Do Institutional Investors Drive Corporate Social Responsibility?

Researchers from universities in Canada, the U.S. and Italy released a paper this week examining the impact of institutional investors on corporate social responsibility.

When it comes to affecting change, institutional investors prefer engagement over outright divestment; they argue it gives them a “seat at the table” and more effectively allows them to engage with a firm. Does that line of thinking hold up?

The researchers studied large firms across 41 countries from 2004 – 2013. A summary of their findings:

We find that institutional ownership is positively associated with firm-level environmental and social commitments. Further, the “color of money” matters. Domestic institutional investors and non-U.S. foreign investors account for these positive associations, while U.S. institutional investors’ holdings are not related to environmental and social scores. Similarly, higher scores are associated with long-term investors such as pension funds but not with hedge funds. Evidence from a quasi-natural experiment shows that institutional ownership causes improvements in environmental scores. Overall, our results suggest that institutional investors, in aggregate, use their ownership stakes to promote good CSR practices around the world.

Download the full paper here.

Photo by  Horia Varlan via Flickr CC License