It’s super important to be thinking about the actual impact of impact investing. There’s a lot of rhetoric out there that’s not backed up, and this paper does a good job of pointing out that in public markets, investing doesn’t impact stock price. That said, there’s a few things related to public market investing that could use some more investigation.
1. I don’t think many public equity impact investors see their primary means of impact as shifting stock price. They create impact through your point 6 - signaling and improving portfolio companies. A more thorough exploration of the potential impact of signaling and the direct impact of shareholder advocacy compared to the impact of donations would make your argument more compelling.
In the report, you say that “Thus, the indirect effects of divestment campaigns are likely to be much greater than the direct effects. This being said, we think that, given the financial opportunity costs of socially responsible investing, for people aiming to have maximal social impact, socially neutral investing to donate to effective charities will usually be more effective.”
Could you point out the justification for this claim? It certainly might be true, but I’m wondering what makes you think it is so. Also I think it’s really important to consider the wealth of literature supporting the impact of shareholder advocacy. This paper has a nice summary of some of that literature:
2. You note that the assumption of reduction in financial performance from ESG investing isn’t backed up by empirical evidence—you note in your report that there is no clear relationship shown in the literature. But it seems like you find the theoretical argument compelling enough to overcome the empirical data—which is not impossible, there could be noise that leads to inconclusive empirical data. But, I am not convinced that the theoretical argument is iron-clad enough to overcome the ambiguity in empirical data.
From your report: “Overall, our view is that screening portfolios will reduce expected financial performance. There is no theoretical explanation for the finding from some studies that screening one’s portfolio improves or does not harm financial performance.” The assumption seems to be that ESG performance is orthogonal to financial performance, I may have missed where this is justified.
A possible theoretical explanation of why screening doesn’t hurt performance: It could be possible that ESG performance is actually a driver of financial performance (or at least risk reduction)? Every active investor has a funnel. Some screen out companies with low profit margins because of a particular investment thesis. Others screen out companies with poor ESG performance because of a particular investment thesis. This idea is becoming more popular—that ESG investing is a part of good investing. See SASB for some of the case that ESG performance impacts financial performance.
[Speaking for myself here not necessarily Hauke.] Hello thanks for these smart comments.
1. Although there is some evidence that the indirect effects of campaigns are more substantial, the evidence isn’t all that good as divestment campaigns were often combined with boycotts and other campaigns. Secondly, take the example of Norway’s sovereign wealth fund, where tobacco divestment cost them $2bn. I would be very surprised if the indirect effects of this gesture would have been more damaging for the tobacco industry than spending the money directly on campaigns against tobacco, which looks a highly cost-effective approach. The aim of the divestment campaign would be to raise awareness among governments presumably, but if that is your aim, it seems to make sense to try to do that directly through ordinary advocacy approaches. I agree that the report could have been clearer on this.
2. The argument in that section was that genuinely strict socially responsible investing would involve financial sacrifice, and ESG-focused screening is not strict. Many socially responsible today don’t exclude all companies in harmful industries. Generally, there is a dilemma for proponents of SRI. SRI is supposed to affect the cost of capital of harmful industries. If it succeeds, then the stock price of these companies will be higher than otherwise and people who invest in them will be able to make excess returns.
It’s super important to be thinking about the actual impact of impact investing. There’s a lot of rhetoric out there that’s not backed up, and this paper does a good job of pointing out that in public markets, investing doesn’t impact stock price. That said, there’s a few things related to public market investing that could use some more investigation.
1. I don’t think many public equity impact investors see their primary means of impact as shifting stock price. They create impact through your point 6 - signaling and improving portfolio companies. A more thorough exploration of the potential impact of signaling and the direct impact of shareholder advocacy compared to the impact of donations would make your argument more compelling.
In the report, you say that “Thus, the indirect effects of divestment campaigns are likely to be much greater than the direct effects.
This being said, we think that, given the financial opportunity costs of socially responsible investing, for people aiming to have maximal social impact, socially neutral investing to donate to effective charities will usually be more effective.”
Could you point out the justification for this claim? It certainly might be true, but I’m wondering what makes you think it is so. Also I think it’s really important to consider the wealth of literature supporting the impact of shareholder advocacy. This paper has a nice summary of some of that literature:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3289544
2. You note that the assumption of reduction in financial performance from ESG investing isn’t backed up by empirical evidence—you note in your report that there is no clear relationship shown in the literature. But it seems like you find the theoretical argument compelling enough to overcome the empirical data—which is not impossible, there could be noise that leads to inconclusive empirical data. But, I am not convinced that the theoretical argument is iron-clad enough to overcome the ambiguity in empirical data.
From your report: “Overall, our view is that screening portfolios will reduce expected financial performance. There is no theoretical explanation for the finding from some studies that screening one’s portfolio improves or does not harm financial performance.” The assumption seems to be that ESG performance is orthogonal to financial performance, I may have missed where this is justified.
A possible theoretical explanation of why screening doesn’t hurt performance: It could be possible that ESG performance is actually a driver of financial performance (or at least risk reduction)? Every active investor has a funnel. Some screen out companies with low profit margins because of a particular investment thesis. Others screen out companies with poor ESG performance because of a particular investment thesis. This idea is becoming more popular—that ESG investing is a part of good investing. See SASB for some of the case that ESG performance impacts financial performance.
https://russellinvestments.com/-/media/files/us/insights/institutions/governance/materiality-matters.pdf?la=en
https://dash.harvard.edu/bitstream/handle/1/14369106/15-073.pdf
[Speaking for myself here not necessarily Hauke.] Hello thanks for these smart comments.
1. Although there is some evidence that the indirect effects of campaigns are more substantial, the evidence isn’t all that good as divestment campaigns were often combined with boycotts and other campaigns. Secondly, take the example of Norway’s sovereign wealth fund, where tobacco divestment cost them $2bn. I would be very surprised if the indirect effects of this gesture would have been more damaging for the tobacco industry than spending the money directly on campaigns against tobacco, which looks a highly cost-effective approach. The aim of the divestment campaign would be to raise awareness among governments presumably, but if that is your aim, it seems to make sense to try to do that directly through ordinary advocacy approaches. I agree that the report could have been clearer on this.
2. The argument in that section was that genuinely strict socially responsible investing would involve financial sacrifice, and ESG-focused screening is not strict. Many socially responsible today don’t exclude all companies in harmful industries. Generally, there is a dilemma for proponents of SRI. SRI is supposed to affect the cost of capital of harmful industries. If it succeeds, then the stock price of these companies will be higher than otherwise and people who invest in them will be able to make excess returns.