Using a wide sample of international publicly traded firms, this paper studies the rapidly increasing practice of incorporating Environmental, Social, and Governance (ESG) metrics in executive compensation contracts. Our evidence suggests that this compensation practice varies at the country, industry, and firm levels in ways that are consistent with efficient incentive contracting. We also observe that reliance on ESG metrics in executive compensation arrangements is associated with engagement, voting, and trading by institutional investors, which suggests that firms could be adopting this practice to align their management's objectives with the preferences of certain shareholder groups. Finally, we find that the adoption of ESG Pay is accompanied by improvements in key ESG outcomes, but not by improvements in financial performance.

Exploiting the unique features of the CDP, the world-leading platform of corporate climate risk disclosures, we study the relationship between institutional investors' demand for climate-related information (as reflected in their CDP signatory status), firms' decision to disclose this information, and corporate carbon emissions. We provide systematic international evidence that ownership by CDP signatories is positively associated with the probability of disclosing information to the CDP, and that such disclosure is associated with subsequent lower carbon emissions. We also observe that CDP signatories are more likely to engage with and divest from top emitters disclosing to the CDP. Overall, these results are consistent with the notion that investor demand for climate-related information results in greater corporate disclosure and contributes to firms’ decisions to lower future carbon emissions.

Can voluntary market-based initiatives effectively promote greener credit allocation? Our paper addresses this question by assessing the role of self-declared environmentally conscious bank shareholders, specifically those endorsing the UN Principles for Responsible Investment, in shaping the sustainability of bank loan portfolios. For our analysis, we utilize a comprehensive dataset that includes information on syndicated loans, firm-level emissions, and both bank and firm ownership and financial data. Controlling for loan demand, at the bank–firm level, we find no evidence of an association between a higher ownership stake by eco-conscious bank shareholders and shifts in banks’ loan allocation strategies between firms with low and high emissions. At the firm-level, we find that lending relationships with banks characterized by greater eco-conscious ownership are not associated with significantly improved environmental performance among borrower firms. Our analysis reveals that banks are treated differently by investors compared to non-financial firms, likely due to regulatory requirements and their unique governance structures, which might explain the observed lack of influence of eco-conscious bank shareholders. Our findings thus indicate the potential limitations of relying on self-declared eco-conscious bank shareholders to guide banks toward environmentally sustainable credit allocation.

This paper examines the role of the “Big Three” (i.e., BlackRock, Vanguard, and State Street Global Advisors) on the reduction of corporate carbon emissions around the world. Using novel data on engagements of the Big Three with individual firms, we find evidence that the Big Three focus their engagement effort on large firms with high CO2 emissions in which these investors hold a significant stake. Consistent with this engagement influence being effective, we observe a strong and robust negative association between Big Three ownership and subsequent carbon emissions among MSCI index constituents, a pattern that becomes stronger in the later years of the sample period as the three institutions publicly commit to tackle Environmental, Social, and Governance (ESG) issues.