Socially responsible investment is a big buzzword these
days, with many new investment funds adding social responsibility as a goal to
supplement the usual goal of earning financial returns. Major investment
entities such as some European state pension funds now require social
responsibility in all their investments. The combination of social and
financial goals has long been problematic because various “sin stocks” of firms
that manufacture unhealthy products (cigarettes, alcohol, guns) earn high
returns, and many other public companies manufacture harmless products but have
other socially irresponsible practices. Sweatshops and dangerous factories are
often profitable and never responsible.
Investing in a socially responsible fund often means earning
lower returns than would be possible with another investment, and managing a
socially responsible fund means spending more time checking firms and ending up
with lower returns than would be possible. In some ways it is surprising that
these funds are so popular, and one wonders what drives them forward. In a new article in Administrative Science Quarterly, Shipeng Yan, Fabrizio Ferraro, and Juan (John) Almandoz looked at exactly this question and paid particular
attention to three potential players: financial professionals, priests, and
unions.
On the financial side, we have investment fund managers and all
others involved in fin
ancial transactions, who are typically seen as pursuing
returns only, preferably with no responsibility constraints. The religious side
includes many Christian churches that have been strong advocates of
responsibility in society generally, including investments. The union side
involves those advocating for workers and for consumer safety, including
through their investment choices. Among these three, who has the most influence
on socially responsible investments?
The answer is that the financing side matters most, but not
in the way we might think. Socially responsible investment is not ideal for
finance professionals, but it does not happen at all if they are not well
established in society. Their expertise and resources are required for socially
responsible investment funds to be established and to be successful. The caveat
is that if a society is tipped too heavily toward financial concerns, socially
responsible funds will have a hard time attracting investors.
What about the influence of religion and unions? Many of the
early promoters of socially responsible investment were churches, and many
early funds had a religious affiliation, but that does not give religion a
strong role in socially responsible investment today – in fact, Yan, Ferraro,
and Almandoz found no effect at all. The role of unions is more important, as higher
union membership translates into more fund management companies engaging in
socially responsible investment. Labor and capital are united, at least in this
domain.
People are motivated to invest for many reasons, and
figuring out how and when the financial sector responds to those motivations
seems key to keeping it on its best behavior.
Yan, Shipeng, Fabrizio Ferraro, and Juan Almandoz. 2018. "The Rise of Socially Responsible Investment Funds: The Paradoxical Role of the Financial Logic." Administrative Science Quarterly, forthcoming.
