Why Do Investors Hold Socially Responsible Mutual Funds?

Dr. Arno Riedl is Professor of Economics and Dr. Paul Smeets is Professor of Finance at Maastricht University. This post is based on their recent article, recently published in the Journal of FinanceRelated research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Socially responsible investments (SRI) are ever-increasing in importance. But why do investors buy these assets? There are three potential motives: (1) purely financial interest, (2) desire to create a positive social image, or (3) strong pro-social preferences.

The authors analyze a unique data set consisting of administrative data linked to survey responses and an incentivized experiment. The experiment is used to elicit intrinsic social preferences using real financial incentives and participants (investors) know that they will remain anonymous. The importance investors place on their social image is measured by asking them how often they talk about their investments. Only when they talk about their investments others are able to observe that they invest socially responsible. The financial motives are assessed by looking at the actual performance of participants using the administrative data as well as survey data regarding their beliefs about performance of SRI and non-SRI equity funds.

This unique combination of different data sources allows the authors to see whether experimentally elicited prosocial preferences of investors can explain their real-life investment behavior. The authors find that social preferences as well as social signaling are indeed an important determinant of socially responsible investment decisions. Financial motives on the other hand appear to be of limited importance. Moreover, investors are actually willing to forgo financial performance to invest in accordance with their social preferences.

Key Findings

16.2% of the investors in the sample can be classified as socially responsible investors, because they hold at least one SRI equity fund. These investors, on average, hold 4,574 euro in SRI equity funds, which corresponds to 23.0% of their total equity investments.

  1. Social preferences are key: An investor classified as prosocial is 14 percentage points more likely to hold an SRI equity fund than a selfish investor. This effect size is economically substantial as only 16% of the total sample holds an SRI equity fund.
  2. The social image matters: Social signaling is a motive for investors to hold SRI equity funds. Investors who talk more often about their investments are also more likely to invest in a socially responsible way.
  3. Donations complement SRI: Socially responsible investors donate about 41% more to charity than conventional investors. An important implication from this is that SRI and other charity giving are complements. That is, SRI does not decrease charitable giving. Rather to the contrary, those who are already willing to give also like to invest in SRI.
  4. Financial reasons matter only for some: In order to invest in concordance with their social preferences, some investors are willing to forgo financial performance. At the margin, however, pessimistic performance expectations reduce the likelihood to invest in a socially responsible way. 

Practical Relevance

Not only are investments in socially responsible assets vastly growing. This paper shows that this interest stems to a significant extent from investors trying to align their investments with their social preferences. In other words, these investors really want to invest in SRI because of its social impact.

These findings are of relevance for asset managers and pension funds. Being able to offer investors and pension fund contributors the possibility to invest in socially responsible assets allows people to invest more in line with their social preferences.

The complete article is available for download here.

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