Three Essays on Environmental, Social, and Governance (ESG)
Abstract
This abstract synthesizes findings from three studies examining the impact of environmental, social, and governance (ESG). In essay one, using environmental regulatory enforcement data from EPA, I find that facility-level political connections are positively related to the likelihood of experiencing environmental regulatory enforcement. The effect is mainly driven by political connections related to Democratic senators. Consequently, politically connected facilities reduce their air pollution. The effect of political connection is diminished when the authority of senators over environmental regulatory enforcement becomes weaker after the 2017 presidential election. Heterogeneity analyses reveal that the impact of political connection is stronger in states with poor air quality and economic development, while it is weaker for facilities with low pollution levels and for facilities owned by the government. In essay two, using a large international dataset that quantifies corporate environmental costs, we analyze the influence of institutional investor ownership, particularly investment horizon and investor origin, on the monetized environmental impact generated by their investee firms. Institutional investor ownership is negatively related to corporate environmental costs. This effect is driven by long-term foreign institutional investors, especially investors from advanced economies. Foreign institutional investors transfer higher norms and standards from their home countries to their investee firms abroad. Corporate environmental costs are negatively correlated with firm valuation and positively correlated with the firm’s cost of equity. To the extent that corporate environmental costs are not already reflected in conventional ESG ratings, our results shed new light on the role of institutional investors in shaping corporate environmental impact. Essay three examines whether environmental costs impact the profitability of insider trading. We use a sample of 3,189 purchase transactions and 10,200 sales transactions from 31 countries over 2011–2018. We uncover evidence that insiders sell their stocks profitably based on public environmental cost information. Further analysis indicates that these results become more pronounced in contexts of high investor inattention to environmental information, as measured by lower Google search frequencies for environmental information and the presence of left-leaning governments. Our findings demonstrate that insiders can benefit from publicly available environmental information and suggest that investor inattention to this information is a key driver of insider trading performance.