Ownership Dynamics and ESG Performance: The Role of Shareholder Concentration and Insider Participation – Tutkimustietoa Finsif-stipendiaateilta 2024

The absence of a one-size-fits-all ESG approach enables company owners to shape sustainability priorities more freely

Despite a growing emphasis on social responsibility in recent years, companies still have a significant amount of discretion when deciding on the level of ESG pursued, as regulation usually only sets a minimal baseline. Determining the optimal level of ESG commitment for a firm is challenging, given that there is no universally applicable standard that suits all companies, making firm level factors highly important. In particular, one key aspect determining company ESG commitment is a company’s ownership structure, as owners play a major role in shaping company strategy through activism, voting in annual general meetings, and officer elections.

Reconciling diverging findings of ownership and ESG with a holistic study

Previous academic literature has studied the association between ownership and ESG through the lenses of ownership concentration as well as owner identity. It has been proposed that as an investors’ ownership share in a company increases, they may increasingly resist ESG investments due to bearing a larger part of the costs of ESG pursuits while benefits are shared with all shareholders (Barnea & Rubin, 2010; Jensen and Meckling, 1976). Insider shareholders may feel these negative impacts of ESG initiatives more acutely, if they compromise financial performance, due to less diversified portfolios (Abeysekera and Fernando, 2020; Rees & Rodionova, 2015). In contrast, institutional investors may be more directly motivated to invest sustainably by regulations such as the MiFID II, or use ESG as a way to manage risks (Fu et al., 2019; Nguyen et al. 2020).

Empirically, the findings of the association between ESG performance and different types of ownership have been diverging. In our thesis, we aim to reconcile these findings by evaluating a sample consisting of 8 439 firm-year observations in the UK, Germany, France, Italy, Spain, and the Netherlands from the years 2002-2022. Our analysis aims to offer a more comprehensive view of how ownership concentration, owner identity and ESG performance are linked.

Insider ownership correlates negatively with ESG performance while institutional ownership has no association

We find that high ownership concentration in general, and particularly a high proportion of company insider ownership, are associated with worse ESG performance. Deviating from findings in previous literature, we document no association between institutional ownership and ESG performance when insider ownership is controlled for, whereas previous literature (i.e. Chen et al., 2020; Dyck et al., 2019; Gloßner, 2019) often reports a positive relationship between institutional owners and ESG.

We also find differences between different dimensions of ESG. For example, the Social pillar of the ESG score shows a less negative association with insider ownership compared to the Environmental and Governance pillars. Furthermore, the occurrence of ESG controversies is not linked to the level of insider or institutional ownership, supporting the notion that avoiding particularly weak ESG performance is in all shareholders’ interest.

Overall, our findings suggest that ownership structures and ESG practices are influenced by complex, idiosyncratic factors, highlighting the importance of considering both ownership concentration and identity in understanding ESG dynamics. Our research provides a reminder for investors, policymakers, and corporate managers to observe ownership dynamics and its different facets when evaluating a firm’s governance.

Jialin Ni
M.Sc. (Economics and Business Administration), Finance, Aalto University

Clarissa Tuutti
M.Sc. (Economics and Business Administration), Finance, Aalto University

The study can be found here.