerial motivation. Unpublished working paper, 10

Gillan S, Starks L (2003) Corporate governance, corporate ownership, and the role of institutional investors: a global perspective. Weinberg C Corp Govern - Working Paper. https://doi.org/10.2139/ssrn.439500

Glossner S (2018) The effects of institutional investors on firm outcomes: Empirical pitfalls of quasi-experiments using Russell 1000/2000 Index reconstitutions. SSRN Elec J.

Gormley T, Gupta V, Matsa D, Mortal S, Yang L (2022) The Big Three and Board Gender Diversity: The Effectiveness of Shareholder Voice. Euro Corp Govern Inst - Finance Working Paper 714:2020. https://doi.org/10.2139/ssrn.3724653

Haigh M, Hazelton J (2004) Financial Markets: A Tool for Social Responsibility? J Bus Ethics 52(1):59–71. https://doi.org/10.1023/B:BUSI.0000033107.22587.0bCrossRef

Hair JF, Anderson RE, Tatham RL, Black WC (1995) Multivariate Data Analysis with Readings. Prentice-Hall Int Inc, Englewood Cliffs, New Jersey

Harjoto M, Jo H (2015) Legal vs. normative CSR: differential impact on analyst dispersion, stock return volatility, cost of capital, and firm value. J Bus Ethics 128(1):1–20. https://doi.org/10.1007/s10551-014-2082-2CrossRef

Harjoto M, Jo H, Kim Y (2017) Is Institutional Ownership Related to Corporate Social Responsibility? The Nonlinear Relation and Its Implication for Stock Return Volatility. J Bus Ethics 146:77–109. https://doi.org/10.1007/s10551-015-2883-yCrossRef

Harjoto M, Laksmana I (2018) The Impact of Corporate Social Responsibility on Risk Taking and Firm Value. J Bus Ethics 151(2):353–373. https://doi.org/10.1007/s10551-016-3202-yCrossRef

Jahn J, Bruhl R (2019) Can bad news be good? On the positive and negative effects of including moderately negative information in CSR disclosures. J Bus Res 97:117–128. https://doi.org/10.1016/j.jbusres.2018.12.070CrossRef

Jo H, Harjoto M (2011) Corporate governance and firm value: The impact of corporate social responsibility. J Bus Ethics 103(3):351–383. https://doi.org/10.1007/s10551-011-0869-yCrossRef

Jo H, Kim H, Park K (2015) Corporate environmental responsibility and firm performance in the financial services sector. J Bus Ethics 131(2):257–284. https://doi.org/10.1007/s10551-014-2276-7CrossRef

Jo H, Na H (2012) Does CSR Reduce Firm Risk? Evidence from Controversial Industry Sectors. J Bus Ethics 110(4):441–456. https://doi.org/10.1007/s10551-012-1492-2CrossRef

Kim L, Wan H, Wang B, Yang T (2019) Institutional Investors and Corporate Environmental, Social, and Governance Policies: Evidence from Toxics Release Data. Manag Sci 65:4451–4949. https://doi.org/10.1287/mnsc.2018.3055CrossRef

Krueger P, Sautner Z, Starks L (2020) The Importance of Climate Risks for Institutional Investors. Rev Financ Stud 33:1067–1111. https://doi.org/10.1093/rfs/hhz137CrossRef

Lu H, Liu X, Falkenberg L (2022) Investigating the Impact of Corporate Social Responsibility (CSR) on Risk Management Practices. Bus Soc 61(2):496–534. https://doi.org/10.1177/000765032092898CrossRef

Lu H, Oh W, Kleffner A, Chang Y (2021) How Do Investors Value Corporate Social Responsibility? Market Valuation and the Firm Specific Contexts. J Bus Res 125:14–25. https://doi.org/10.1016/j.jbusres.2020.11.063CrossRef

Martinez-Conesa I, Soto-Acosta P, Palacios-Manzano M (2017) Corporate social responsibility and its effect on innovation and firm performance: an empirical research in SMEs. J Clean Prod 142:2343–2383. https://doi.org/10.1016/j.jclepro.2016.11.038CrossRef

Mackey A, Mackey T, Barney J (2007) Corporate social responsibility and firm performance: investor preferences and corporate strategies. Acad Manag Rev 32(3):817–835. https://doi.org/10.5465/amr.2007.25275676CrossRef

McCahery J, Sautner Z, Starks L (2016) Behind the scenes: the corporate governance preferences of institutional investors. J Finan 71(6):2905–2932. https://doi.org/10.1111/jofi.12393CrossRef

Miller S, Eden L, Li D (2020) CSR Reputation and Firm Performance: A Dynamic Approach. J Bus Ethics 163(3):619–636. https://doi.org/10.1007/s10551-018-4057-1CrossRef

Mishra S, Modi S (2013) Positive and Negative Corporate Social Responsibility, Financial Leverage, and Idiosyncratic Risk. J Bus Ethics 117(2):431–448. https://doi.org/10.1007/s10551-012-1526-9CrossRef

Mishra S, Suar D (2010) Does Corporate Social Responsibility Influence Firm Performance of Indian Companies? J Bus Ethics 95(4):571–601. https://doi.org/10.1007/s10551-010-0441-1CrossRef

Petersen H, Vredenburg H (2009) Morals or economics? Institutional investor preferences for corporate social responsibility. J Bus Ethics 90(1):1–14. https://doi.org/10.1007/s10551-009-0030-3CrossRef

Price J, Sun W (2017) Doing good and doing bad: The impact of corporate social responsibility and irresponsibility on firm performance. J Bus Res 80:82–97. https://doi.org/10.1016/j.jbusres.2017.07.007CrossRef

Renneboog L, Szilagyi P (2011) The role of Shareholder proposals in corporate governance. J Corp Finan 17(1):167–188. https://doi.org/10.1016/j.jcorpfin.2010.10.002CrossRef

Schmidt C, Fahlenbrach R (2017) Do exogenous changes in passive institutional ownership affect corporate governance and firm value? J Financ Econ 124(2):285–304. https://doi.org/10.1016/j.jfineco.2017.01.005CrossRef

Serafeim G, Ioannou I (2017) Market reaction to nonfinancial disclosure. Harvard Business School Research Working Paper

Soppe A (2004) Sustainable Corporate Finance. J Bus Ethics 53:213–224. https://doi.org/10.1023/B:BUSI.0000039410.18373.12CrossRef

Starks L, Venkat P, Zhu Q (2020) Corporate ESG Profiles and Investor Horizons. Working paper. /link?doi=https://doi.org/10.2139/ssrn.3049943

Sun W, Cui K (2014) Linking corporate social responsibility to firm default risk. Euro Manag J 32(2):275–287. https://doi.org/10.1016/j.emj.2013.04.003CrossRef

Sun L, Stuebs M (2013) Corporate Social Responsibility and Firm Productivity: Evidence from the Chemical Industry in the United States. J Bus Ethics 118(2):251–263. https://doi.org/10.1007/s10551-012-1579-9CrossRef

Surroca J, Tribó J, Waddock S (2010) Corporate responsibility and financial performance: The role of intangible resources. Strateg Manag J 31(5):463–490. https://doi.org/10.1002/smj.820CrossRef

Tang Z, Hull C, Rothenberg S (2012) How Corporate Social Responsibility Engagement Strategy Moderates the CSR–Financial Performance Relationship. J Manag Stud 49(7):1274–1303. https://doi.org/10.1111/j.1467-6486.2012.01068.xCrossRef

Van de Vrande V (2013) Balancing your technology-sourcing portfolio: How sourcing mode diversity enhances innovative performance. Strateg Manag J 34(5):610–621. https://doi.org/10.1002/smj.2031CrossRef

Wang Y, Lin Y, Fu X, Chen S (2023) Institutional ownership heterogeneity and ESG performance: Evidence from China. Finan Res Lett 51:103448. https://doi.org/10.1016/j.frl.2022.103448CrossRef

Wang Z, Sarkis J (2017) Corporate social responsibility governance, outcomes, and financial performance. J Clean Prod 162:1607–1616. https://doi.org/10.1016/j.jclepro.2017.06.142CrossRef

Yu EPY, Luu BV (2021) International variations in ESG disclosure—Do cross-listed companies care more? Int Rev Financ Anal 75:101731. https://doi.org/10.1016/j.irfa.2021.101731CrossRef

Zhu Y, Sun L, Leung A (2014) Corporate social responsibility, firm reputation, and firm performance: The role of ethical leadership. Asia Pac J Manag 31(4):925–947. https://doi.org/10.1007/s10490-013-9369-1CrossRef

Ashwin Kumar N, Smith C, Badis L, Wang N, Ambrosy P, Tavares R (2016) ESG factors and risk-adjusted performance: a new quantitative model. J Sustain Finan Invest 6(4):292–300. https://doi.org/10.1080/20430795.2016.1234909CrossRef

Bernile G, Bhagwat V, Yonker S (2018) Board diversity, firm risk, and corporate policies. J Financ Econ 127(3):588–612. https://doi.org/10.1016/j.jfineco.2017.12.009CrossRef

Title: Firms’ socially responsible activities: the role of the Big Three
Author: Lukai Yang
Publication date: 18-03-2023
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 4/2023
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-023-09622-1

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 4/2023

Volatility spillovers between oil and financial markets during economic and financial crises: A dynamic approach

Top-flight European football teams and stock returns: market reactions to sporting events

Chasing the sun and catching the wind: Energy transition and electricity prices in Europe

Re-examining the impact of oil prices on stock returns in the presence of time-varying volatility

Forecasting Economic Growth: Evidence from housing, banking, and credit conditions

Activity strategies, bank stability and policy uncertainty