Corporate Social Responsibility Issue
Do Responsible Investment Indices Improve Corporate Social Responsibility? FTSE4Good's Impact on Environmental Management
Version of Record online: 25 JUL 2013
© 2013 John Wiley & Sons Ltd
Corporate Governance: An International Review
Special Issue: Corporate Social Responsibility, Institutional Structures and Corporate Governance
Volume 21, Issue 5, pages 495–512, September 2013
How to Cite
Mackenzie, C., Rees, W. and Rodionova, T. (2013), Do Responsible Investment Indices Improve Corporate Social Responsibility? FTSE4Good's Impact on Environmental Management. Corporate Governance: An International Review, 21: 495–512. doi: 10.1111/corg.12039
- Issue online: 4 AUG 2013
- Version of Record online: 25 JUL 2013
- Corporate Governance;
- Corporate Social Responsibility;
- Environmental Management;
- Investor Engagement;
- Responsible Investment Indices
This study investigates the impact of a responsible investment index on environmental management practices. Firms that were included in the FTSE4Good index but failed to meet enhanced requirements were subject to both engagement by FTSE and the threat of expulsion from the index. We examine the combined effect of these actions, estimate the contribution of both elements separately, and the influence of concentrated equity ownership, corporate governance, and the institutional environment. We also evaluate whether the effect is persistent or transitory.
For a sample of 1,029 firms from 21 countries, our findings demonstrate that engagement combined with the threat of expulsion from the FTSE4Good index doubles the probability that a firm failing to meet the environmental management criteria in 2002 would comply by 2005. The higher compliance rate for the firms receiving engagement persists until the end of our study in 2010. We also find that compliance is positively associated with low levels of concentrated ownership and with firms based in coordinated rather than liberal market economies.
Our results contribute to the understanding of the complexities of governance, where decision makers are constrained or influenced by equity holders, the firm's governance system, institutional arrangements, and collective engagement by institutional equity holders. Our findings are consistent with both institutional and agency issues impacting on decision making.
Our study suggests that engagement via a responsible investment index reinforced by the threat of public expulsion from the index provides an effective route for large-scale collaborative investor engagement on corporate social responsibility issues targeting large and internationally diverse firms. It also demonstrates why regulators may wish to encourage engagement of this type to achieve social benefits.