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 financial 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.