# It’s a book of Investor beliefs and corporate climate policies
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2021-11-15
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: Investor beliefs and climate risk: Impact of hurricanes on
Meta Description: Discover why investor support for environmental proposals fluctuates based on climate events, ownership stakes, and industry sectors. Learn more here.
URL: https://financedigest.com/its-a-book-of-investor-beliefs-and-corporate-climate-policieshtml

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_![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/119-1-1736837305304-compressed.jpg)_

_By **Dr Guosong Xu**_

The recent [UN Climate Change Conference of the Parties](https://ukcop26.org/) (COP26) has once again brought climate actions to the forefront of the political agenda of major economies around the world. At the centre of the fight against climate change are the actions taken by companies. Recently, we have observed a growing demand amongst investors for corporate accountability on climate-related issues. A key instrument for achieving this goal is shareholder activism. However, activism does not always seem to be shareholders strong suit…

Reflecting [investor concerns over climate](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk") change, corporate proposals on climate-related policies have been steadily increasing. However, surprisingly, these environmental proposals [rarely receive](https://www.financedigest.com/britain-to-receive-rare-lng-cargo-from-australia-oman.html "Britain to receive rare LNG cargo from Australia, Oman") sufficient support. In my recent study with [Dr Eliezer Fich](https://www.lebow.drexel.edu/people/eliezerfich) at Drexel University, we find that only 2.8% of such proposals were passed during shareholder meetings among U.S.-based companies between 2006 and 2020.

Why is [shareholder support for environmental proposals so low](https://www.financedigest.com/monte-dei-paschis-cash-call-93-covered-so-far-despite-low-shareholder-take-up.html "Monte dei Paschi’s cash call 93% covered so far despite low shareholder take-up")? What are the implications for companies and investors? These questions inspired our study. Besides the pecuniary motives behind reluctance to endorse corporate climate policies (we know these policies can be costly), we suggest that investors’ psychology, namely, their beliefs about salient [climatic risks](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says"), could play a key role.

**Do investors’ beliefs matter?**

To capture [investors’ beliefs about the climate change](https://www.financedigest.com/bayer-hits-8-month-high-as-investors-welcome-ceo-change.html "Bayer hits 8-month high as investors welcome CEO change"), the study explores the impact of natural disasters (major hurricanes and tornadoes) that struck the headquarter locations of large institutional shareholders, such as pension or mutual funds, in the U.S. between 2006 and 2020. For instance, in 2020 hurricane Laura [hit several](https://www.financedigest.com/severe-april-storms-result-in-2bn-hit-to-us-economy-according-to-aon-catastrophe-report.html "Severe April storms result in bn hit to US economy, according to Aon catastrophe report") counites in the U.S., resulting in devastating economic damage and fatalities. Due to the scale of the natural disaster and widespread media reporting, shareholders’ [awareness of climate risks increased](https://www.financedigest.com/increasing-consumer-awareness-to-fuel-adoption-of-trailer-suspension-system-market.html "Increasing Consumer Awareness to Fuel Adoption of Trailer Suspension System Market"). We examined whether this led them to be more [supportive towards environmental](https://www.financedigest.com/new-office-expansion-enables-vaisala-to-accelerate-growth-in-industrial-and-environmental-measurements-businesses-professional-services-and-customer-support-the-new-office-will-cater-for-all-vaisala.html "New office expansion enables Vaisala to accelerate growth in industrial and environmental measurements businesses, professional services and customer support. The new office will cater for all Vaisala’s customers in the Latin America region.") policies.

In total, over 12,000 unique funds were analysed. We examined shareholders’ [voting](https://www.financedigest.com/hsbc-board-recommends-shareholders-vote-against-spin-off-resolution.html "HSBC board recommends shareholders vote against spin-off resolution") records of their portfolio firms according to the Institutional Shareholder Services (ISS) Voting Analytics database.

We made several important findings:

Firstly, [funds in areas hit by a hurricane were significantly more likely to vote](https://www.financedigest.com/norway-wealth-fund-to-vote-for-labour-rights-motion-at-starbucks-agm.html "Norway wealth fund to vote for labour rights motion at Starbucks AGM") in favour of an environmental proposal in the immediate aftermath of the event. Comparing shareholder support for the same proposal, we found that support was as much as 38% [higher among the investors](https://www.financedigest.com/investors-seek-higher-returns-as-catastrophe-bond-issuance-slows-during-q2-according-to-aon-study.html "INVESTORS SEEK HIGHER RETURNS AS CATASTROPHE BOND ISSUANCE SLOWS DURING Q2, ACCORDING TO AON STUDY") located in a hurricane county than from investors in unaffected counties. This [increase is substantial given the average support rate](https://www.financedigest.com/how-to-increase-repeat-purchase-rates-in-ecommerce.html "How to increase repeat purchase rates in eCommerce") for such proposals is 25%.

Secondly, the impact on shareholder actions depended on shareholders’ characteristics. When an institution had a higher ownership [stake in the portfolio](https://www.financedigest.com/iberdrola-hires-barclays-to-sell-stake-in-spanish-renewable-portfolio-expansion-says.html "Iberdrola hires Barclays to sell stake in Spanish renewable portfolio, Expansion says") company, the reaction to the proposal became stronger. Moreover, the sensitivity towards perceived climate risk was also [higher when the portfolio firm](https://www.financedigest.com/polish-e-commerce-firm-allegro-eyes-higher-q1-profit.html "Polish e-commerce firm Allegro eyes higher Q1 profit") was operating in a high pollution industry, such as petroleum and natural gas, construction, and chemicals, or when the firm was physically closer to a hurricane disaster area.

However, this more environmentally conscious outlook was, for many, temporary. Most [investors returned](https://www.financedigest.com/certainty-in-an-uncertain-world-post-brexit-investors-turn-to-commercial-property-and-fixed-returns.html "Certainty in an uncertain world – post-Brexit investors turn to commercial property and fixed returns") to their previous stances and reversed their support for such schemes within just three years – something which will do little to encourage long-term change.

Interestingly, other fund characteristics such as size, performance, flows, general attitudes towards environmental, social, and corporate governance (ESG) issues were found to have very little [impact on our research](https://www.financedigest.com/what-brexit-blues-new-research-reveals-over-half-of-businesses-in-the-financial-sector-believe-brexit-will-have-a-long-term-positive-impact.html "What Brexit blues? New research reveals over half of businesses in the financial sector believe Brexit will have a long-term positive impact") findings.

**What are the implications?**

There were positives to be gained from our investigations. Increased support from hurricane-affected investors was [seen to have crucial implications for corporate environmental policies](https://www.financedigest.com/opec-seen-sticking-to-policy-despite-higher-oil-demand.html "OPEC+ seen sticking to policy despite higher oil demand"). Foremost, it [raises the overall approval rates](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes") during a shareholder meeting – we found that firms with a greater number of hurricane-affected shareholders saw an overall greater level of support for the environment from their shareholders, and had a 39% higher chance of passing an environmental proposal during the shareholder meetings as a result.

Certainly, we do not need (or wish) [natural disasters](https://www.financedigest.com/global-natural-disaster-losses-reach-45bn-during-1h-2018-insurance-payouts-estimated-at-21bn-according-to-aon-catastrophe-report.html "Global natural disaster losses reach bn during 1H 2018; insurance payouts estimated at bn, according to Aon catastrophe report") to teach us climate risks, but their impact serves as an important wake-up call – one which we should not forget. One key takeaway from our study is that investors’ psychology, and their beliefs about the [climate change](https://www.financedigest.com/exclusive-world-bank-seeks-more-funds-to-address-climate-change-other-crises-document.html "Exclusive-World Bank seeks more funds to address climate change, other crises -document") in particular, have the power to shape the future of corporate environmental policies. Fortunately, academics, governments, and the [business community as a whole still have time to challenge](https://www.financedigest.com/new-business-launches-to-support-it-professionalsfacing-mission-critcial-sector-challenges.html "NEW BUSINESS LAUNCHES TO SUPPORT IT PROFESSIONALSFACING MISSION CRITCIAL SECTOR CHALLENGES") investors’ and managers’ beliefs about the climate. Education, policy support, and media can all help in this effort. Of course, changing people’s beliefs is not an easy goal, but making the effort to do so is vital if our industries are to be able to contribute to a long-standing effort to tackle [climate change](https://www.financedigest.com/deloitte-research-reveals-inaction-on-climate-change-could-cost-the-worlds-economy-us178-trillion-by-2070.html "Deloitte research reveals inaction on climate change could cost the world’s economy US8 trillion by 2070"), and not just engage in temporary hype.

**_![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/119-1736837305314-compressed.jpg)_**

 **_Author Bio_** _:_

[**_Dr Guosong Xu_**](https://www.rsm.nl/people/guosong-xu/) **_is_** **_an Assistant Professor of Finance at_** [**_Rotterdam School of Management, Erasmus University_** **_(RSM)_**](https://www.rsm.nl/) **_and co-author of “_** **_Do Salient Climatic Risks Affect Shareholder Voting?”_** **_alongside_** [**_Eliezer M. Fich_**](https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=253556) **_of Drexel University. The paper is available at SSRN:_** [**_https://ssrn.com/abstract=3895071_**](https://ssrn.com/abstract=3895071)


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