Stuart L. Gillan, Jay C. Hartzell, Andrew Koch, and ... - Pitt Business

To provide further insights into this issue, Table V reports the correlations among the
ESG scores. With regard to the net scores, which consider both positive and negative aspects of
the three ESG classifications, there is a 17.9% correlation between the net environmental and
social responsibility scores, but little correlation between either of these and the net governance
score. As a basis for comparison, and because of the idiosyncrasies of the KLD governance
ratings pre-2008, we also include the Gompers, Ishii, and Metrick (2003) G index in this
correlation table and find little to no association between the KLD ESG scores and the G index 11 .
ESG and Institutional Investors
As noted above, both conventional wisdom and the UNPRI webpage imply that large
institutional investors tend to use ESG considerations in at least some of their investment
decisions. If institutions are taking these factors into consideration, then we would expect to
observe associations between measures of ESG and institutional ownership. To investigate this
issue, we model the fractional institutional ownership in a firm as a function of each of the
component E, S, and G scores individually, while controlling for other firm characteristics as in
Bennett, Sias, and Starks (2003). The regressions are pooled panel data, with industry and year
fixed effects and standard errors clustered by firm using data from the 1992-2007 time period. 12
Table VI reports the coefficients for each of the ESG scores. Using the KLD ratings as
proxies for ESG factors of interest to institutions we find little evidence that, in aggregate,
institutional investors are attracted to firms with high net ESG scores. In fact, we find no
association between fractional institutional ownership and the net environmental score. In
11
We also plan to examine the relation between each of the KLD ESG scores and another widely employed measure
of firm governance, the entrenchment index developed by Bebchuk, Cohen and Ferrell (2009).
12
Using the Fama-MacBeth (1973) technique for cross-sectional regressions over the entire time period produces
similar results.
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