Theory to Practice

Renewable governance: Is it good for the environment?

The context

There is growing concern among institutional investors about environmental sustainability and the unwillingness by some companies to act on them. A survey conducted by Krueger, Sautner and Starks reveals that investors believe that environmental risks have deep financial implications for their portfolio of firms, and these risks have begun to materialize.


In a complementary KPMG survey of board members and executives from 41 countries, less than half of respondents believe that focusing on environmental, social, and governance (ESG) issues leads to better business performance in the long run, and only 11% say that their boards have implemented solid strategies to contend with ESG risks and opportunities. This is despite the fact that key investors continue to underscore the connection between ESG and long-term firm performance. So, when it comes to ESG, there appears to be a divide separating the mindsets of investors and boards of directors.


Investors need to deploy effective governance mechanisms before boards will act on their demands. Our research hypothesizes that board renewal mechanisms – that reshape the thinking of board members – are indispensable tools enabling investors to bridge the gap between what they want done on sustainability and what company insiders are actually doing. To illustrate, in campaigns of environmental activists, an essential tactic is to replace current board members with new like-minded ones, who share the views of investors. What’s more, investor-friendly changes in the voting rules force the incumbent board to pay more attention to investor preferences, as it becomes easier for investors to vote them out.

The research

In our article, we study a sample of 3,292 companies from 41 countries to test our hypothesis that board renewal is essential to improving environmental performance. As far as mechanisms that could potentially renew the thinking of the board, we focus on two for which we were able to collect sufficient data at a global level and capture quasi-exogeneous variation in our sample period.


The first mechanism is the adoption of majority voting rules, which means that a candidate must receive more than half of the votes to be elected to the board. This gives external investors the power to stop candidates from joining the board, and greater investor power in shaping company decisions is typically associated with better financial performance. Instead, with plurality voting, (which is generally used in lieu of a majority system), investors have less power.


The second mechanism involves a proxy for mandatory board renewal, which may be required by regulators or investors, or come from social pressure. A common example of forced board renewal we see all over the world is the concerted effort to increase the number of women on corporate boards.


To ascertain whether board renewal mechanisms are linked to future environmental performance, we utilize ASSET4 ESG (now known as Refinitiv ESG), which offers complete coverage of companies around the globe for a long time series. The environmental performance metrics tracked by ASSET4 include CO2 emissions, the use of renewable energy, the percentage of recycled waste, and so on.


Given the gap between the preferences of investors and board members with respect to environmental performance, our assumption is that to modify corporate policies, investors need board renewal mechanisms that are powerful enough to renew the thinking of board members. We identify two such corporate governance mechanisms: the adoption of majority voting and the introduction of a female board member. In our international sample we observe that board renewal is positively and significantly linked to environmental sustainability, around the world.   


The panel regressions with firm fixed effects show that majority voting or the addition of a female board member are both correlated to 3-4% higher environmental performance. In addition, the positive association between board renewal and future environmental performance is stronger in countries with stronger institutions, and when the companies in question have a motivated institutional investor base. 

Conclusions and takeaways

Our empirical results suggest that renewing the board of directors, in most cases, increases the likelihood that the company will improve its sustainability credentials.


Our findings provide a roadmap for investors whose priority is sustainability. We suggest that they should not focus on aggregate measures of ESG or environmental performance as stand-alone metrics. Instead, to reshape the thinking of the board of directors and to align it with their preferences, investors should push for renewal mechanisms such as majority voting and adding women to the board.


One of our results is to document a strong relationship between female board members and future environmental performance. A possible explanation here is that women affect environmental performance for reasons that are specifically associated with their gender. Consistent with these results, prior studies in behavioral economics have shown that, compared to males, females exhibit a greater tendency towards “other regarding” preferences, a mindset which may also positively impact environmental performance.