Filling and voting on shareholder proposals has been a critical corporate governance mechanism, enabling investors to mitigate classical principal-agent problems. In the past, most shareholder proposals concerned corporate governance issues such as CEO remuneration, takeover prevention, board structure, and voting rights. In recent years, sustainable investors have started leveraging their shareholder rights and filing proposals to improve firms’ environmental or social performance. Such sustainable engagements are increasingly prominent as investors file hundreds of proposals annually with potentially significant consequences. A recent NBER working paper titled “Timing Sustainable Engagement in Real Asset Investments” analyzes a core factor influencing the effectiveness of sustainable engagement: The depreciation levels of real assets of the firm.

The impact of sustainable engagements is uncertain. Engagement on environmental or social issues frequently involves direct, costly, and substantial adjustments to firms’ operations. Addressing such concerns could aid firms in improving their sustainability performance. However, their substantive nature makes it uncertain to what extent managers will adopt investors’ demands. For instance, Boston Properties got engaged in 2007 to reduce emissions for environmental reasons, took the concerns seriously, and became a market leader in environmentally friendly office buildings. In contrast, Exxon faced a similar environmental engagement this year and decided to sue its shareholders, who strove to potentially reduce their revenue by curbing emissions. Such disparities highlight the importance of assessing the effectiveness of engagement. However, doing so is empirically challenging as investors select target firms and topics more likely to yield a positive impact.

Our study circumvents this problem by using variation in the timing of sustainable engagement, with respect to the depreciation of the real assets of the firm. Managers will be more inclined to meet investors’ demands when the associated costs are lower. Improving sustainable performance often requires firms to replace or make costly adjustments to their physical assets. These adjustment costs differ over time due to physical depreciation and operational downtime. For instance, installing an electric heating and cooling system (HVAC) in a building would be significantly cheaper when the existing gas system already needs to be replaced, and the retrofit is timed alongside other renovations. Further, it would make much less economic sense to perform major capital expenses when a heating system has recently been installed, regardless of the pressure of investors. Following this logic, we argue that investor engagement is more effective when real assets of the firm are physically depreciated and improving sustainable performance is expected to be cheaper.

Our analysis of the effectiveness of engagement is based on a unique dataset that covers the entire population of buildings operated by the US-listed real estate industry (REITs) and heavy polluters (EPA TRI manufacturing and utility facilities). This dataset provides detailed permit information, specifying the exact aspect and day a building has been retrofitted since 1990. This level of detail allows us to calculate the share of sustainable permits used in extensive renovation periods by these firms, providing a comprehensive view of sustainable investments in the (real) assets of the firm.

Using this sample, we find that accurately timed sustainable engagements substantively improve firms’ sustainable performance. Sustainable engagement during large renovation periods increases firms’ sustainable investments by 64%. However, sustainable engagement that is not accurately timed or not accepted by shareholders reduces the share of sustainable permits by 15% to 31%, depending on the specification. These results are independent/unrelated of governance engagement proposals, not explained by the sale of unsustainable properties, and not driven by investor selection in firms with particularly unsustainable properties.

Our research provides two novel insights for investors and lawmakers. First, we highlight the critical role of timing in sustainable finance. Profit-optimizing firms will only adopt investors’ sustainability demands when they deem them profitable. The current debate in practice and academia primarily concerns identifying the firms for which these implementation costs are lower. Whereas this debate is central to attaining more impact with sustainable investment strategies, we recommend practitioners and academics consider not only who to engage with but also when it is the right time to do so. This is particularly pronounced for firms that heavily rely on fixed assets and face capital adjustment costs when improving their sustainable performance.

Second, our research highlights the complexity of timing sustainable engagement in practice. In our sample of sustainable real estate investments, we find that investors often struggle to predict when their engagements will be most effective. Notably, they only correctly time 12% of their sustainable engagements during heavy renovation periods, a marginal improvement on the 11% unconditional probability of timing it right. Moreover, the timing of engagement is off to the extent that combining the effects of accurately and inaccurately timed engagements yields no significant overall improvements in firms’ environmental and sustainable performance. This lack of effective timing primarily stems from information asymmetries between investors and firms on the physical state of depreciation of their fixed assets. Specifically, even when firms publicly announce their intent to perform major renovations, legal constraints on the timing of engagements under SEC law 14a8 prevent investors from filing timely sustainable engagements. To address these issues, investors could invest resources or communicate with management to determine when assets are physically depreciated. Given the above, our work suggests that sustainable investors with limited engagement capacity could better spend resources on identifying the right timing for engagement rather than filing untargeted sustainable shareholder proposals.

The  full paper can be downloaded at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4883596