The Mixed Record of Socially Responsible Investing on Firm Behavior

New research shows that funds with a good track record of social responsibility have attracted more assets. But that is a historical effect; additional fund flows do not lead to further improvements in social responsibility.

There clearly has been a dramatic increase in investor interest in sustainable investing, as evidenced by the fact that by 2020, according to the US SIF Trends Report, there was in excess of $17 trillion in U.S. sustainable investment strategies, topping $40 trillion globally.1

Davidson Heath, Daniele Macciocchi, Roni Michaely and Matthew Ringgenberg contribute to the sustainable investment literature with their May 2021 study, “Does Socially Responsible Investing Change Firm Behavior?” They assembled a novel set of outcome variables designed to measure whether socially responsible investing (SRI) affects different firm stakeholders. Their outcome variables assessed the relation between SRI and firm customers, employees and society in general. In particular, they examined nine different measures of employee satisfaction using data from Glassdoor, three measures of customer satisfaction using data from the Consumer Financial Protection Bureau, two measures of workplace safety using data from the Occupational Safety and Health Administration (OSHA), two measures of diversity on boards of directors using data from BoardEx and Institutional Shareholder Services, and eight different measures of pollution using data from the Environmental Protection Agency. Their data sample covered U.S. open-end mutual funds for the period 2011-2018.

Following is a summary of their findings:

  • SRI funds choose to invest in stocks with better environmental and social responsibility. For example, SRI fund ownership is strongly related to lower pollution and an increase in investments in pollution abatement technologies at the firm level.
  • Employees at firms with more ownership by SRI funds rated their firm better in nearly every category, including career opportunities, compensation benefits, corporate culture and overall job satisfaction. Using OSHA data, SRI fund ownership was associated with fewer workplace injuries as measured by hospitalizations and amputations.
  • Firms with greater SRI ownership have significantly more women on their board of directors and slightly more non-Caucasian board members.
  • Greater SRI fund ownership is associated with fewer customer complaints and better relief for complaints, and relief that occurs in a timelier manner.
  • SRI fund ownership does not lead to further improvements in environmental or social responsibility – following an exogenous increase in SRI capital allocated to a stock, there was no change in air, land or water pollution, nor any change in workplace safety, employee satisfaction, or gender or racial diversity on corporate boards.