Introduction
This study examines how shareholder engagement on environmental, social, and governance (ESG) issues affects firms’ downside risk. Using proprietary data from a large UK-based institutional investor managing over USD 1 trillion in assets, it assesses whether ESG interventions act as a safeguard against adverse events. The findings show that successful engagements—particularly environmental ones—reduce downside risk, measured by value-at-risk (VaR) and lower partial moments (LPM).

Engagement data and process

The dataset covers 1,443 ESG engagements with 485 firms in 32 countries between 2005 and 2018. The majority occurred in the United States (22%) and the United Kingdom (19%), followed by Japan, South Korea, France, Germany, and Brazil. The investor primarily conducts private, confidential dialogues with executives and boards. Engagements mainly address governance (51%), followed by environmental (26%) and social (23%) issues.

Environmental engagements focus on climate change (47%), environmental strategy, supply chains, water, and pollution. Social issues include human rights (42%), labour rights (27%), and bribery and corruption (14%). Governance topics centre on executive remuneration (28%), board independence (26%), and diversity (23%). Engagements advance through four milestones: (i) raising a concern; (ii) target acknowledgement; (iii) target action; and (iv) successful completion. Thirty-three per cent reach full completion, 19% the action stage, and 30% acknowledgement. The average engagement duration is around 35 months.

ESG downside risk reduction

The analysis tests whether ESG engagements lower firms’ downside risk. Comparing two-year periods before and after engagement with matched control firms, the study finds significant declines in downside risk following successful engagements. When firms acknowledge investor concerns (M2), VaR falls by 0.205—around 9% of the standard deviation. Where firms take action (M3), VaR drops by nearly 1.0.

No significant effects are seen when engagements fail to reach acknowledgment, reinforcing that success drives results. The findings remain robust across models and controls, with no evidence of pre-existing trends between target and control firms. This supports a causal link between engagement and reduced downside risk.

Heterogeneous effects of ESG engagement on downside risk

Results differ by region and engagement type. The strongest risk reductions occur in North America, where investors have stronger rights and can use mechanisms such as proxy voting. European and other regions show weaker or statistically insignificant effects.

By theme, environmental engagements—particularly on climate change—produce the largest benefits. VaR at target firms declines by about 0.30 compared with controls. Social and governance engagements show weaker results, possibly due to challenges in measuring social outcomes or because governance reforms influence returns more than risk exposure.

Risk reduction channel: Empirical results on environmental incidents

To identify the underlying mechanism, the study analyses environmental incident data from RepRisk. Firms with large declines in downside risk show a 26% reduction in severe environmental incidents post-engagement, including pollution events and environmental damage. Firms with smaller or no risk reductions show no such decline, confirming a link between engagement and tangible improvements in environmental outcomes.

Conclusions

ESG-focused shareholder engagement can reduce firms’ downside risk, particularly when engagements are successful and address environmental concerns such as climate change. The findings indicate that institutional investors’ ESG activities offer measurable risk mitigation benefits alongside potential performance gains. Effective, action-oriented engagement—especially on environmental issues—enhances corporate resilience and supports long-term risk management.