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(June 8, 2021, Hong Kong) Socially Responsible Investment (SRI) Funds have become popular in recent years as investors increasingly give weight to measures such as reducing pollution, maintaining employee and customer satisfaction and diversifying board membership. However, new research shows that while such funds are good at picking firms that adopt such behaviours, they do not inspire those firms to further improve their performance.

The research, by Professor Roni Michaely, Professor in Finance at HKU Business School, and co-authors Davidson Heath and Matthew C Ringgenberg of the University of Utah and Daniele Macciochi of the University of Miami, is the first of its kind to offer evidence of the impact of SRI funds on corporate behaviour. This is important information for investors because the allocation to SRI funds has more than doubled over the last decade – last year (2020), for instance, an SRI fund launched by BlackRock attracted more than $600 million in its first week of activity.

“Our fundamental question was whether SRI funds could change real-world behaviour. What we found is that while SRI funds tend to hold firms that are already considered better along environmental and social dimensions, those firms do not become any more responsible after they are selected by SRI funds. They are not encouraged to go the extra mile,” Prof. Michaely said.

He and his co-authors studied firms’ environmental and social profiles both before and after they were held by SRI funds. Beforehand, the firms exhibited lower pollution, greater board diversity, higher employee satisfaction, higher workplace safety and fewer customer complaints* than firms in the portfolios of non-SRI funds. However, afterwards, the firms generally did not improve on this performance.

Pollution abatement investments showed little difference, meaning the entrance of SRI did not encourage firms to increase investments or aim to further reduce their pollution. Employee and customer satisfaction remained highly similar – SRI funds did not appear to motivate them to achieve greater satisfaction rates. However, SRI ownership was associated with a small increase in women on the board (1.4 percentage points) and non-Caucasians on the board (0.5 percentage points), although this was not seen as a significant change.

“There are three main possibilities for the relationship between SRI and firm-level stakeholders: SRI funds behave no differently than non-SRI funds and in effect are a form of ‘greenwashing’; SRI funds select companies that already focus on environmental and global issues; or, SRI funds engage with their portfolio firms to mitigate risks and improve their behaviour. Our evidence suggests that while SRI funds do invest differently than non-SRI funds, their decisions to invest in firms and the amount invested do not have any measurable effect on firms’ behaviour. In other words, there is a selection effect, but not a treatment effect,” Professor Michaely said.

The results offer a cautionary note to investors that socially responsible investing may not improve real-world behaviour. Investors are thus advised to scale back their expectations. Moreover, given the increased interest in SRI investing, it is also advised that there be better and more transparent reporting by SRI funds about their activities.

Full version of this research paper:
Does Socially Responsible Investing Change Firm Behavior?
https://ssrn.com/abstract=3837706

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HKU Business School strives to nurture first-class business leaders and foster academic and relevant research to serve the needs of Hong Kong, China and the rest of the world in the new Asia-led economy. As Asia’s premier international business school, we engage leading scholars from all corners of the globe and they instil in the students global knowledge with an Asian perspective. HKU Business School attracts top students from Hong Kong and beyond. It admits the highest proportion of non-local undergraduate students amongst all Faculties at HKU. Three of its undergraduate programmes are ranked among the University’s top 10 programmes.

Our full-time MBA programme has a strong Asia and China focus, and the programme has been ranked Asia’s no. 1 in the World MBA Rankings released by the Economist Intelligence Unit (EIU) for nine consecutive years from 2010 to 2018. Students can opt for an overseas exchange opportunity to supplement their campus learning in Hong Kong: a London track at London Business School, a New York track at Columbia Business School or a Hong Kong/China track at Fudan University.

HKU Business School also offers an elite EMBA-Global Asia programme, jointly with CBS and LBS, for globally-focused senior executives and professionals. Its International MBA Programme, delivered in Shanghai in collaboration with Fudan University, was the first of its kind when it was launched in 1998. The School collaborated with Guanghua School of Management of the Peking University and offered a DBA programme and the HKU-PKU EMBA Programme in 2017 and 2018 respectively.

HKU Business School is fully accredited by the European Quality Improvement Systems (EQUIS) and the Association to Advance Collegiate Schools of Business (AACSB).

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