What Drives Corporate ESG? Disentangling the Importance of Investors, Managers, and Firms

We study the relative importance of investor, manager, and firm heterogeneities on firms' Environmental, Social, and Governance (ESG) policies. We find that investor fixed effects explain most of the variation in ESG choices. The improvement in the model fit from adding investor effects is particularly strong for the environmental dimension. Significant associations between investor effects and both voting decisions on ESG proposals and the likelihood that firms are involved in environmental and social misconducts confirm that we capture economically important heterogeneities in investors' behavior. Additional analyses also show stronger empirical support for an underlying channel based on investor influence over ESG policies rather than investor selection of high ESG firms