RIEB Discussion Paper Series No.2025-01

Title

Power of Values-based Investors on ESG Actions of Value-orientated Managers

Abstract

This study examines how for-profit firms obtain capital from values-based, socially responsible investors by undertaking environmental, social, and governance (ESG) actions within a search model. In this model, the two parties are matched and benefit from informational advantages throughout the search process. The paper shows that an increase in the number of socially responsible investors encourages the for-profit firms capable of taking ESG actions to consistently take such actions, even if doing so may result in negative marginal pecuniary returns. Consequently, the paper concludes that regulators aiming to encourage firms to adopt more ESG actions should incentivize investors to prioritize ESG performance in their investment decisions. It also demonstrates that strengthening shareholder rights or promoting corporate governance reforms does not necessarily motivate firms to pursue ESG actions.

Keywords

ESG; Search; Social impact; Socially responsible investor; Competitive capital market; Bargaining; Value versus values motivations

JEL Classification

D83, G23, G32, M14

Inquiries

Meg ADACHI-SATO
Junior Research Fellow, Research Institute for Economics & Business Administration, Kobe University
Faculty of Business Administration and Accountancy, Khon Kaen University
E-mail: megasato@diamond.kobe-u.ac.jp.