[Empirical outcomes of shareholder engagement 2/4]
How to use engagement to cut left‑tail risk rather than just polish disclosure?
Andreas G. F. Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T. Starks, and Xiao Y. Zhou study how stewardship affects downside risk in their paper « ESG shareholder engagement and downside risk ».
They use proprietary data on 1,443 engagements at 485 firms between 2005 and 2018 to explore whether successful ESG engagements measurably lower firms’ downside risk, as measured by their Value-at-Risk (VaR) and Lower Partial Moment (LPM).
Their main conclusions include:
- Across all targets, downside risk declines after engagement, but effects concentrate in successful cases.
- When the company acknowledges the issue raised in the engagement, its VaR falls by 0.205, about 9% of the variable’s standard deviation, and LPM shows a comparable 8% reduction.
- When engagement induces concrete actions, VaR drops by 0.993 relative to controls, roughly three to four times bigger than with a mere acknowledgement.
- Environmental engagements, primarily climate‑related, deliver the strongest risk benefits; for environmental targets bien acknowledged, VaR declines by 0.299 versus controls, while social or governance themes show no statistically significant average effect on downside risk.
- Among environmental targets that experience large VaR or LPM declines, the severity‑weighted number of environmental incidents falls by 26% after engagement, while no comparable decline occurs where downside risk does not materially fall.
- LPM reductions are statistically significant for North America but not for Europe or elsewhere, Which shows heterogeneity in engagement efficiency and measured outcomes across regions.
- Dialogues on environmental and social topics mainly involve top executives, while governance focuses more on boards.
- An engagement campaign mean duration is 35 months), and only 33% of them ultimately reach successful completion.
This research suggests portfolio‑level sustainable finance strategies can treat effective engagement as downside‑risk insurance, especially on environmental themes.
Asset managers should prioritise progress from acknowledgement to actual actions, track engagement milestones, and integrate post‑engagement VaR/LPM shifts into the risk analysis.
The study faces three main caveats: evidence comes from one large UK‑based investor, left-tail disasters are rare, and residual selection and unobservables remain possible in spite of careful modelling.