'While the financial performance of [socially responsible] investments has been explored, it is less clear whether the presence of SR funds has any real consequences for firm behaviour.'
Interesting study out from professors at the London and Stockholm schools of economics ‘A Theory of Socially Responsible Investment’ examines this very question: does your SR investing change company behaviour? The authors focus on “negative externalities” that often benefit the company – and their profitability – while being detrimental to society and/or the planet at large. Probably a few examples come quickly to mind.
The authors develop a detailed theoretical model, with ten pages of appendix proofs, and an important distinction of investing for impact –
Narrow Mandate Impact: the fund ‘accounts for the absolute level of social costs (negative externalities) produced by firms in its portfolio’.
Impact Mandate: the fund ‘accounts for social costs relative to a counterfactual scenario in which the fund does not invest in a given firm’ --- think the relative level of social costs whether they invest in the firm or not.
They setup numerous company investment scenarios with ‘financial investors’ who ‘care exclusively about financial returns’ and socially responsible investors with a mandate that ‘incorporates not only financial payoffs, but also social costs’ where the extent of social costs inclusion depends on the type of impact – absolute or relative.
Overall, they find that the type of impact the SRI fund seeks has a significant impact on company behaviour, and that your standard “ESG” labeled fund is probably ineffective at changing behavior in this context given their focus on just the companies they own (narrow impact):
‘…in their current form, most ESG funds are unlikely to have impact because they lack a broad [impact] mandate.’ As ‘given an abundant supply of profit-motivated capital, it is not enough for SR funds to simply invest in firms that generate low absolute levels of social costs.'
The authors point out another issue with SR / ESG funds – ‘the free-rider problem’ – your investment in an ESG fund may create social ‘returns’ that accrue to everyone, whether they invested along-side you or invested elsewhere in their exclusive focus on financial returns. However, in a nod to the faith-values area where we operate, they note the ‘warm-glow’ effect – or return to investors when they get a boost from ‘having done their part’ to align investments with values.
This latter point reminded me of a paper by FaithInvest friend Ajahn Amaro A Currency of Well-being, where ‘non-bankable social returns’ are part of the objective – essentially our collective well-being – ‘the blessings that flow both ways between the polar partners in the symbiosis…well-being – material and non-material – is [received] on both sides…’