Abstract

Socially responsible investors buy financial securities with two goals: to make a market-based return, and to make companies act in a more socially responsible way. Most research on socially responsible investment deals with investing in stocks traded on major exchanges. We add the case of loaning small amounts of funds to microentrepreneurs through a discussion of a particular case. The case is that of Calmeadow which, in conjunction with the Royal Bank of Canada, set up a microlending project in rural Nova Scotia (Canada). Using Hirschman’s analysis of “exit” and “voice”, we show that while socially responsible investors may make market-based returns for their investments in stocks traded on major exchanges, they have no effect on corporate behaviour because their action consists of exit, and they are easily replaced by other investors. They attain their first goal but not their second. On the other hand, in the Calmeadow/Royal Bank of Canada case, we see that those who lend money to microenterprises can more easily use voice. The relative power difference between the lender and the microentrepreneur enables the lender to make the microentrepreneur act in a more socially responsible way, although only marginally. But because of the market imperfections existing in this case (the very high transactions costs associated with administering small loans), the lender concluded it could not attain a market rate of return. In this case, then, the lender attained its second goal but not its first.