Renewable Energy 195 (2022) 1155e1164 Contents lists available at ScienceDirect Renewable Energy journal homepage: www.elsevier.com/locate/renene Do renewable energy mutual funds advance towards clean energy- related sustainable development goals? Carmen-Pilar Martí-Ballester Business Department, Universitat Autonoma de Barcelona, Spain a r t i c l e i n f o a b s t r a c t Article history: This study examines the effects of sustainable energy-focused institutional shareholders on corporate Received 5 April 2022 sustainable energy performance. It employs a sample of 43 renewable energy mutual funds and 1074 Received in revised form portfolio firms covering 2006 to 2019. To examine this relationship appropriately, the study adopts 9 June 2022 Petersen's (2009) panel data approach and clusters standard errors by firm and year. The results indicate Accepted 23 June 2022 that institutional investors lead firms to improve their corporate sustainable energy and environmental Available online 26 June 2022 performance. Therefore, investment decisions adopted by renewable energy mutual funds achieve positive outcomes in the real world. This has policy implications, showing that economic policies focused Keywords: Renewable energy mutual funds on financing the transition of the real economy towards sustainability and improving the financial Corporate sustainable energy performance sector's contribution to sustainability goals are being achieved. Corporate environmental performance © 2022 The Author. Published by Elsevier Ltd. This is an open access article under the CC BY-NC license Sustainable development goals (http://creativecommons.org/licenses/by-nc/4.0/). 1. Introduction can reduce environmental risk and enhance the long-term envi- ronmental (or social) performance of portfolio firms and renewable Institutional investors play an important role in sustainable energy mutual funds. These improvements in environmental fund development by implementing socially responsible strategies dur- performance allow managers to satisfy the needs of a niche market ing the portfolio selection process [1e4]. Among the strategies of individual investors concerned about sustainable energy, envi- adopted, themed strategies focused on one of the United Nations’ ronmental, and social responsibility issues, favouring that mutual sustainable development goals have received increased attention funds, as shareholders, contribute to the progress towards an from institutional investors [5e9]. The European assets under affordable and clean energy-related sustainable development goal management tied to themed strategies grew to 462.34% from 2007 (SDG7) [20]. Thus, investment decisions result in positive real- to 2017, reaching V148.84 billion in 2017 [7,8]. The assets managed world outcomes, which contribute to achieving the goals of the by renewable energy-themed funds represented 12% of the amount European Union (EU) Renewed Sustainable Finance Strategy. This invested in all themed strategies at the end of 2017 [8]. These strategy focuses on financing the transition of the real economy single-themed mutual funds implement renewable energy towards sustainability and improving the contribution of the screenings in their equity selection process to meet the increasing financial sector to sustainability goals [21]. demands of clients who consider sustainable energy issues in their Despite the influential role of renewable energy mutual funds in investment decisions, thereby sacrificing their short-term financial implementing regional economic policies, such as the EU Renewed performance [10e15]. This may encourage renewable energy Sustainable Finance Strategy, to achieve the clean energy sustain- mutual funds, as institutional shareholders, to improve the envi- able development goal (SDG7), finance literature has not paid ronmental outcomes of the firms in which they invest [16e18]. attention to their influence on sustainable energy, environmental, Renewable energy mutual funds may exercise their voting po- and social improvements achieved by portfolio firms. To fill this wer and take advantage of their superior managerial skills to knowledge gap, this study analyses the effect of renewable energy integrate sustainable energy and socially responsible activities into mutual funds as institutional investors on the sustainable energy, the core business strategies of firms in which they invest [19]. This environmental, and socially responsible performance of portfolio firms worldwide. This is the first study to examine the behaviour of renewable E-mail addresses: CarmenPilar.Marti@gmail.com, CarmenPilar.Marti@uab.cat. energy mutual funds towards the adoption of sustainable energy https://doi.org/10.1016/j.renene.2022.06.111 0960-1481/© 2022 The Author. Published by Elsevier Ltd. This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/). C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 systems in portfolio firms. The findings of this study indicate that According to agency theory [27], ownership separation in the renewable energy mutual funds are important long-term oriented hands of renewable energy mutual funds (principals) and control in institutional investors. They make investment decisions based on the hands of a firm's managers (agents) can generate an agency explicit renewable energy criteria, contributing to financing the problem because their interests diverge. Renewable energy mutual transition of the real economy towards sustainability and to funds commit to their long-term oriented clients (individual in- achieving an affordable and clean energy-related sustainable vestors) to invest in firms that achieve high sustainable energy development goal (SDG7). standards. This is based on the adoption and monitoring of sus- This study contributes to the literature by investigating how tainable energy policies, targets, indicators, and processes, whose institutional investors influence socially responsible practices long-term profitability is detrimental to short-term financial per- adopted by firms in which they invest. Dyck et al. [1] show that formance from the natural-resource-based view of a firm [28]. This institutional investors drive firms to improve their environmental interest in renewable energy mutual funds to enhance firms' sus- and social performance. However, corporate social responsibility tainable energy outcomes at the expense of forgoing short-term (CSR) subcategories do not have equal importance for institutional financial performance does not agree with firms' managers. Ac- investors, as Chen et al. [20] showed that institutional investors cording to managerial opportunism theory, firm managers priori- promote CSR improvements that have financial value for portfolio tise short-term shareholder value to enhance their reputation as firms. Following this line of research, this study shows that insti- managers and maximise short-term private profits when man- tutional investors focusing on renewable energy issues lead firms to agement's compensation schemes are linked to the firm's strong improve their corporate sustainable energy and environmental stock price behaviour [20,29]. performance. Institutional investors can restrain this managerial opportunism The remainder of this paper is organised as follows. Section 2 with large block shareholder positions having sufficient voting presents a literature review and hypotheses. Section 3 describes power to exert pressure on the board and make critical corporate the sample, variables, and model. Section 4 reports and discusses decisions about adopting sustainable energy strategies [30]. A the results of this study. Finally, section 5 presents the main con- similar theoretical argument that ownership concentration in- clusions and implications of this study. fluences CSR decision-making has been empirically supported by Oh et al. [19], Chen et al. [20], and Chung et al. [29]. This suggests 2. Literature review that large institutional shareholders invest in improving the long- term competitiveness of firms by pressuring them to adopt rare Green finance plays an important role in providing financial and inimitable CSR practices to reduce environmental risk, differ- resources to firms carrying out renewable energy projects [4,22]. entiate their products, and consequently improve their long-term These renewable energy-related firms usually have difficulties in corporate financial performance. They cannot disinvest their large accessing finance mainly due to the existence of risks, low short- holdings without severely reducing their investment value. This term returns, lack of long-term financing and lack of capacity by alignment in the long-term investment horizon was discovered by market actors [23,24]. However, renewable energy mutual funds Oikonomou et al. [32], Boubaker et al. [33], and Panicker [34]. could be an efficient green finance tool for several reasons. First, Similarly, focusing on one dimension of corporate social perfor- they accumulate large amounts of money that allows them to mance, Dyck et al. [1] showed that institutional investors invest in firms with large renewable energy projects and have contribute to enhancing environmental and social outcomes. sufficient voting power to exert influence to improve the corporate Conversely, Kim et al. [35] found a negative relationship between environmental activities of their portfolio firms [1,10,11]. Second, toxic release facilities, as a corporate environmental performance renewable energy mutual funds have a long-term investment ho- (CEP) measure, and institutional ownership, which depends on rizon because their investors are mainly worried about environ- external pressures from the community and is congruent with the mental issues in the long-term investment horizon [13]. However, institutional theory [36]. Thus, it is hypothesised that: to the best of our knowledge previous literature has not paid H1. Mutual renewable energy funds positively affect the renew- attention to the ability of institutional investors to drive the sus- able energy outcomes of portfolio firms. tainable energy performance of firms worldwide. External pressure from stakeholders may play an important role Renewable energy mutual funds, as institutional investors, in encouraging firms and mutual funds to adopt environmental make their investment decisions considering a firm's financial strategies, such as those focused on sustainable energy practices, to performance and sustainable energy performance, which is a gain social legitimacy, making it easier to achieve long-term prof- component of corporate environmental performance. The effect of itability and survival [36,37]. According to institutional theory, the implementation of environmental practices such as renewable government signatories that ratified environmental agreements, energy systems on firms' financial performance remains contro- such as the Paris Agreement, exert coercive pressure on civil society versial. Previous literature examining the financial cost and bene- and firms’ environmental behaviour by promulgating mandatory fits of improving firms' sustainable energy performance achieves environmental laws, monitoring, and levying sanctions. The Paris mixed results [1,25,26]. Investments in sustainable energy practices Agreement is a legally binding global treaty on climate change could generate a competitive advantage for firms by differentiating adopted by 197 countries at the Paris Climate Conference in their products and reducing their environmental risks. Alterna- December 2015 and enforced in November 2016. Adopting this tively, investments to improve firms' sustainable energy perfor- agreement has led governments to promulgate environmental laws mance could cause agency problems [27]. Large shareholders that promote energy efficiency and renewable energy resources to without financial preferences may not perceive the costs of suppliers and customers. renewable energy commitments pressuring firms to enhance their These coercive measures favour many clients with environ- sustainable energy systems. If a firm's managers care about these mental concerns who demand sustainable energy products and pressures they will increase the investments in renewable energy services from firms and mutual funds. To satisfy this demand, as activities to satisfy the needs of these large shareholders but if the institutional investors, mutual funds may pressure firms to imple- managers are not worried about institutional owners' pressures ment green production processes to offer a differentiated sustain- they will not improve sustainable energy performance, prioritising able energy product categorised as alternative energy mutual funds the short-term shareholder value to enhance their reputation [1]. 1156 C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 by rating agencies such as Morningstar and Lipper Global. These and socially responsible practices in portfolio firms [20,32,34]. rating agencies exert normative pressure on mutual funds and Second, this study examines the effect of institutional investors’ discredit non-compliers, moved from this alternative energy cate- ownership on the sustainable energy, environmental, and social gory. These agencies also legitimise the renewable energy mutual responsibility practices of portfolio firms worldwide. In contrast, funds and provide an identity marker that distinguishes them from previous studies only treat the impact of institutional investors on other thematic mutual funds. This attracts activists and clients who the full or sub-dimensions of corporate social performance perceive that renewable energy mutual fund shares enable prog- [1,19,20,31]. ress towards sustainable development [38]. Consequently, alter- native energy categorisation allows mutual funds to attract clients 3. Research method concerned with renewable energy. It increases fund flows together with managers’ earnings, usually linked to assets under manage- This section describes the sample construction, data sources, ment. It favours the imitation of mutual funds by pressuring firms key variables used, and proposed models. in their portfolios to adopt sustainable energy strategies [36,37]. Thus, it is hypothesised that: 3.1. Sample H2. Firms with greater institutional ownership display better This study obtains data on the annual portfolio holdings of 43 environmental outcomes from the adoption of the Paris alternative energy equity mutual funds labelled as primary funds Agreement. from 2006 to 2018 using the alternative energy filter available in Long-term institutional investors can pay attention to other Refinitiv Eikon Lipper fund database. Alternative energy equity socially responsible activities adopted by renewable energy-related mutual funds invest mainly in the stocks of firms that promote the firms in which they invest. This is because it is likely that these CSR use of renewable and sustainable energy technologies designed to activities improve the long-term fundamental value and ultimately avoid the burning of fossil fuels, which cause global warming. This the financial performance of mutual funds investing in them. Prior sample includes liquidated, merged, and active renewable energy studies show that sustainability compliance allows fund managers funds; therefore, it is free of survivorship biases. The Refinitiv Eikon to reduce portfolio risk from negative corporate externalities and Lipper database has been a leading provider of independent fund improve long-term fund financial performance [39e41]. Further- content related to fund classifications, metrics for risk manage- more, institutional investors improving firms' social, environ- ment, and fund portfolio holdings for over 40 years. It covers more mental, and governance outcomes may attract individual investors than 340,000 share classes in more than 80 markets, including concerned about the environmental, social, and corporate gover- mutual funds. nance impacts of their investments, thereby increasing fund flows. This study also collects data of 1266 firms, in which renewable This allows managers to increase the value of the assets under energy funds invest, related to social performance, environmental management (on which management fees are based). Therefore, performance, corporate governance performance, and sustainable institutional investors may only exert efforts to change environ- energy items from 2007 to 2019 from Refinitiv ASSET4 ESG data- mental, social, and corporate governance issues that allow them to base. This database measures the environmental, social, and capitalise on investor demand for fund flows. Institutional investors corporate governance performance of over 6000 firms, collecting lead firms to improve corporate social responsibility issues information from publicly available sources (company websites, receiving attention from investors concerned about renewable annual reports, and corporate social responsibility reports) across energy issues [20,42]. Martí-Ballester [13] points out that renew- ten main themes. They are emissions, environmental product able energy fund investors do not react to past financial perfor- innovation, resource use, workforce, community, product re- mance, derive their utility from non-financial attributes associated sponsibility, human rights, shareholders, corporate social re- with sustainable energy practices, or consider other ethical issues sponsibility strategy, and management from 2002. when making investment decisions. Considering that renewable This study obtains annual economic and financial data of these energy attributes are a specific dimension of CEP, investors' pref- 1266 firms, including the industry type, country, total assets, cur- erences for sustainable energy attributes can lead institutional in- rent assets, return on assets, total debt, property, plant and vestors to improve their portfolio firms’ environmental activities. equipment investment, research and development expenditures, However, this effect can confound the relationship between the sales, Tobin's Q, and total common shares outstanding of firms proportion of institutional investors and corporate social re- between 2006 and 2018 from Refinitiv Datastream database. This sponsibility performance [43]. Thus, it is hypothesised that: database provides historical economic and financial data for over H3. As shareholders, renewable energy mutual funds do not drive 100,000 equities listed on stock markets worldwide. firms to engage in all CSR dimensions. To ensure data quality, this study excludes firms with incom- plete data by year and winsorizes the independent and control This study contributes to the literature in several ways. First, this variables at 0.5% at both tails, with the exception of the research is the first study to examine the behaviour of renewable energy and development (R&D) variable, which is winsorised at 0.5% at the mutual funds towards adopting sustainable energy systems in top tail. The final sample includes 3843 firm-year observations and portfolio firms. Renewable energy mutual funds are important 1074 firms from 39 countries from 2006 to 2019. long-term oriented institutional investors that make investment decisions based on explicit renewable energy criteria. They 3.2. Variables contribute to financing the transition of the real economy towards sustainability and achieving the affordable and clean energy- 3.2.1. Dependent variables related sustainable development goal (SDG7). However, this effect This study uses corporate sustainable energy, environmental, is not perceptible in other studies that consider mutual funds and social, governance, and CSR performance as dependent variables. other types of financial entities. They treat them as a homogeneous An index was constructed to measure firms' sustainable energy group, despite the different types of institutional owners having performance (CSEP). First, specific items related to sustainable different preferences, risk tolerances, and investment horizons that energy systems implementation are identified from Refinitiv determine their attitudes towards implementing environmental ASSET4 database, as shown in Table 1. All items are transformed 1157 C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 Table 1 practices [19]. Several variables were included to control for this Sustainable energy items. effect. Leverage represents the ratio of a firm's total debt to its total Item Definition assets to mitigate concerns about extreme outliers. Liquidity is ENRRDP0122 Does the company have a policy to improve its energy efficiency? measured using (1) net cash flow (NCF), which represents the ratio ENRRDP046 Does the company make use of renewable energy? of net cash receipts and disbursements resulting from the opera- ENPIDP066 Does the company develop products or technologies for use in the tions of the firm to total assets, and (2) the current ratio (CR), which clean, renewable energy (such as wind, solar, hydro and geo- is the ratio of total current assets to total current liabilities. Tangi- thermal and biomass power)? bility is the ratio of investment in property, plants, and equipment ENRRDP0192 Has the company set targets or objectives to be achieved on energy efficiency? to the total assets. Capital intensity (capital) is the ratio of capital ENPIDP015 Does the financial company have a public commitment to divest expenditures to total assets. from fossil fuel? Poor past financial performance can lead firms to adopt con- ENRRDP052 Does the company report about environmentally friendly or servative behaviour [34]. This is controlled for profitability (ROA) green sites or offices? ENPIDP040 Does the company construct nuclear reactors, produce nuclear and Tobin's q variables. ROA denotes the return on assets, measured energy or is active in another way in the nuclear energy industry? as income before tax interest expenses to total assets. Tobin's q represents the market capitalization of equity plus the total debt- to-total assets ratio. Firms can differentiate their products by into binary variables, corresponding to the value of one for each incorporating green attributes that require investment in corporate question that firms answer positively (e.g. firms that have a policy environmental responsibility. This is controlled for research and to improve their energy efficiency, set targets to be achieved on development intensity (R&D) variable. R&D refers to the ratio of energy efficiency, make use of renewable energy, divest from fossil R&D expenditures to total assets. Country is a dummy variable with fuel, and report on environmentally friendly green buildings), and 39 categories indicating the country in which the firm is located. zero otherwise. The only exception is the question related to nu- The industry is a dummy variable with 11 categories indicating the clear energy production, which corresponds to a value of zero when economic sector to which each firm belongs. Countries and in- firms produce nuclear energy, and one otherwise. Subsequently, an dustries were included to control for changes. All variables are equally weighted performance measure was constructed. Accord- summarized in Table 2. ing to Martí-Ballester [25], adopting sustainable energy practices Table 3 reports the descriptive statistics of dependent, inde- does not impact corporate financial performance using Tobin's q pendent, and control variables. Table 4 presents the correlation measure as a proxy. matrix among independent and control variables used in this study, This study also uses the environmental, social, governance, and whose values are less than 0.8, indicating that multicollinearity is CSR performance scores provided by ASSET4, whose values oscil- not a problem. late between 0 and 100 points, and measures firm performance relative to all other firms by year from 2007. It ranges these values 3.3. Methodology from 0 to 1 by dividing the value provided by ASSET4 by 100 to mitigate the concern of extreme outliers. To test the hypotheses of this study, the following model is run: 3.2.2. Independent variable Scoref ;t ¼fþ bIOf ;t1 þ dZf ;t1 þYeart þIndustryf þCountryf þ εf ;t To examine the effect of institutional ownership (IO) on (1) corporate sustainable energy and environmental, social, and governance performance, this study considered the independent where Scoref,t is the CSEP, CEP, CSP, CGP, and overall CSR perfor- variable IO. This variable is measured as the number of outstanding mance scores of firm f in year t; IOf,t-1 denotes the percentage of shares of firm i owned by renewable energy funds as a group at the total renewable energy fund ownership for firm f at time t-1; Zf,t-1 end of year t-1 over the total number of shares outstanding at the represents a set of control variables for firm f at time t-1; Yeart is a firm's year-end [44]. These data are obtained from Refinitiv Eikon dummy variable that takes the value of one if the dependent var- Lipper fund and Refinitiv Datastream databases. iable data corresponds to time t and zero otherwise; Industryf is a dummy variable that takes the value of one if firm f belongs to the 3.2.3. Moderator variable economic sector indicated and zero otherwise; and Countryf is a Firms with high institutional ownership at the time of the Paris dummy variable that takes the value of one if firm is located in the Agreement can subsequently increase their corporate renewable country indicated and zero otherwise. This study includes firm size, energy and environmental and socially responsible performance. tangibility, leverage, net cash flow from operating activities, current Mutual funds exercise their voting power to pressure firms in ratio, capital expenditure ratio, R&D expenditure ratio, ROA, and which they invest in implementing sustainable energy practices. Tobin's q in Model [1] as control variables. All independent and This study introduces the PARIS variable, which takes a value of one control variables were lagged by one year to mitigate the possible for 2016, 2017, 2018, and 2019, and zero otherwise. Furthermore, endogeneity between the dependent and independent variables or the interaction term between institutional ownership and PARIS control variables, as in Dick et al. [1] and Oikonomou et al. [32]. This variables is included. study adopts Petersen's [46] approach to cluster standard errors by firm and year. 3.2.4. Control variables To test the hypothesis that external pressures favour institu- This study also considers control variables commonly used in tional investors focused on sustainable energy issues to lead to studies, such as firm size, leverage, liquidity, profitability, R&D in- changes in corporate sustainable energy performance, this study tensity, tangibility, capital intensity, and Tobin's q [1,30,42,45]. introduces the Paris Agreement in Models (2) and (3) as follows: Large firms are more visible and receive more pressure from stakeholders to improve their CEP. Controlling for this, firm size Scoref ;t ¼ f þ bXf ;t1 þ gXf ;t1 PARISt þ dZf ;t1 þ Yeart (Size) variable is measured as the Napierian logarithm of a firm's þ Industryf þ Countryf þ εf ;t (2) total assets. According to slack-resources theory, firms with more slack resources may increase their investment in environmental 1158 C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 ParisxOI is negative but statistically insignificant, not supporting Scoref ;t ¼ f þ bXf ;t1 þ gPARISt þ gXf ;t1 PARISt þ dZf ;t1 H2. This finding suggests that institutional investors maintain þ Industryf þ Countryf þ εf ;t (3) pressure on firms in which they invest to engage in sustainable energy practices after the Paris Agreement. However, the positive where Scoref,t is the CSEP, CEP, CSP, CGP, and overall CSR perfor- and significant coefficient of the Paris variable in Model (3) of mance scores of firm f in year t, and Parist is a dummy variable that Table 5 indicates that firms’ sustainable energy performance takes the value of one for the 2016e2019 period and zero other- increased after the Paris Agreement was ratified in 2016. This result wise. Xf,t-1 Parist represents the interaction term which measures suggests that other stakeholder groups, such as governments and the relationship between institutional ownership and corporate policymakers, have increased their pressure on firms to implement sustainable energy performance following the Paris Agreement. sustainable energy practices since the Paris Agreement. Because of The other variables were similar to those in the model (1). the Paris Agreement, governments worldwide have promulgated energy laws and established subsidies that encourage firms to 4. Results implement sustainable energy practices to improve corporate en- ergy performance [47]. This section presents the main empirical findings of this study, Regarding the control variables, the size variable has a positive which first examines the effect of renewable energy fund owner- and significant impact on subsequent corporate sustainable energy ship on firms’ sustainable energy practices, and the impact of the performance in the three models, indicating that large firms ach- Paris Agreement on the relationship between institutional owner- ieve better corporate sustainable energy performance. This is ship and corporate sustainable energy performance. This study probably because large firms are more visible and subject to more considers full CSR performance scores and dimension-level CSR external pressure, as stated by Panicker [34]. This study also found a (environmental, social, and governance) performance scores to positive and statistically significant effect of the R&D variable on explain whether institutional ownership promotes other social subsequent corporate sustainable energy performance in the three responsibility activities in firms,. models, suggesting that firms developing R&D projects achieve higher corporate sustainable energy performance. This is likely 4.1. The effect of institutional ownership on firms’ sustainable because renewable energy-related firms invest in environmental energy practices innovation to reduce operational costs and improve product dif- ferentiation [27,34]. Conversely, the CR variable is negatively Table 5 reports the results for the regression Models (1), (2), and related to subsequent corporate sustainable energy performance, (3), where the dependent variable is the corporate sustainable indicating that risk-averse firms adopt more efficient sustainable energy performance score. The institutional ownership proportion energy practices, thereby enhancing corporate sustainable energy (IO) coefficient is positive and significant at the 1% level for all the performance. The remaining control variables were statistically models, thus, supporting H1. This indicates that firms with greater insignificant. institutional ownership subsequently achieve higher levels of For robustness, this study tests the Granger causality between corporate sustainable energy performance. Specifically, 1% change sustainable energy practices and institutional investor proportion in institutional ownership predicts a 4.26% increase in corporate using the approach of Xiao et al. [48]. The null hypothesis of non- sustainable energy performance and improves this percentage in causality is not rejected at the 5% significance level. Models (2) and (3). Thus, renewable energy mutual funds are a driving force responsible for sustainable energy performance of 4.2. The effect of institutional ownership on corporate firms in which they invest worldwide. environmental activities Models (2) and (3) in Table 5 capture the effect of institutional investors' proportion on corporate sustainable energy performance Table 6 reports the results for the regression Models (1), (2), and after the Paris Agreement through the interaction term, ParisxOI. (3), where the dependent variable is the CEP score. The institutional For both models, the coefficient estimate for the interaction term ownership proportion (IO) coefficient is positive and significant at Table 2 Variable description. Variable Definition OIt-1 Number of firm i's outstanding shares owned by renewable energy funds as a group at the end of year t-1 over the number of total shares outstanding at the firm's year end Paris Dummy variable taking the value of one for the years 2016, 2017, 2018 and 2019 and zero Sizet-1 Napierian logarithm of a firm's total assets at time t-1 Tangibilityt- Investment in property, plant, and equipment to total assets at time t-1 1 NCFt-1 Net cash receipts and disbursements resulting from the operations of the firm to total assets at time t-1 R&Dt-1 Research and development expenditures to total assets at time t-1 CEt-1 Capital expenditures to total assets at time t-1 Leveraget-1 Ratio of the firm's total debt to total assets at time t-1 ROAt-1 Net income plus after-tax interest expenses to total assets at time t-1 TobinsQt-1 Market capitalization of equity plus total debt to total assets at time t-1 CRt-1 Total current assets to total current liabilities at time t-1 Country Dummy variable with thirty-nine categories indicating the country in which firm is located Industry Dummy variable with eleven categories indicating the economic sector to which each firm belongs Year Dummy variable with thirteen categories taking value of 1 for year t and 0 otherwise. CEPt Corporate environmental performance score at time t, ranging from 0 to 1. CGPt Corporate governance performance score at time t, ranging from 0 to 1. CSPt Corporate social performance score at time t, ranging from 0 to 1. CSR CSR performance score at time t, ranging from 0 to 1. CSEPt Corporate sustainable energy performance at time t, ranging from 0 to 1. 1159 C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 Table 3 Summarized statistics. Variable Observations Mean Standard deviation Minimum Maximum OIt-1 3843 0.002 0.004 0.000 0.050 Sizet-1 3843 16.057 1.377 12.187 19.551 Tangibilityt-1 3843 0.321 0.230 0.008 0.931 CFt-1 3843 0.095 0.058 0.164 0.326 R&Dt-1 3843 0.020 0.030 0.000 0.199 CEt-1 3843 0.050 0.038 0.001 0.276 Leveraget-1 3843 0.258 0.150 0.000 0.710 ROAt-1 3843 0.064 0.056 0.309 0.304 TobinsQt-1 3843 0.014 0.008 0.004 0.068 CRt-1 3843 0.017 0.010 0.003 0.101 CEPt 3843 0.560 0.257 0.000 0.985 CGPt 3843 0.557 0.217 0.029 0.985 CSPt 3843 0.559 0.239 0.006 0.981 CSRPt 3843 0.533 0.186 0.018 0.929 CSEPt 3843 0.493 0.199 0.000 0.857 Table 4 Correlation matrix for regression variables. 1. OIT 2 3 4 5 6 7 8 9 10 11 2.ParisxOIt-1 0.469 3.Paris 0.077 0.286 4.Sizet-1 0.216 0.174 0.064 5.Tangibilityt-1 0.025 0.005 0.070 0.167 6.CFt-1 0.124 0.089 0.026 0.161 0.008 7.R&Dt-1 0.014 0.065 0.066 0.142 0.327 0.239 8.CEt-1 0.026 0.021 0.109 0.038 0.583 0.199 0.084 9.Leveraget-1 0.020 0.009 0.030 0.238 0.368 0.289 0.328 0.122 10.ROAt-1 0.148 0.105 0.041 0.150 0.127 0.621 0.118 0.058 0.252 11.TobinsQt-1 0.096 0.028 0.098 0.328 0.184 0.562 0.345 0.030 0.216 0.574 12.CRt-1 0.024 0.069 0.083 0.370 0.263 0.208 0.335 0.125 0.397 0.200 0.357 the 5% and 10% level for all the models, suggesting that firms with Table 5 greater institutional ownership achieve higher levels of CEP. Renewable energy mutual funds and firms’ sustainable energy performance. However, institutional investors show a weaker role in improving DV: CSEP Coefficient Coefficient Coefficient the firms’ environmental performance than corporate sustainable Model 1 Model 2 Model 3 energy performance. Specifically, a 1% change in institutional OIt-1 4.2641 *** 4.6902 *** 4.6186 *** ownership predicts a 2.69% increase in CEP and improves this (1.1380) (1.2356) (1.2362) percentage up to 3.37% and 3.36% in Models (2) and (3), respec- ParisxOIt-1 — 1.6512 1.5402 (1.6780) (1.6684) tively. These results show that institutional ownership only im- Paris — — 0.0289 *** proves those environmental issues that may lead firms to (0.0060) implement sustainable energy strategies, thus, supporting H1 and Sizet-1 0.0601 *** 0.0599 *** 0.0601 *** H3. (0.0045) (0.0045) (0.0045) Models (2) and (3) in Table 6 capture the effect of institutional Tangibilityt-1 0.0295 0.0308 0.0312 (0.0392) (0.0392) (0.0390) investors' proportion on CEP after the Paris Agreement through the CFt-1 0.1249 0.1278 0.1429 interaction term ParisxOI. For both models, the coefficient estimate (0.1242) (0.1247) (0.1263) for the interaction term ParisxOI was negative but statistically R&Dt-1 0.9672 *** 0.9761 *** 0.9695 *** insignificant. This finding suggests that institutional investors have (0.2415) (0.2428) (0.2426) CEt-1 0.0263 0.0248 0.0126 maintained pressure on firms that invest in environmental activ- (0.1503) (0.1501) (0.1484) ities related to sustainable energy issues after the Paris Agreement Leveraget-1 0.0297 0.0307 0.0308 ratification. However, the positive and significant coefficient of the (0.0430) (0.0427) (0.0428) Paris variable in Model (3) of Table 6 indicates that firms’ envi- ROAt-1 0.0728 0.0739 0.0797 ronmental performance increases after the Paris Agreement rati- (0.1122) (0.1126) (0.1121) TobinsQt-1 0.2258 0.2532 0.0941 fication. This result suggests that other stakeholder groups have (0.8263) (0.8287) (0.8065) increased pressure on firms to implement environmental practices CRt-1 1.3576 ** 1.3606 ** 1.3610 ** beyond adopting sustainable energy systems. (0.5577) (0.5575) (0.5553) Regarding the control variables, there is a positive and signifi- Constant 0.5377 *** 0.5290 *** 0.5532 *** (0.1072) (0.1085) (0.1050) cant relationship between size, R&D variables, and CEP variables, Industry Yes Yes Yes while the CR variable is negatively associated with CEP. The Year Yes Yes No remaining control variables were statistically insignificant. Country Yes Yes Yes For robustness, this study tests the Granger non-causality be- R-squared 0.2848 0.2850 0.2834 tween environmental practices and institutional investor propor- Number of firms 1074 1074 1074 Number of observations 3843 3843 3843 tion using Xiao et al.’s [48] approach. The null hypothesis of non- causality is not rejected at the 5% significance level. 1160 C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 4.3. The effect of institutional ownership on corporate governance performance score. The institutional ownership proportion (IO) dimension of CSR performance coefficient is positive but statistically insignificant at the 10% level for all the models. This indicates no relation between share Table 7 reports the results for the regression models (1), (2), and ownership and firms' social performance. This supports H3. (3), where the dependent variable is the corporate governance Therefore, institutional investors focused on sustainable energy performance score. The institutional ownership proportion (IO) issues do not drive changes in firms' social policies. Furthermore, coefficient is negative but statistically insignificant at the 10% level the results show that firms with greater institutional ownership for all the models. This indicates no relation between share during the Paris Agreement do not exert effort to improve their ownership and firms' corporate governance performance. There- portfolio firms' social activities as shown by the insignificant fore, institutional investors focused on sustainable energy issues do negative coefficient of ParisxIO. These findings are consistent with not drive changes in corporate governance policies, thus, support- institutional investors driving firms to improve specific corporate ing H3. Furthermore, the results show that firms with greater social responsibility issues that receive attention from investors institutional ownership during the Paris Agreement do not exert concerned about renewable energy issues. However, the significant effort to improve their portfolio firms' corporate governance ac- positive coefficient of Paris in model (3) of Table 8 suggests that tivities as revealed by the insignificant positive coefficient of Par- other stakeholders exert effort to change firms’ social practices isxIO. These findings are consistent with the understanding that after the implementation of the Paris Agreement. institutional investors drive firms to improve certain corporate Regarding the control variables, there is a positive and signifi- social responsibility issues that receive attention from investors cant relationship between size, R&D variables, and CSP variables, concerned about renewable energy issues. However, the significant while leverage and CR variables are negatively associated with CSP. positive coefficient of Paris in model (3) of Table 7 suggests that The remaining control variables were statistically insignificant. other stakeholders exert effort to improve the firms’ corporate governance practices after the Paris Agreement ratification. 4.5. The effect of institutional ownership on corporate social Regarding the control variables, there is a positive and signifi- responsibility performance cant relationship between size and R&D variables and the CGP variable, while the leverage variable is negatively associated with Table 9 reports the results for the regression Models (1), (2), and CGP in models (1) and (2) of Table 7. The remaining control vari- (3) where the dependent variable is the CSR performance score. The ables were statistically insignificant. institutional ownership proportion (IO) coefficient is positive but statistically insignificant at the 10% level for all the models. This 4.4. The effect of institutional ownership on social dimension of CSR indicates no relation between share ownership and CSR perfor- performance mance. This finding supports hypothesis H3, suggesting that institutional investors lead firms to adopt sustainable energy Table 8 reports the results for the regression models (1), (2), and practices that do not generate synergies between environmental, (3), where the dependent variable is the corporate social Table 6 Table 7 Renewable energy mutual funds and firms’ environmental performance. Renewable energy mutual funds and firms’ governance performance. DV: CEP Coefficient Coefficient Coefficient DV: CGP Coefficient Coefficient Coefficient Model 1 Model 2 Model 3 Model 1 Model 2 Model 3 OIt-1 2.6918 * 3.3705 ** 3.3566 ** OIt-1 0.0921 0.1068 0.2630 (1.3732) (1.3518) (1.3138) (1.4931) (1.5075) (1.4737) ParisxOIt-1 — 2.6300 2.5645 ParisxOIt-1 — 0.0567 0.3066 (2.0508) (2.0172) (2.6897) (2.6820) Paris — — 0.0471 *** Paris — — 0.0214 ** (0.0065) (0.0104) Sizet-1 0.0989 *** 0.0986 *** 0.0986 *** Sizet-1 0.0582 *** 0.0582 *** 0.0582 *** (0.0054) (0.0055) (0.0054) (0.0063) (0.0063) (0.0063) Tangibilityt-1 0.0151 0.0130 0.0130 Tangibilityt-1 0.0315 0.0315 0.0301 (0.0467) (0.0468) (0.0466) (0.0406) (0.0413) (0.0414) CFt-1 0.0501 0.0455 0.0381 CFt-1 0.0255 0.0256 0.0216 (0.1315) (0.1326) (0.1332) (0.1272) (0.1290) (0.1257) R&Dt-1 1.0616 *** 1.0759 *** 1.0720 *** R&Dt-1 0.5832 ** 0.5829 ** 0.5844 ** (0.2974) (0.2985) (0.2973) (0.2502) (0.2530) (0.2545) CEt-1 0.1105 0.1130 0.1189 CEt-1 0.2528 0.2527 0.2484 (0.1720) (0.1718) (0.1706) (0.1685) (0.1689) (0.1702) Leveraget-1 0.0805 0.0820 0.0812 Leveraget-1 0.0855 * 0.0855 * 0.0836 (0.0538) (0.0537) (0.0537) (0.0517) (0.0517) (0.0522) ROAt-1 0.0071 0.0087 0.0095 ROAt-1 0.1488 0.1487 0.1577 (0.1198) (0.1202) (0.1204) (0.1080) (0.1086) (0.1081) TobinsQt-1 0.2068 0.1632 0.2525 TobinsQt-1 0.3289 0.3279 0.2854 (1.0163) (1.0210) (0.9860) (0.9343) (0.9463) (0.8820) CRt-1 2.4226 *** 2.4272 *** 2.4088 *** CRt-1 0.6583 0.6582 0.6259 (0.6793) (0.6773) (0.6748) (0.6463) (0.6455) (0.6470) Constant 1.0214 *** 1.0075 *** 1.0669 *** Constant 0.3336 *** 0.3339 *** 0.3661 *** (0.1674) (0.1686) (0.1587) (0.1141) (0.1156) (0.1119) Industry Yes Yes Yes Industry Yes Yes Yes Year Yes Yes No Year Yes Yes No Country Yes Yes Yes Country Yes Yes Yes R-squared 0.4540 0.4544 0.4531 R-squared 0.1812 0.1812 0.1781 Number of firms 1074 1074 1074 Number of firms 1074 1074 1074 Number of observations 3843 3843 3843 Number of observations 3843 3843 3843 1161 C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 Table 8 social, and corporate governance dimensions of CSR performance. Renewable energy mutual funds and firms’ social performance. Moreover, the positive impact of institutional investors on CEP is DV: CSP Coefficient Coefficient Coefficient blurred in the aggregate measure of CSR performance as a result of Model 1 Model 2 Model 3 different institutional investor impacts associated with specific OIt-1 0.4224 0.9075 0.6296 dimensions of social responsibility. Furthermore, the results show (0.9508) (1.0212) (1.0330) that firms with greater institutional ownership during the Paris ParisxOIt-1 — 1.8797 1.4868 Agreement do not exert effort to improve their portfolio firms' CSR (1.2933) (1.2525) activities, evidenced by the insignificant negative coefficient of Paris — — 0.0867 *** (0.0111) ParisxIO. These findings are consistent with the understanding that Sizet-1 0.0902 *** 0.0899 *** 0.0895 *** institutional investors drive firms to improve the CSR issues that (0.0052) (0.0053) (0.0052) receive attention from investors concerned about renewable en- Tangibilityt-1 0.0403 0.0388 0.0387 ergy issues. However, the significant positive coefficient of Paris in (0.0416) (0.0416) (0.0412) CFt-1 0.0785 0.0752 0.0665 Model (3) of Table 9 suggests that other stakeholders exert effort to (0.1225) (0.1229) (0.1218) change firms’ environmental, social, and corporate governance R&Dt-1 0.8109 *** 0.8211 *** 0.8213 *** practices after implementing the Paris Agreement. (0.2317) (0.2324) (0.2338) Regarding the control variables, there is a positive and signifi- CEt-1 0.0446 0.0464 0.0751 cant relationship between size, R&D, ROA variables, and the CSRP (0.1909) (0.1910) (0.1929) Leveraget-1 0.1278 *** 0.1289 *** 0.1236 *** variable, whereas leverage and CR variables are negatively associ- (0.0475) (0.0474) (0.0469) ated with CSRP. The remaining control variables are statistically ROAt-1 0.1610 0.1621 0.1385 insignificant. (0.1035) (0.1038) (0.1131) The results indicate that renewable energy mutual funds drive TobinsQt-1 0.7229 0.6918 0.9060 (0.9788) (0.9804) (0.9342) portfolio firms to improve their corporate sustainability and envi- CRt-1 1.7678 *** 1.7712 *** 1.6777 *** ronmental performance. However, other stakeholders have (0.6093) (0.6076) (0.6175) improved in corporate governance and social performance. Constant 0.2951 0.2851 0.4346 ** (0.1916) (0.1917) (0.1859) 5. Conclusions and discussion Industry Yes Yes Yes Year Yes Yes No Country Yes Yes Yes Renewable energy mutual funds play an important role in the R-squared 0.4945 0.4947 0.4886 progress towards sustainable development by enhancing the sus- Number of firms 1074 1074 1074 tainable energy performance of firms worldwide. This study Number of observations 3843 3843 3843 examined whether institutional investors focus on the renewable energy sector lead firms to improve sustainable energy practices and other socially responsible activities. The sample data consisted Table 9 of 1074 firms from 39 countries in which 43 renewable energy Renewable energy mutual funds and firms’ environmental, social and governance mutual funds were invested from 2006 to 2018. Next, panel data performance. models clustering the standard errors by firm and year [46] were DV: CSRP Coefficient Coefficient Coefficient adopted. The empirical findings show that institutional investors Model 1 Model 2 Model 3 worldwide pressure firms to improve their corporate sustainable OIt-1 0.7461 1.2706 0.9266 energy performance. The institutional investor's impact on firms' (0.9664) (0.9285) (0.9454) sustainable energy activities remained constant after implement- ParisxOIt-1 — 2.0325 1.6028 ing the Paris Agreement in 2016, suggesting that these mutual (1.5717) (1.5587) funds invest to align fund investments with their investors' sus- Paris — — 0.0602 *** (0.0098) tainable energy ideals. Furthermore, these improvements in firms' Sizet-1 0.0576 *** 0.0573 *** 0.0571 *** sustainable energy practices extend to other environmental activ- (0.0048) (0.0048) (0.0049) ities, implying that greater institutional ownership is associated Tangibilityt-1 0.0109 0.0093 0.0098 with better environmental performance. However, this effect on (0.0347) (0.0347) (0.0344) CFt-1 0.0636 0.0600 0.0451 firms' social and corporate governance performance is insignificant. (0.1084) (0.1089) (0.1114) Consequently, the changes caused by institutional investors on R&Dt-1 0.5988 *** 0.6098 *** 0.6093 *** firms' environmental performance are blurred in the aggregate (0.2230) (0.2235) (0.2235) measure of CSR performance. This effect remained constant after CEt-1 0.1653 0.1672 0.1914 the Paris Agreement came into effect in 2016. (0.1537) (0.1539) (0.1579) Leveraget-1 0.0726 * 0.0738 * 0.0691 * Although institutional investors did not increase their efforts to (0.0397) (0.0397) (0.0389) improve firms’ corporate socially responsible activities after the ROAt-1 0.1778 * 0.1790 * 0.1586 Paris Agreement, the empirical findings show that renewable (0.0966) (0.0967) (0.1027) energy-related firms are more reactive in enhancing sustainable TobinsQt-1 0.0179 0.0157 0.2530 (0.8401) (0.8398) (0.8239) energy, environmental, social, corporate governance, and socially CRt-1 1.6237 *** 1.6273 *** 1.5509 *** responsible performance in the following years. This suggests that (0.5734) (0.5715) (0.5827) other stakeholders have a stronger effect on promoting socially Constant 0.1827 0.1720 0.2810 ** responsible practices in renewable energy-related firms after the (0.1227) (0.1228) (0.1194) Paris Agreement ratification. Renewable energy-related firms have Industry Yes Yes Yes Year Yes Yes No since adhered to their commitments and the sustainable develop- Country Yes Yes Yes ment goals, thus improving their full CSR performance scores and R-squared 0.3536 0.3540 0.3460 dimension-level CSR (environmental, social, and governance) per- Number of firms 1074 1074 1074 formance scores. Number of observations 3843 3843 3843 These findings have practical implications for governments and 1162 C.-P. Martí-Ballester Renewable Energy 195 (2022) 1155e1164 policymakers seeking mechanisms that promote the large-scale [7] C.P. Martí-Ballester, Examining the financial performance of pension funds focused on sectors related to sustainable development goals, Int. J. Sustain. reallocation of financial resources towards a more sustainable real Dev. World Ecol. 27 (2020) 179e191, https://doi.org/10.1080/ economy. 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