Institutional Investors and Sustainability in Firms: Saying Good Versus Doing Good

Environmental, social, and governance (ESG) is rising as a framework for informing corporate practices among publicly-listed companies and asset management firms. Subsuming an increasingly larger proportion of institutionally-managed assets and shareholder resolutions, ESG has been heralded by proponents as a corporate turn from shareholder to stakeholder capitalism. Drawing on a statistically-representative dataset of publicly-listed companies in the U.S., this paper examines institutional investor ownership as a prospective mechanism for ensuring ESG compliance among companies. Institutional investors are associated with nonlinear gains in emissions reduction and gains in female representation at both director and executive level, but increases in pay disparity between the CEO and median employee wages among their invested companies. Most companies only implement ESG compliance policies for environmental sustainability with no repercussions for earnings and lack policies that affect profitability and executive compensation, such as employee protections, human rights, whistleblower protections, and anti-corruption. These policy deficiencies are intentional: with the implicit support of institutional investors, companies assimilate ESG infringements into core firm operations to lower capital expenditures, stabilize revenue, increase operating margins, and exacerbate executive compensation. Rather than a storied embrace of stakeholder values, companies continue to evoke shareholder value as a framework for capital allocation and firm operations.