Engagement by financial institutions can affect corporate climate policies when a feasible request is combined with a credible threat of exit, according to recent findings of a field experiment investigating the impact of index provider engagement.

The experiment involved sending a letter to a group of firms from an index providers’ chief executive officer asking them to commit to a science-based climate target (SBTi). The findings of which were published in a paper authored by Massachusetts Institute of Technology (MIT) sustainable finance experts Florian Heeb and Julian Kölbel.

According to the authors, the paper adds to the existing literature on the societal impact of sustainable finance, arguing that shareholder engagement is a superior strategy to divestment for investors looking to reduce negative externalities.

The experiment

A randomly chosen group of 300 out of 1,227 international companies received a letter from an index provider, encouraging the firm to commit to setting a SBTi in order to remain included in its climate transition benchmark indices.

Heeb and Kölbel found that 21% of firms that received the letter had committed versus 15.7% in the control group. Among the key implications drawn from the study by the authors was that it appeared to confirm that engagement could be an effective tool to trigger change.

Furthermore, it highlighted that passive investors can also be active stewards for climate action. 

Aligning Portfolios with the Paris Agreement

Research published in The Impact of Climate Engagement: A Field Experiment paper suggested that ESG screens may be more impactful if firms are informed about them

“Our results show that firms react to index provider requests, at least if they commit a credible threat of exit. This adds an interesting impact perspective to the strongly growing family of funds linked to climate indexes,” the duo added.

The results also suggested that ESG screens may be more impactful if firms are informed about them.

Additionally, as the threat of exit exists for all index constituents, whether they got the letter or not. The treatment may have increased firms’ awareness of the threat, thereby making them more likely to act, the report added.

“In a world of increasingly prevalent, and complex, ESG integration, this is crucial. It may be hard for firms to keep track of all the screens their different shareholders apply. So actively informing firms may increase the effect of ESG screens on corporate behaviour,” the duo added.

Both Heeb and Kölbel stressed that while they have only looked at the commitments made, they are keen to see if the commitments are followed up by any real emission reductions and ambitious climate targets.

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