Morning Knowledge /9. CSR

Since institutional investors own the bulk of the world's equity capital, it is important to understand how they affect the behavior of the companies they invest in. A study of over 3,000 firms across 41 countries by Hannes Wagner (Professor of Finance, Bocconi University) and colleagues shows that they can be a force for good. The study shows that investors have a positive and causal effect on firms' environmental and social (E&S) performance. Investors, in turn, are motivated both by financial considerations and by social attitudes, to promote these two pillars of corporate social responsibility.

These surprising findings matter because they demonstrate that mainstream institutional investors care about E&S issues, and actively push firms to improve their E&S performance. While one might expect activist investors, such as environmental and social impact funds, to push for such changes, the study instead finds that a broad range of mainstream investors do this.

In particular, the effect is driven by institutional investors from countries with social norms that deem strong E&S performance valuable. These are mostly European countries-they fill the first 17 positions in a country ranking of attitudes towards E&S issues, produced by the authors. Only pension funds, with their long investment horizons, have a positive effect on E&S regardless of their country of origin.