Common ownership and firms’ ESG performances

The role of common ownership in shaping firms’ ESG performances

Environmental pollution seems inevitable for the growth of developing countries. During economic development, environmental quality deteriorates due to negative externalities. To curb this, changes to corporate governance are essential. This research focuses on studying how common ownership affects the environmental outcomes and ESG performance of firms. While the role of common ownership in firms’ ESG performances is understudied, having a better understanding of this causal relationship will allow improvements to corporate governance practices to address environmental concerns.



The challenge

Amongst other externalities, environmental degradation has become an important inherent consideration in the business world. It is, therefore, essential to understand the impact of common ownership on ESG performances, considering the increased integration of ownership in recent times.

Common ownership is defined as the extent to which the shareholders of companies overlap in an economy. Multiple studies conducted so far aiming to understand the determinants of ESG performance have overlooked the impact of common ownership. As a growing number of companies are integrated by way of common ownership, it is expected that ESG and other market externalities will be better internalised through collective decision-making. As ownership is becoming more integrated in recent times, it is critical to analyse the impact of ESG spillovers of a company on to its peers and how common ownership can shape this dynamic.

The intervention

The researchers formulate a model to assess the possible channels of impact of common ownership on ESG investments and performance. They hypothesise that in a scenario without common ownership, each firm chooses its own production level and ESG investments. However, when common ownership is taken into consideration, it is expected that the firms will internalise the effect of their production and ESG investment decision on each other’s performances and decisions. Therefore, as firms become more integrated through common ownership, their propensity to consider the effect of ESG spillovers on each other improves which subsequently increases their ESG investments.

The research focuses on two forms of tests: data regression to shed light on the correlation between common ownership and pollution; and experimentation to understand the impact of variation in common ownership to establish causality.

The potential impact

This research aims to help uncover the potential impacts of common ownership in determining firms’ ESG investments and ESG performance. This understanding will help clarify how changes in corporate governance would affect environmental outcomes of business.

The study will also help establish if in a common ownership scenario, the ESG investments by one firm would create positive spillovers for other firms, and thus increasing the investment returns or ESG performance for everyone. If so, this it will allow the forming of better governance and ownership strategies to augment ESG performances.

In today’s business ecosystem, environmental regulations are understood to curb economic growth in developing countries. If common ownership is established to be an elevator for ESG performance, it will pave a path to address environmental concerns in developing countries without compromising on economic growth.