Socially Responsible Investment and Pro-Social Change

By Starr, Martha A. | Journal of Economic Issues, March 2008 | Go to article overview

Socially Responsible Investment and Pro-Social Change

Starr, Martha A., Journal of Economic Issues

Beginning with 1980s activism intended to stop foreign investment in South Africa, there has been a rise in "socially responsible investment" (SRI) in the United States and Europe. While definitions vary somewhat, SRI generally refers to the selection of investments based both on traditional financial criteria and on key dimensions of firms' social performance. Commonly identified aspects of social performance include: producing safe and useful products; minimizing adverse environmental impacts; implementing workplace practices that favor workers' well-being; adopting labor standards for overseas operations; and contributing positively to surrounding communities. SRI may also involve engaging in dialogue with companies about ways to improve their social performance through shareholder advocacy and resolutions.

While there has been a considerable amount of financial and business research on socially responsible investment and the related phenomenon of corporate social responsibility (CSR), (1) social responsibility has attracted much less attention in economic research. This is unfortunate both because the idea of social responsibility poses a number of problems for core economic ideas, and because it is a phenomenon of sufficient empirical importance as to have some potential to re-shape patterns of production and consumption in the global economy. The basic mechanism via which businesses are induced to show greater concern with social dimensions of performance is activism by socially-concerned groups, including religious organizations, interest groups oriented to specific issues (environment, labor, human rights, animal welfare, etc.), consumer activists, and institutional investors and mutual funds that practice SRI. Upon expression of concern about a business's practices, many businesses voluntarily take actions to address identified problems, not out of social concern per se but rather to minimize adverse publicity, stem loss of sales, and/ or mitigate adverse effects on the stock price. The change in the business context then, wherein businesses can anticipate having problematic aspects of their social performance come under scrutiny, creates incentives for them to address problems preemptively, at least when the expected benefits are sufficiently high to offset the costs. It is conceivable at least, that if the pressure exerted by newly evolving norms of social responsibility are sufficiently strong, they could produce a "race-to-the-top" wherein companies compete along social and financial dimensions, in contrast to the "race-to-the-bottom," wherein profits are exclusively prioritized, that has been of much concern in recent years.

The phenomenon of SRI poses a number of interesting problems for core economic ideas. For one, as much as the idea of "moral sentiments" has been a part of economic thinking since Adam Smith, there has been little rigorous work until recently on the nature and composition of social preferences--that is, preferences toward ways in which social and economic life are patterned. (2) It is increasingly recognized that contrary to predictions of standard economic theory, people often behave in "other-regarding ways," that is, as though they are concerned about the implications of their actions for the well-being of others. Thus, for example, much recent research finds that in experimental situations, people often interact according to norms of fairness, rather than pursuit of individual gain. (3) Other work claims to identify basic social preferences common among people, such as "inequity aversion," wherein people seek to reduce inequalities within a group, even at a cost to themselves. Certainly such "social preferences"--as institutional and social economists have long argued--should be seen not as hardwired into human cognition, but rather as reflecting complex combinations of psychological predispositions and institutional and cultural processes, where both are evolutionarily shaped. …

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