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Study: Hedge Funds More Likely to Attack Firms With Higher ESG Ratings

By:
Chris Gaetano
Published Date:
Jun 26, 2020
A recent study has found that activist hedge funds (that is, funds that actively try to use investment pressure to change the companies they invest in) are more likely to let loose their fury on firms that emphasize corporate social responsibility; however, those that are more specific about their environmental, social and governance (ESG) strategies are better able to avoid their wrath, according to Institutional Investor.

The researchers, from HEC Paris, examined data from U.S.-based activist campaigns from 2000 to 2016. What they found was that the likelihood of a company being targeted increased from 3 percent to 5 percent if its corporate social responsibility scores rose by two standard deviations above the average. The researchers said this is because activist hedge funds tend to believe that such efforts are a waste of time and money that could have better gone to maximizing shareholder value.

Their ire, however, was directed mostly toward those companies that were vague in their language on how ESG initiatives pertain to their strategic and operational goals. Using plain-language analysis of conference calls where managers discussed their ESG plans, the researchers found that the more the firm uses words like "would," "could," or "should," as well as the use of the future tense, which implies the ESG work could be years in the future, the more activist hedge funds were likely to target them.

The study concluded that while activist hedge funds are more likely to target companies moving toward ESG goals in general, they are even more likely to attack those that couch these goals in vague communications, and less likely to attack the ones that are more specific and immediate about what they plan to do.