We study a unique database of 7,415 private shareholder engagements on ESG issues with 2,465 publicly listed firms worldwide from 2007 to 2020. We provide new insights into private engagement characteristics and evaluate target firms’ financial and ESG performance after the engagements. Importantly, we investigate the extent to which private engagements address financially material ESG issues and how materiality matters for the financial performance of firms following the engagement. Using the materiality frameworks of the SASB and MSCI, we determine which engagements address ESG issues that are material given the industry in which the target firm operates. We find that more than 74% of the private engagements address material topics, suggesting that materiality matters to the choice to engage. We also find that target firms recognize which issues are material since material engagements are more likely to succeed.
An important question we answer in this paper is how firms perform after engagements on material ESG issues. We find that firms with successful material engagements significantly outperform peers by 2.5% over the 14 months after those engagements. In terms of economic significance, some of the magnitudes of the post-engagement stock returns we find are modest, while they are more significant for material engagements and for specific ESG subtopics. On the whole, we agree with the observation of Dimson, Karakaş, and Li (Citation2015) that ESG engagement returns, on average, lie somewhere in between the large effects found for traditional activism by hedge funds and the smaller effects found by earlier studies on the traditional activism by institutional investors (e.g., filing shareholder proposals at U.S. firms).
Regarding accounting performance, we find that material engagements are more often significantly associated with profitability and cost ratios compared to immaterial engagements. Material governance engagements most consistently show significant associations with future performance in terms of higher profitability and lower expense ratios. Furthermore, environmental engagements positively relate to capital and R&D expenditures when they are material.
Next to financial performance, our evidence indicates that engagements are, on average, accompanied by an improved ESG performance of target firms. Importantly, environmental engagements are associated with a decrease in CO2e intensity and an increase in the MSCI environmental score. However, we do not observe a significant decrease in the total level of CO2e emissions. Since current research shows that institutional investors might choose to decarbonize their portfolios by underweighting high-carbon firms rather than engaging with them (Atta-Darkua et al. Citation2022), future research could further study whether firms’ emissions deteriorate over the long run following engagements.
Several implications arise from the results of our paper. First, the results indicate that materiality matters for the post-targeting stock market and accounting performance of target firms. Hence, investors who engage on ESG issues that align with their financial goals are more likely to accomplish their objectives by focusing on material ESG issues. Second, our finding that material engagements are more likely to succeed indicates that investors who strive for engagement success should address material topics, regardless of whether they pursue financial or other goals with their engagements. At the very least, our findings illustrate that investors benefit from making materiality salient when engaging on ESG issues.
Third, we recommend that investors use materiality frameworks, such as SASB or MSCI, to collect structural data on their engagement efforts. Investors differentiate between financially material and stakeholder-material sustainability. Financially material sustainability encompasses the effects of the economy, environment, and its people (stakeholders) on the corporation, while stakeholder materiality involves the effect of the corporation on its stakeholders. It is important to note that ESG issues can be both shareholder and stakeholder material (i.e., double material). In this paper, we do not determine the extent to which private ESG engagements are material from a stakeholder perspective. The Global Reporting Initiative (GRI) is currently developing sector-level, stakeholder-materiality standards that investors and academics can use to examine the double materiality of shareholder engagement in future reporting and research.
We conclude this paper with a few cautionary notes and recommendations for future research. First, although academics and practitioners increasingly deem engagement as a plausible mechanism for shareholders to generate a positive societal impact, we are cautious not to interpret our results as evidence that the engagements causally affect firm behavior. Because we cannot observe the entire universe of private engagements by other stakeholders, identifying which ones affect firm behavior is challenging. Moreover, given ESG data limitations, we mostly study larger firms while the potential to influence smaller ones through engagement is arguably greater. Hence, our study provides a solid indication but not a definitive account of the overall effect of engagements on target firms.
Second, many investors aim to improve firms’ ESG performance via engagement, but our study may not capture long-term improvements in ESG performance. Many ESG policies that firms adopt today materialize slowly. For example, after an engagement on carbon emissions, a target firm might set long-term targets to reduce emissions. However, only time will tell whether the firm can reach the targets. Because we study ESG scores and emissions in the five years after an engagement, we cannot make claims about the long-term effects of engagement.
Finally, our paper does not take a stance on whether frameworks for assessing the financial materiality of ESG issues, such as those of the SASB and MSCI, should be prioritized over other materiality frameworks in engagement decisions. For example, given the scope of our paper, we do not address the extent to which engagements guided by financial materiality steer firms toward achieving the UN sustainable development goals or climate targets laid out by climate science. How well different materiality frameworks help investors in contributing to such goals is an interesting question that we leave for future research.

