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How are institutional investors playing a significant role in pushing companies to ensure they address climate change risks, diversity on boards, modern slavery, executive pay and more?

For a long time environmental, social, and governance (ESG) issues were a secondary concern for investors and Board Directors. Today the environmental and social impact of a portfolio is a vital consideration for institutional investors and pension fund trustees underpinned by good corporate governance. 

Our research on ESG

How Accountants can help companies tackle climate change.
For most companies, interactions with nature are not visualised on a company's profit and loss statement or on their balance sheet. They remain 'externalities' outside the remit of financial reporting. So how can these externalities become internalised so that Accountants can integrate climate change risk and sustainable decision making into their financial reporting? A paper "Corporate reporting and accounting for externalities" co-authored by Professor Brendan O’Dwyer addresses this very question.

Market reactions to the UK Modern Slavery Act
Professor Marie Dutordoir has been studying market reactions to the UK Modern Slavery Act (MSA) which was introduced in 2015. In the paper "Shareholder wealth effects of modern slavery regulation" she suggests the MSA now makes it more difficult for companies to pretend they have a supply chain free of modern slavery - because even though the Act doesn’t explicitly tell them what to report, companies that are doing nothing to eradicate modern slavery in their supply chain will find it hard to say anything about it. "So the market should be able to see that. A well-designed regulation can push companies to clean up their supply chains."

Investing in Female Corporate Leadership
In the paper "Investing in Female Corporate Leadership" Professor Ser-Huang Poon has found that female leadership can improve an organisation’s corporate social responsibility (ESG) especially in the areas of diversity and governance.

New research from Professor Ian Garrett and Dr Ning Gao demonstrates that CEOs are judged on their companies' social reputation in the labour market for Directors. Their results also suggest that social reputation plays an important role in promoting corporate social responsibility (CSR).

A paper co-authored by Professor Marie Dutordoir has looked at Corporate Social Responsibility (CSR) and how it affects firms’ financing initiatives. The study analysed the impact of off-the-shelf ESG ratings on stock price reactions to equity offerings. It found that if a company had a high ESG rating then the market reacted more positively to its equity offering. This appeared to be good news, but worryingly the researchers also found that the company with the high ESG rating then appeared to use the proceeds in a less value-creating way such as by storing it as cash, and the firms were also found to have worse long term performance.

This paper is the first large-scale textual analysis of disclosure practices of European and UK CSR reports.

In response to the EU law (Directive 2014/95/EU) on corporate ESG disclosure, which took effect from January 2017, this paper presents a comprehensive analysis of the status of CSR/ESG reporting practice in 15 industrialized countries in Europe. It performs topic modelling using all publicly available CSR (Corporate Social Responsibility) reports for all constituent firms of the major stock market indices of 15 industrialized countries included in MSCI Europe for the sample period from 1999 to 2016. It addresses the questions; ‘Which of the ESG topics that are in the headlines?’, ‘What are the sector differences?’, ‘What has been changed?’, ‘Is integrated or separate report more common and by who?’

We recently addressed ESG in a Vital Topics event with keynote speaker Sacha Sadan, Director of Corporate Governance at Legal and General Investment Management.

In 2016 we hosted an ICAEW sponsored event about ESG factors and integrated corporate reporting where Professor George Serafeim of Harvard Business School delivered the keynote lecture on how integrating environmental, social and governance data in order to better understand both the risks and opportunities of businesses was crucial for both the directors managing change and investors in the companies.