Title: The Impact of hedge fund activism on corporate governance. A focus on Environmental, Social and Governance topics.Abstract:This research proposal relies mostly on previous research that has been conducted on returns of hedge fund activism as well as current observations on growing problems within Environmental, Social and Governance (ESG) criteria. The aim of this research is to better understand the impact that activist campaigns run by hedge funds have on ESG of companies that they invest in.Introduction:In 2017, we have had a prolific year in terms of the number of hedge funds launching activist campaigns against public companies. Activism aims to implement drastic changes in the company strategy, the capital allocation plan as well as addressing several corporate governance issues. Rising corporate governance issues in companies appears as a market factor that drives activism in return.In the past decades, companies have oriented their strategy toward maximizing profits for shareholders, corporate leaders and governments Investors are now re-thinking the role of business in society.Environmental, Social and Governance topics are something that investors are increasingly intent on holding public company boards of directors and management teams accountable.Investors are increasingly focusing on companies’ social and environmental practices, where norms are being defined for environmental, social, and governance policies. Availability of data on companies’ performance in these fields are becoming increasingly available over time and thus more reliable as transparency grows.Some research papers are highlighting a link between ESG concerns and higher returns.The Boston Consulting Group (BCG) found in a study published by the BCG that companies with more ethical operations are more profitable and are valued more highly than competitors.A Bank of America Merrill Lynch study identified that companies that scored in the top third on ESG characteristics relative to their peers, outperformed stocks in the bottom third by 18 percentage points.A recent survey of 320-plus institutional investors found broad support for ESG-related themes, with 80% of respondents stating that companies have not considered environmental and social issues as core to their business. Also, generating sustainable returns over time requires a sharper focus on ESG issues.Finally, according to a survey by the consultancy, Create-Research, 60 per cent of investors say they are planning to increase their investment toward responsible operations over the next three years. For Activist hedge funds, it appears like a great opportunity to increase assets under management and focus on the above.Activist hedge funds have recently been putting ESG policies in their core campaign strategy, especially those US and UK based hedge fund activists. Hedge funds and other activist investors are expecting to get in the ESG game as well as they look for new measures to improve corporate performance and rally support for campaigns. The bottom line being that the market is demanding more attention to these issues, primarily because shareholders believe they play an integral part in a company’s overall performance.Therefore, this reasoning leads us to several research questions: Research question 1: How hedge activism on corporate governance issues is creating value? Research question 2: How are targets chosen by activist focused hedge fundsResearch question 3: How Hedge fund activism is establishing new corporate governance rules?Research question 4: How is success determined in ESG activism?This poses the question, what impact does hedge fund activism have on Environmental, Social and Governance standards?Literature review• What do we know about the subject already?Hedge fund activism is a subject that has been extensively treated between 2000 and 2010. We intend to build our research as an extension to prior work carried out by Clifford (2008), Bebchuk, Brav, and Jiang (2014). The research carried out by Brav et al. (2008) and Greenwood and Schor (2009) analysed the global performance of activist target firms and therefore we will be looking particularly at these.There has been little research carried out about ESG specifically due to it being a relatively new concept and a buzzword for making sure boards of companies are adhering to a certain level of standard. However there have many studies on corporate governance and ethical investment.In a study published by Boston Consulting Group, it was found that companies with more ethical operations make bigger profits and are valued more highly than competitors. Additional findings include: nonfinancial performance was important in predicting valuation of companies. Nonfinancial performance was measured by several ESG metrics. Investors gave a larger multiple valuation to companies that performed better on certain ESG indicators and companies with better scores had higher margins.A comprehensive investigation carried out by Barko, Cremers, and Renneboog (2017) found that hedge funds target companies with a lower ESG ratings. Also, ratings of targets increase during the period that the activist was involved. A successful period of engagement was one where one or more ESG policies was changed.Further research has found that when ESG proposals were filed with the SEC, abnormal returns are earned by investors. Therefore, social responsibility is important in creating value for firms (Khurana, I., K., Li, Y. and Wang, W., 2017). As Brav et al (2008) identified, there is a positive market reaction to when hedge funds commence campaigns highlighting CEO compensation as excessive and this is a key component of corporate governance.• Do we already expect to find something in particular?Boards and their advisors should expect and prepare for a new wave of ESG activism, with strong backing from very large shareholder groups, centered not only on environmental priorities, but also on such issues as diversity, customer data and cyber security as well as corporate governance. A key expectation is that reducing agency costs at target companies by shareholder monitoring. Funds which have concrete ESG principles should perform better as investors are now thinking more about responsible investment including concerns about the environment. Sustainability is becoming a big theme in this age and so those who adhere to these principles should be well placed to take advantage.Data and methods• How can we find information about our subject?Fortunately, a wide range of research papers and surveys are available on our hedge fund activism and corporate governance issues, but none is particularly focusing on ESG and returns.As this is a current topic, we suggest keeping a close eye monitoring the news in the industry.Creating a sample: Using Bloomberg, we can define a sample of companies targeted by hedge fund activists highlighting governance issues, focusing on ESG related topics. Performance can be measured by looking at when the activist bought a stake in the target and until they liquidated their stake. We can classify the effect on an operational standpoint and analyze the global financial performance within the evolution of the share price and returns for the investor. An independent dataset of activist hedge funds and interventions will be constructed using the Securities and Exchange Commission (SEC) EDGAR and Factset. The SEC 13D investor filings will also be used as part of the paper. ESG indicators will be taken from Asset4 which is available from DataStream. Time series data of ESG indicators is also available through the MSCI ESG KLD statistics. This gives a score to a wide range of public companies based on their ESG business practices.• How can we analyse the information to answer our question?We are going to analyse the relevance of our information using the statistical software R. It could be interesting to measure the returns of the activist campaign on ESG using the calculation of abnormal returns. The abnormal returns are the returns over a pre-defined benchmark returns. The benchmark could be any portfolio we defined against which we want to measure the performance of the portfolio impacted by hedge fund activism we are studying. In that prospect, we will rely on the Fama–French three-factor model and following on research done by Becht, M., & al 2017. This model is used in asset pricing and portfolio management to describe the stock return. The three factors used on by model are (1) market risk, (2) the outperformance of small versus big companies, and (3) the outperformance of high book/market versus small book/market companies.For calculation purposes, we will need to calculate the stock returns and the benchmark returns separately. Then subtract the benchmark returns from the stock returns.With returns = (Closing price – opening price) / opening priceand abnormal returns = Stock returns – benchmark returns.