Summary Mandatory Papers & Guest Lectures for Sustainable Finance & Value Creation (323081-M-6)
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Course
Sustainable Finance & Value Creation (323081M6)
Institution
Tilburg University (UVT)
An extensive summary of all mandatory papers and guest lectures of the course Sustainable Finance & Value Creation (323081-M-6).
Each paper covers the research question, hypotheses, data collection, methodology, results, and an overall conclusion.
Part 1
Liang & Renneboog (2020): Corporate Social Responsibility and Sustainable Finance: a review
of the literature.
Three views of CSR:
1. Win-win: Doing well by doing good. Generated firm value is distributed across all stakeholders
(including shareholders). Or doing good by doing well.
2. Delegated philanthropy: corporate policies are channels for the expression of citizen values.
3. Agency view: the behaviour reflects insiders’ own desires and caring about various
stakeholders may weaken managerial accountability.
Bebchuck et. al. (2022): Does Enlightened Shareholder Value Add Value?
Main research question: Can replacing shareholder value maximisation by enlightened shareholder
value maximisation benefit stakeholders or society?
Conditions for equivalence of SVM and ESVM:
1. Corporate leaders are not myopic and fully take into account the long-term consequences that
their choices have on long-term shareholder value.
2. Corporate leaders are well informed about the consequences of their choices (or at least as
well informed about these consequences as other agents in the economy).
3. Courts avoid the micromanagement of corporate decisions and defer to the discretion of
corporate leaders under the business judgement rule.
4. Because outsiders are well-informed too, only changes in actual treatment of stakeholders, and
not merely linguistic changes in the formulation of the decision standard, are taken to be actual
changes.
Arguments for replacing SVM with ESVM:
1. Addressing short-termism: it leads to R&D and long-term capital underinvestment.
a. Won’t make a difference as incentives of corporate leaders remain short-termist.
2. Educating and informing corporate leaders: would improve corporate decision-making.
a. No effective way for spreading management insights.
3. Providing cover for directors seeking to serve stakeholders: encouraged to make stakeholder-
friendly decisions more frequently.
a. Why would we expect corporate leaders to use their reduced accountability to
shareholders to benefit stakeholders?
4. Improving corporate image and avoiding regulatory backlash: rebuilding social trust in business.
a. Reduced demand for meaningful legal and regulatory reforms that could effectively
protect stakeholders.
Liang & Renneboog (2017): On the Foundations of Corporate Social Responsibility.
Main research question: What are the fundamental forces that steer corporations to behave as good
citizens rather than as pure profit maximisers?
- Why do some firms want to be more socially responsible than pure profit maximisers?
- Why do firms in some countries engage more in CSR than firms in other countries?
Data: ESG ratings (with less emphasis on Governance) from MSCI Intangible Value Assessment
(IVA) (1999-2014), RiskMetrics Environmental and Social ratings, Vigeo, and ASSET4. 114 countries,
123 industries.
Methodology: Compare median ESG values across different legal origins, between capitalist and
socialist countries. Analyse association between a company’s CSR and it’s country egal origin,
political institutions, social preferences, and corporate characteristics.
¿ ' ' '
IVA ¿ =α t + β Lega l c +δ X ¿ + γ Z ct +ε ¿
Legal is a vector of different types of civil law origins (time-invariant).
Results:
1. Cross-country GLS
- Civil law firms have higher CSR & ESG scores than common law firms.
- Capitalist countries do better than former socialist countries.
- French origin firms do better than English origin firms.
, 2. Random-effect ordered probit
- Civil law firms have higher CSR scores compared to common law firms.
3. Quasi-natural experiments (scandals and disasters)
- For civil law firms, the product responsibility score went up by more than 5% after the 2008
Chinese Milk scandal, in comparison to common law firms.
- Deepwater Horizon oil spill 2010: Energy-related firms in civil law countries upgraded various
aspects of their environmental performance by 7% on average, relative to energy-related
firms in common law countries.
- Indian Ocean earthquake and tsunami 2004: check effect on donations (are not lasting
effects). Firms in civil law countries donated on average more money than those n common
law countries.
Conclusion: Firms in civil law countries are more responsive to CSR shocks than firms in common
law countries.
Marquis (2020): The B Corp Movement Goes Big. Stanford Social Innovation Review.
B Corp: a B Corp is a for-profit organisation, certified by the non-profit B Labs. Each B Corporation
has to undergo a “B Impact Assessment” (BIA), which is a tool for continuous improvement and
deeper engagement. The Corps have to undergo this BIA every 2 years.
An analyst reviews and ensures consistency and accuracy of the submitted assessment, if the score
is below 80 (out of 200), the BIA helps to identify new areas to create impact.
Each B Corp has to have 1 area of excellence and multiple areas of proficiency. The assessment is
about 4 key sections of the corporations entire operations:
1. Governance;
2. Workers (employees);
3. Community;
4. Environment.
B Corps and their directors have to consider impact on all stakeholders, they have to publish public
reports of their overall environmental and social performance. Furthermore, each business
(regardless of its corporate structure, the state, or country is operates in) can file for being a B Corp.
These Corps have to pay certification fees based on yearly revenues ($500 to $50,000).
Benefit Corporation: also called “Public Benefit Corporation” (PBC). This is a legal entity (in 30 U.S.
states), it incorporates a public benefit.
Directors of such firms are required to consider impact on all stakeholders, they have to publish public
reports of their overall environmental and social performance, but they also report on self-reported
metrics and evaluations to their shareholders. PBCs have to pay state filing fees ranging from $70-
$200.
The purpose of an PBC is to provide corporations the option of having both for-profit and social impact
purposes and interests.
Part 2
Guest lecture by PwC: M&A department.
PwC focuses mainly on large clients. They help clients throughout the entire M&A process.
Their advisory teams are: (1) Consulting, (2) Deals, and (3) Cyber Security & Forensics.
- The Deals department consists of 9 sub-departments. M&A is one of them. It has a total of
350 employees.
ESG in the M&A market: drivers that put ESG on top of the agenda for financial services
organisations and normal corporations are, among others:
1. Changing consumer sentiments;
2. Corporate reputation;
3. Revenue growth (well performing in ESG is often related to well performing financially);
4. Workforce expectations;
5. Investor expectations;
6. Regulatory scrutiny;
7. Transformation and value creation.
, ESG can lead to outperformance and value creation: building more trust with different stakeholders,
offering of growth opportunities (new markets/products), risks are lowered, and so are costs.
At PwC, they use a materiality map to identify relevant topics for each company:
According to the CSRD (Corporate Social Responsibility Directive in the EU) firms will need to report
based on such a materiality map from 2024 onwards. However, non-financial data disclosure is still a
challenge. Even well ESG performing companies are struggling with it.
ESG due diligence:
- Why? Highlight new risks and opportunities. It’s becoming more and more relevant.
- What? A review of the most important ESG opportunities, value creation levers, and risks.
- How? An assessment based on research and conversations with the management,
complemented with site visits and inhouse experts.
- Outcomes? Quantification of impact of the sustainability topics on financial performance.
The key factors are taken into account. These are, strategic alignment (it should represent the client’s
ESG strategy), deal value (it must be useful for the valuation), external stakeholders and financing
(opportunity for lower borrowing costs), and regulatory (is the target ready for upcoming legislation?).
Part 3
Christensen et. al (2017): The Real Effects of Mandated Information on Social Responsibility in
Financial Reports: Evidence from Mine-Safety Records.
Main research question: What are the real effects of the mandatory inclusion of mine-safety
disclosures?
Data: Section 1503 of the Dodd-Frank Act (requires reporting citations for violations of mine-safety
regulations in annual 10K and IDO 8K filings). Mine Safety and Health Administration (MSHA) website
for mine-safety disclosures (MSD).
2,726 MSD mines and 23,533 non-MSD mines. 2002-2013.
Hypotheses:
1. If MSD increases awareness of firms’ safety records, it provides incentives for managers to
improve mine safety (through political costs, reputational concerns, and activism).
2. If MSD increases the implications of safety issues for firm value, then it gives managers
incentives to alter resource allocation decision to improve safety.
Methodology
- Effect of MSD on incidence rate of citations for violations of mine-safety regulations:
Difference-in-Difference analysis around date of Dodd-Frank Act for MSD and non-MSD
mines.
o Differentiate between severe citations and non-severe citations.
- Effect of MSD on injury rates (assumption is that decrease in citations leads to a reduction in
injuries). Over a 1 year and 2 year period.
- Labour productivity: difference-in-difference around the adoption of the Act.
o Use log of tons of coal mined per hour worked as dependent variable. Only
observable since 2006.
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