Socially Responsible Investing: Marketing Tool or Solution to ESG Problems?
MIT SMR Strategy Forum
Socially responsible investing refers to an investment strategy aimed at both creating social change and generating financial returns for an investor. Investment funds with an ESG (environmental, social, and governance) label have skyrocketed in recent years, and, according to a 2021 survey, 82% of professional investors worldwide plan to increase their allocations to socially responsible investments over the next year.
As the number of assets in sustainable investment funds have soared, so too have concerns over greenwashing, inadequate regulations, and a lack of transparency when it comes to metrics.
In this month’s MIT Sloan Management Review Strategy Forum, we asked our panel of strategy experts from across the globe to respond to the following statement: Socially responsible mutual funds are more of a marketing tool than a solution to environmental and social problems.
Half of our panel pushed back on the claim that socially responsible investing is mostly a marketing tool, with 43% disagreeing and 7% strongly disagreeing. However, most are quick to point out that in order for socially responsible funds to become more effective levers of change, better mechanisms for measurement and regulation are important. As Erik Brynjolfsson of Stanford University says, “Making ESG investing easier and more salient is likely to drive management to pay more attention to environmental and social problems. That said, this sector is still rife with sloppy metrics and accounting that enable pretenders to mimic firms making real efforts to address these challenges.”
University of Toronto
With regard to concerns of greenwashing, panelist Caroline Flammer of Boston University notes that by implementing better mechanisms, such as regulations and certification programs, investors and companies could mitigate the risk that these investments are used as marketing props. She points to her recent research on corporate green bonds that was published in the Journal of Financial Economics. “Companies improved their environmental footprint following the issuance of green bonds, but only when the bond’s greenness was certified by independent third parties,” she says. “Arguably, similar mechanisms could help improve the credibility (and viability) of socially responsible mutual funds.”
Another common refrain among those who disagree is that even if the impact of these funds remains small for now, they aren’t doing active harm, and the signal they send is for the better. As Stanford University’s Kathleen Eisenhardt writes, “They are better than nothing. That is, they let people invest according to their passions as well as send relevant signals to the market and society as a whole.”
“Socially responsible mutual funds offer investors the possibility to align their investments with their social preferences. These funds screen companies to ensure they have practices that conform to the values of the fund. They often use their ownership rights to influence management. Companies face greater pressures to be socially responsible. Ultimately, these funds have an impact.”
Neither Agree nor Disagree
In the middle, 19% of our experts assert that it can go both ways when it comes to socially responsible investing. As Scott Stern of the MIT Sloan School of Management writes, “While some ‘triple bottom line’ mutual funds (and other investment vehicles) are pure marketing (dubious metrics, etc.), there are many that are putting their money where their mouth is and are beginning to have a meaningful impact on overall investor demand.”
Even if marketability comes into play, many investors are authentic about social responsibility. As Jin Li of Hong Kong University says, “The marketing component is likely to be present, but there are also fund managers who genuinely care about ESG issues. They also believe that companies with superior ESG performance may better avoid regulation risks and generate higher returns. The beliefs of these managers can therefore push companies to better deal with environmental and social problems.”
Neither agree nor disagree
“It varies. Some are deadly serious about this. Others are using it as a marketing tool. But the trend toward more socially and environmentally responsible investing is a good one overall.”
University of Toronto
Thirty-one percent of our panelists agree that currently, socially responsible mutual funds are more of a marketing tool than a vehicle for change that addresses pressing issues. Meghan Busse of Northwestern notes that “companies need stronger incentives to reduce their climate impacts than they have had so far. Investor pressure could be one such incentive. … But investor pressure alone won’t be enough to solve environmental problems. If companies only respond (or are only pressured to respond) enough to protect their own profits, they won’t be considering the costs to others of their actions — climate impacts especially. The problem won’t be solved until a carbon price or similar policy forces companies to internalize all the costs of their choices.”
With the generally low impact of socially responsible investments, most note that it’s important to turn attention to policy levers in order to move the dial. As John Van Reenen of the MIT Sloan School of Management writes, “To tackle climate change, we need a carbon tax, tougher regulation, and higher green R&D subsidies.”
“Unless investors take an active role in influencing the companies’ investments — something mutual funds are not doing — they don’t make companies adhere more to ESG criteria. Mutual funds might help companies certified as ESG, but only if there is an oversupply of ESG funds such that financing for ESG investment is cheaper than for non-ESG investment without arbitrage kicking in.”
“Historically, these funds have been oversubscribed relative to investment opportunities. Now, the availability of capital is encouraging social entrepreneurs to establish new enterprises dedicated to environmental and social problems.”