As DEI (diversity, equity, and inclusion) initiatives become increasingly more important, pressure mounts for companies to include a more diverse board of directors. Various studies show how including a more diverse BOD directly impacts a firm’s overall performance, but what about a firm's environmental, social, and governance (ESG) performance? This paper studies the relationship between BOD characteristics and a company’s ESG rating. Using a dataset of S&P 100 companies, this paper looks to analyze how BOD characteristic factors influence the 2021 Sustainalytics, MSCI, and S&P Global ESG Rating of each S&P 100 company.
In addition to BOD characteristics, this paper also looks to analyze the effect of shareholder activism on ESG ratings. Shareholder activism is represented by the number of shareholder proposals included on the proxy ballot. Shareholders are pushing for companies to adopt ESG initiatives, therefore they are submitting more resolutions connected to these issues. Shareholder resolutions have the potential to directly affect how a company is run and the policies adopted. For example, a shareholder resolution could ask a company to report its annual carbon emissions in an attempt to create more transparency and accountability connected to climate change. Because of this, shareholder resolutions have the potential to positively impact a company’s ESG Rating, and it must be included as a potential variable affecting the ESG ratings.
This paper concludes that the Sustainalytics, MSCI and S&P Global ESG Ratings are affected by different variables. The Sustainalytics ESG Risk Rating is most significantly influenced by the number of shareholder proposals. More specifically, the greater the number of shareholder proposals, the higher the ESG Risk Rating, which is a negative result. Shareholder proposals are rarely ever passed, which could explain why they have a negative effect on the ESG rating. The S&P Global ESG Rating is affected by the percentage of independent directors, meaning the higher the percentage of independent directors, the better the ESG rating. Board members who have a material relationship with the company may not always have ESG related issues in mind, which could lead to this result. The MSCI ESG rating is most influenced by the percentage of beneficial ownership, which can be connected to the constraint of shareholder activism. Using these results, it can be hypothesized that when BOD own more shares of stock, the MSCI ESG Rating is negatively affected.