Institutional Investors and Corporate Environmental Costs

Using a novel dataset from Freiberg et al. (2021) that measures corporate environmental costs, we examine the influence of institutional investors on the monetized environmental impact generated by their investee firms. Using a sample of 64 countries and 12 industries, we document that institutional ownership is negatively associated with corporate environmental costs. The effect of institutional ownership on corporate environmental costs is driven by long-term and foreign institutional investors. They are more pronounced in low-income countries, and in countries with weak environmental regulation. In additional analysis, we find that firms’ environmental costs are negatively correlated with firm value and positively correlated with the cost of equity. To the extent that corporate environmental costs are not fully reflected in conventional ESG scores, our findings shed new light on the role of institutional investors in shaping corporate environmental impact