This study empirically analyses the exclusion of companies from investors’ investment universe due to a company’s business model or due to a company’s violations of international norms. We conduct a time-series analysis of the performance implications of the exclusion decisions of two leading Nordic investors, Norway’s Government Pension Fund-Global and Sweden’s AP-funds. We find that their portfolios of excluded companies do not generate an abnormal return relative to the funds’ benchmark index. While the exclusion portfolios show higher risk than the (...) respective benchmark, this difference is only statistically significant for the case of GPFG. These findings suggest that the exclusion of the companies generally does not harm funds’ performance. We interpret these findings as indicative that with exclusionary screening, as practiced by the sample funds, asset owners can meet the ethical objectives of their beneficiaries without compromising financial returns. (shrink)

This study explores the underlying drivers of US public pension funds’ tendency to tilt their portfolios towards companies with stronger corporate social responsibility. Studying the equity holdings of large, internally managed US state pension funds, we find evidence that the political leaning of their beneficiaries and political pressures by state politicians affect funds’ investment decisions. State pension funds from states with Democratic-leaning beneficiaries tilt their portfolios more strongly towards companies that perform well on CSR issues, and this tendency is intensified (...) when the state government is dominated by Democratic state politicians. Moreover, we find that funds which tilt their portfolios towards companies with superior CSR scores generate a slightly higher return compared with their counterparts. Overall, our findings indicate that funds align their investment choices with the financial and non-financial interests of their beneficiaries when deciding whether to incorporate CSR into their equity allocations. (shrink)

Business Ethics, the Environment &Responsibility, Volume 32, Issue 4, Page 1452-1469, October 2023.

From a simple idea to unite asset owners in their quest for responsible investment at its launch in April 2006, the United Nations supported Principles for Responsible Investment have grown in just one decade into an initiative with more than 1500 fee-paying signatories. Jointly, the PRI’s signatories hold assets worth more than $80 trillion, making it one of the more prevalent not-for-profit organizations worldwide. Furthermore, the PRI’s ambitious mission to transform the financial system at large into a more sustainable one (...) makes it a worthwhile subject of inquiry from an institutional perspective. We undertake an empirical investigation of the adoption of the PRI by asset owners during five crucial years of the association’s emergence: 2007–2011. Following a tripartite view of institutional theory proposed by Scott, we explore if regulative, normative, and cultural–cognitive factors influence an asset owner’s decision to subscribe to the PRI. Applying both parametric and non-parametric survival analysis, we find that asset owners are indeed significantly affected by normative, cultural–cognitive, and regulative aspects. In particular, public service employee and labor union pension funds from social backgrounds more culturally aligned with values represented by the RI movement with historically more voluntary legislation on environmental, social, and governance issues are most likely to sign the PRI. In contrast, institutional environments with a higher number of pre-existing mandatory ESG regulation decrease the likelihood of signing the PRI. Our results indicate that normative and cultural–cognitive factors were crucial contributors to the PRI’s growth. With respect to the regulative environments, our results imply that some asset owners may use the PRI as a collective industry initiative to substitute for mandatory legislation. Conversely, a high level of historical mandatory legislation may constrain organizational resources that could otherwise be dedicated to voluntary initiatives such as PRI. Our findings are robust to relevant controls and econometric concerns. (shrink)

A growing group of institutional investors use divestment strategically to deter misconducts that are harmful for the climate and society. Based on Kantian ethics, we propose that divestment represents investors’ universal and absolute moral commitment to socially responsible investing (SRI). Following categorical and hypothetical imperatives and reciprocity as a norm, we hypothesize how institutional investors’ commit to SRI through a divestment strategy against ethically reprehensible behaviour of banks, especially when these investors represent banks themselves. Using a hand-collected database of the (...) revelation dates of enforcement actions on banks, we find evidence that banks are less likely to divest equity holding on banks with misconduct (fined banks) than their non-bank institutional investors peers. Banks that commit to invest responsibly by signing for the Principles for Responsible Investment (PRI) are not significantly more likely to divest on fined banks stocks than non-signatory banks. Moreover, divestment of fined banks whose own legitimacy to operate is in question is not significantly different from non-fined banks divestment. We find that European banks are more inclined to sell their holdings permanently on fined banks than their United States peers. Therefore, bank’s moral commitment to SRI via divestments is influenced more by cultural and reciprocity norms than their moral commitment to participate in the PRI. (shrink)

The present paper explores, theoretically, and empirically, whether compliance with the International Code of marketing of breast-milk substitutes impacts on financial performance measured by stock markets. The empirical analysis, which considers a 20-year period, shows that stock markets are indifferent to the level of compliance by manufacturers with the International Code. Two important issues emerge from this result. Based on our finding that financial performance as measured by stock markets cannot explain the level of compliance, the first issue refers to (...) what alternative types of mechanisms drive manufacturers who comply the least with voluntary codes such as the International Code. Conversely, from our finding that stock markets do not reward the most compliant, the second issue raised is an inherent weakness of stock markets to fully incorporate social and environmental values. (shrink)

How is the tension between conflict and deliberation resolved in shareholder engagement? We address this question by studying shareholder engagement as a deliberative process with three stages: establishing dialogue, solution development, and solution implementation. We theorize that two interactionist mechanisms, deliberative interaction and the voicing of disagreement, play different roles at different stages of the process. We test our hypotheses with a proprietary database of 169 environmental, social, and governance engagements with US public companies over 2007–12. We find that while (...) deliberative interaction does not help advance the engagement process, it positively moderates the effect of disagreement in the solution development stage. By contrast, in the solution implementation stage, deliberative interaction amplifies the negative effect of disagreement, thus hindering progress in the engagement. Our article contributes to shareholder engagement, deliberation theory, and interactionist organization theory by establishing that engagement effectiveness is an interactional achievement shaped by both deliberation and disagreement. (shrink)