In 2006, the United Nations Global Compact launched Principles for Responsible Investment (PRI), and the Japanese Ministry of Environment advocated financial mechanisms for environmental protection.

We find that institutional ownership in 2005 is positively related to the probability of subsequent improvements in environment ratings for Japanese firms. The result is especially evident for domestic institutional shareholders who signed up for the PRI.

These results suggest that soft law aimed at institutional investors can enhance responsible business practices and that national government initiatives play an effective role.

Finally, improved ratings in the environment category do not harm shareholder wealth.

 

By: Elizabeth Motta, School of Economics, Kyushu University, and Konari Uchida, Kyushu University – Faculty of Economics

See the full SSRN article here