Implications of ESG interests on traditional compensation schemes and the role of institutional investors

Abstract

This thesis studies the effects of environmental, social, and governance (ESG) performance on traditional incentives tied to financial metrics for a sample of S&P500 firms over the years 2021 and 2022. The study aims to comprehend whether companies tend to align their financial incentives with ESG conduct and assess the position of institutional investors, verifying also if this relationship differs across sectors. The analysis utilises a static panel data model to investigate the two-year data set. The findings indicate an absence of a significant relationship between the mentioned variables, providing limited empirical support for the direct impact of ESG performance on financial incentives. Moreover, higher proportions of institutional ownership do not exhibit a substantial influence on this relationship, as demonstrated by a non significant interaction effect. When examining sector-specific dynamics, an interesting pattern emerges as financial companies display a significant causal effect of ESG performance on financial incentives that is present also considering the interaction of institutional ownership. This suggests that reputation management, investor preferences, sector-specific risks, and regulatory requirements may drive companies belonging to the financial sector to align financial incentives with ESG objectives. While these results contribute to the understanding of the interplay between ESG strength and financial incentives, the study acknowledges limitations related to the short time span, the limited sample size, the broad industry classification that impede a full generalizability of the findings and constitute a clue for future research.