Eliezer M Fich, Guosong Xu
Review of Finance, Volume 29, Issue 2, March 2025, Pages 567–602, https://doi.org/10.1093/rof/rfaf003
This paper studies whether exposure to salient climatic disasters affects institutional investors’ assessment of the environmental risks threatening their portfolio firms and, in turn, their support for environmental proposals. To inform this research question, we empirically examine voting on environmental proposals by mutual funds recently exposed to major hurricanes that hit their headquarter location.
We examine a sample of 357,649 votes by institutional shareholders on environmental proposals from 2006 to 2020 in the U.S. We find that mutual funds in areas affected by a hurricane are significantly more likely to endorse an environmental proposal in a non-affected firm immediately after the strike. We show that two economic channels account for our results:
- First, fund managers start caring more about the externalities of firms’ environmental policies after personally experiencing a hurricane. Consistent with this possibility, we find that Democratic managers are significantly more likely to support an E-proposal after a hurricane than their Republican counterparts. Moreover, we observe that managers who experienced a stock price drop when a previous E-proposal was ratified continue to vote for new environmental proposals following a hurricane.
- Second, managers, concerned about their careers and their fund’s performance, become worried about post-hurricane fund outflows related to their fund investors’ changed environmental preferences. As a result, fund managers cater to their fund investors’ preferences by increasing support for firms’ environmental policies. Consistent with this explanation, we find that after a hurricane strike, local and high-brown-stock-holding funds are more likely to boost their support for environmental proposals. We also find that managerial tenure, a common proxy for lessened career concerns, attenuates the overreaction towards E-proposals.
Moreover, we find that after hurricane exposure, funds reallocate their investment towards firms that faced a close-vote for an E-proposal that did not pass in the previous year. According to our results, after enduring a hurricane hit, funds are 2% more likely to buy shares of these marginal E-firms where their votes are likely very consequential.
Because of increased institutional investor support, E-proposals are more likely to pass after more institutional investors are exposed to hurricane strikes, and this impact is particularly strong for proposals that face close votes within a narrow passage/fail margin. However, we find that the passage of environmental proposals, particularly those endorsed by more hurricane-stricken funds, is met with lower stock market reactions. These findings suggest that salience-induced shareholder activism represents an overreaction and is not value-creating.
These findings should be of interest to regulators, academics, investors, and other groups debating the role of corporations in environmental protection. While our tests indicate that salience-induced climate activism harms shareholder wealth, we do not assess the impact of these engagements on the welfare of society at large. We hope that our work motivates other researchers to explore this important piece of the puzzle.