ESG Investment Papers Top This Year’s IRRCi Research Awards

Two research papers that have the potential to reshape investor thinking on fossil fuel divestment and how passive investors influence corporate governance and performance have won the Investor Responsibility Research Center Institute (IRRCi) annual investor research competition. The winners will be recognized today at the Columbia Law School’s 2015 Millstein Governance Forum, The Board-Centric Model in the Array of Shareholders, in New York City. Each winning research team will be presented with a $10,000 award.

The winning practitioner research paper, Beyond Divestment: Using Low Carbon Indexes, provides an actionable roadmap for institutional investors trying to navigate a financially viable path for managing carbon risk. The research provides a new framework for evaluating ways to reduce exposure to both current and potential future carbon-related assets. Currently, most approaches are focused on divesting assets from companies in the fossil-fuel sector based on current emissions only. More specifically, the research compares a selective divestment strategy with two approaches that use re-weighting and optimization to increase exposure to more carbon-efficient companies and decrease exposure to large current and future emitters, thus aiming to reduce long-term portfolio risk. Both approaches also use optimization techniques to reduce short-term risk against the benchmark. The research is authored by a team of researchers at MSCI – Remy Briand, Linda-Eling Lee, Sébastien Lieblich, Véronique Menou and Anurag Singh. Download the research here.

The winning academic research, Passive Investors, Not Passive Owners, demonstrates that while passive investors – such as those that invest through index funds – are not active owners in the traditional sense of accumulating or selling shares so as to exert influence over managers and their choices, they are far from passive owners. Instead, the research finds that passively managed mutual funds, and the institutions that offer them, use their large voting blocs to exercise voice and exert influence on firms’ governance. The research finds that ownership by passively managed mutual funds is associated with significant governance changes such as more independent directors on corporate boards, removal of takeover defenses and more equal voting rights. These governance changes, in turn, are shown to improve firms’ long-term performance. The authors include Ian R. Appel, Ph.D., assistant professor of finance at the Carroll School of Management at Boston College; Todd A. Gormley, Ph.D., assistant professor of finance at The Wharton School; and Donald B. Keim, professor of finance and director of the Rodney L. White Center for Financial Research at the Wharton School, University of Pennsylvania.Download the research here.

“The two winning papers were selected because they offer fresh thinking on key issues confronting investors. Climate change is a systemic investment challenge for institutional investors. And, the fund flow to index funds begs the question of what influence that will have on the real economy. These two research papers will be valuable tools for investors, policymakers, academia for rethinking assumptions, testing conventional wisdom and helping to understand those two key questions,” said Jon Lukomnik, IRRCi executive director.

Linda-Eling Lee, global head of ESG research at MSCI, said, “We are honored to be recognized by the IRRCi with this prestigious award. Looking ahead past the recent climate change conversations in Paris, the Beyond Divestment research is particularly important as it highlights the favorable characteristics of a low carbon approach, which aims to reduce exposure to carbon intensive companies while limiting short term risk against a benchmark. We are thrilled to announce that we are donating our prize money to CDP, a pioneer in encouraging carbon disclosure.”

“Institutions that offer passively managed funds, like Vanguard and State Street, are an increasingly important component of U.S. stock ownership, and the impact of their growth on firm-level governance is widely debated,” said Ian R. Appel, assistant professor of finance at the Carroll School of Management at Boston College. In contrast to arguments that such institutions might be lazy investors that do not monitor managers, our evidence suggests they successfully influence firms’ governance choices in ways that improve long-term, firm-level performance.”

For the first time in the IRRC Institute Award’s four-year history, the judges selected multiple research papers for Honorable Mention recognition. The judges said the superb quality of the 2015 award submissions mandated the change. Several of the honorable mention papers likely would have won the award in other years, the judges indicated.

The papers receiving Honorable Mention recognition are:

  • Does Hedge Fund Activism Lead to Short-Termism? Evidence from Corporate Innovation by Alon Brav (Duke University), Wei Jiang (Columbia University), Song Ma (Duke University) and Xuan Tian (Indiana University).
  • Active Ownership by Elroy Dimson (London Business School; University of Cambridge), Oguzhan Karakas (Boston College) and Xi Li (Temple University).
  • Investment Implications of Environment, Social, and Governance Sustainability: Evidence from Short Selling by Archana Jain (Rochester Institute of Technology), Pankaj K. Jain (University of Memphis) and Zabihollah Rezaee (University of Memphis).
  • Hedging Climate Risk by Mats Andersson (AP4), Patrick Bolton (Columbia Business School), and Frédéric Samama (SWF Research Initiative)
  • Public vs Private Provision of Governance: The Case of Proxy Access by Tara Bhandari (U.S. Securities and Exchange Commission), Peter Iliev (Pennsylvania State University) and Jonathan Kalodimos (Oregon State University).
  • Does Voluntary Disclosure Of Climate Change Risk Signal Overall Firm Risk? Evidence From Financial Reporting Quality And Firm-Level Investment Activity by Shira Cohen, (Temple University).
  • Valuing the Vote: The Impact of Proxy Voting on SBA Portfolio Holdings by the Florida State Board of Administration.

The following panel of respected judges reviewed the submissions and selected the winning papers and honorable mentions:

  • Mark Anson Chief Investment Officer, Acadia Investment Management
  • Collette Chilton, Chief Investment Officer, Williams College
  • Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
  • James Hawley, Professor & Director, Elfenworks Center for Fiduciary Capitalism, Saint Mary’s College of California
  • Robert Jackson, Jr., Professor of Law and Faculty Co-Director, Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School
  • Nell Minow, VEA Vice-Chair, and Columnist, Huffington Post

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