“Some rise by sin, and some by virtue fall”: Empirical articles on socially responsible investing in financial markets

Nath, Saheli

doi:https://doi.org/10.21985/n2-wzza-tm19

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“Some rise by sin, and some by virtue fall”: Empirical articles on socially responsible investing in financial markets

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This dissertation project uses both quantitative and qualitative analytical approaches to examine the dynamics of responsible investing in financial markets. The first chapter investigates how the institutionalization of responsible investing as a business strategy affects category claims made by mutual funds. The study finds that as the divestment movement in the late twentieth century became institutionalized in the US financial markets by being incorporated as a business strategy into more mainstream investment vehicles like mutual funds and pension funds, the related terminology, definitions, strategies and practices associated with ethical investing became more diversified and ambiguous due to fuzzy boundaries, duality of virtue inherent in the portfolio targets, and exercise of discretion by portfolio managers. Notwithstanding recent efforts at standardization of metrics measuring portfolio performance on responsible investment, on average socially responsible investment funds differ significantly from conventional funds in terms of ESG-related outcomes. Further, there is still significant heterogeneity among SRI funds themselves. As increased heterogeneity led to greater ambiguity about who belongs to a category, fund managers adopted distinct measures-based, values-based and expertise-based approaches to resolve ambiguity. The second chapter investigates cross-country variation in responsible investing practices using both quantitative and qualitative approaches. The study finds partial support for the claim that pension funds and mutual funds operating in countries where people have more freedom of expression and greater control of corruption will perform better on environmental, social and governance dimensions compared to countries where people have relatively less freedom of expression and less institutional control of corruption. Surprisingly, this article does not find support for the hypothesis that when asset owners and investment managers perceive high regulatory quality and government effectiveness in their country, they will pay greater attention to responsible investment, as measured by the number of organizational employees dedicated specifically to responsible investment. Through a qualitative analysis of the responses explaining employment decisions, the study uncovered that organizations can undertake either an integrative or specialized or hybrid approach to employment, which affects the number of reported staff dedicated to responsible investment. The third chapter uses Hirschman’s “exit, voice, and loyalty” framework to review the extant literature and examine exit by ethical funds, barriers to exit, modes and strategies of exit and consequences of exit following a corporate transgression. It employed a case study approach to examine whether socially responsible investment funds that hold equity in a transgressing firm react more negatively to severe ESG violations compared to conventional investment funds. Using the Wells Fargo scandal as our focal point, the results indicated that SRI-status of the mutual fund did not affect the decision to fully or partially “exit” from the fund’s equity position in Wells Fargo. Public institutional investors like government agencies that represent the welfare logic of the state were more likely to take up the activist role by imposing discipline on Wells Fargo through sanctions and temporary exit. The study has important implications for the use full or partial exit as a form of shareholder activism to impose discipline on the transgressing firm.

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