Socially responsible investing (SRI) has grown in popularity over the past 50 years. Funds that invest in social goals, such as the environment, social justice, or public health, are launched regularly and available worldwide. But they invariably face a tension between two competing logics: the financial one of making money and the social one of promoting nonmonetary value. How do investors resolve these competing logics, and what factors inform their decisions? And how important is the prevailing logic of the economy and society in which the funds are launched?
In particular, do socially responsible investment funds catch on more in countries with advanced financial economies? This is one question posed in a new paper by management professors Shipeng Yan, of the City University of Hong Kong, and Fabrizio Ferraro and Juan (John) Almandoz, of IESE Business School in Barcelona.
Countries with highly financialized economies, such as the United States and Great Britain, have more sophisticated financial markets and a sharper focus on profits throughout their societies. It makes sense that advanced economies like these can provide fertile ground for launching many socially responsible funds. Yet such funds may also face stronger, countervailing forces from the predominantly financial logic at work in society.
When the researchers looked at how many socially responsible funds were launched in 19 countries between 1970 and 2014, they found that the richest countries were not in the vanguard. “At the moderate level of financialization, we have the highest founding rates of socially responsible funds,” Yan says. “That’s a little bit surprising.”
These results point to a new understanding of “how a dominant logic interacts with alternative logics to promote or stifle institutional change,” the researchers write. As financial logic overtakes a country’s economy, the number of socially responsible funds founded first expands, and then contracts, in an inverse-U-shaped pattern. That’s in part because of competing organizing principles among those with pro-social ends, such as “unions, religion, and green political parties,” and those with financial ends. Paradoxically, financialization provides not only the means for creating SRI but also the source of its undoing. The more a country advances toward financialization, the more pro-social “alternative logics” recede.
“We propose and find that the relationship between the dominant financial logic and the social logic of SRI shifts from complementary to competing as the financial logic becomes more prevalent in society and its profit-maximizing end becomes taken for granted,” the researchers write.
To consider this question, the paper looks only at new funds, not at funds that have been renamed with a socially responsible label. That avoids the problem of what Ferraro dubs “whitewashing,” in which an existing investment fund without a strong social focus switches its marketing to tout SRI principles.
The paper’s main contribution to the field of economic sociology is its encouragement of academics to look at financialization as separate means and ends, Ferraro says, especially since the ends of profit-maximizing cause many of the world’s economic problems. “That’s why we find these inverted U-shaped relationships” between the level of financialization and the founding of socially responsible funds, he explains.
The researchers also find that labor unions in particular drive up the rate of socially responsible fund launches in a country. “If labor unions are powerful in the country, financial markets are also likely to develop funds that are about something unions care about,” Ferraro says.
The paper’s research design is important because of its breadth, compared with work that involves only a few countries or a time frame of just a few years, says Marc Ventresca, professor of strategic management at Oxford University’s Saïd Business School.
The work connects to a larger debate among scholars about how to include data on environmental, social, and governance results within a company’s financial reporting, Ventresca says. It also speaks against the idea that financial logic is on an inexorable march to become even more entrenched in advanced economies. Instead, this research and other works are highlighting disparities in how financialization works within societies and challenging the narrative that social progress in a country necessarily means a greater degree of financial logic, he adds.
“The comparative part that is important here is that different countries have radically different rules on securities and financial markets, so it’s very hard to maintain the fiction that there is a single, homogeneous financial logic,” Ventresca says.
Shipeng Yan, Fabrizio Ferraro, and Juan (John) Almandoz, “The Rise of Socially Responsible Investment Funds: The Paradoxical Role of the Financial Logic,” Administrative Science Quarterly, 2018.
Read more stories by Chana R. Schoenberger.