Did the Introduction of a Reputation Mechanism for Stewardship Code Voluntary Disclosures Improve Investor Engagement?

Institutional investors have limited resources dedicated to engagement activities, yet, in manycases they hold thousands of stocks in their portfolios. We exploit the introduction of the tieringclassification system by the Financial Reporting Council (FRC) in 2016 for signatories reportingunder the UK Stewardship Code, the first and still only country to do so. Using various researchdesigns, we show that the introduction of this tiering system is associated with a future increase inoverall engagement activities, and with portfolio firms’ ESG performances, for those investorsgiven a “Tier 1” classification by the FRC. We attribute these findings to Tier 1 investors usingthe FRC classification system to burnish their reputations as being active and engaged monitors