Do Responsible Investors Invest Responsibly?
Rajna Gibson Brandon, Simon Glossner, Philipp Krueger, Pedro Matos, Tom Steffen
Review of Finance, Volume 26, Issue 6, November 2022, Pages 1389–1432, https://doi.org/10.1093/rof/rfac064
There is growing interest globally in responsible investing, whereby institutional investors incorporate environmental, social, and governance (ESG) issues into their investment processes. We study the leading initiative, the Principles for Responsible Investment (PRI), which was founded in 2006 by some of the world’s largest institutional investors and reached combined assets under management of over US$ 120 trillion at the end of 2021. Our focus is whether institutions who commit to invest responsibly by joining the PRI do so in practice, as responsible investing can only make the world more sustainable if investors live up to their commitments.
We examine whether PRI signatories in general and especially those with higher reported levels of ESG incorporation in the annual PRI reporting framework have more sustainable equity portfolio allocations. For this purpose, we combine filings by institutional investors on their equity holdings around the world with stock-level ESG ratings from three leading ESG data providers to calculate value-weighted ESG scores at the portfolio level. We call these portfolio ESG scores and use these to quantify the extent to which an institutional investor is incorporating ESG issues into their investment analysis and decision-making processes (Principle 1 of the PRI).
We find that PRI signatories have better portfolio ESG scores than non-PRI signatories – but this holds only for institutions domiciled outside of the U.S. In the U.S., we observe a substantial disconnect between what institutional investors claim to do in terms of ESG and what they really do. We do not find better portfolio ESG scores for US PRI signatories, not even for those that report full ESG incorporation. US PRI signatories that report no ESG incorporation in fact have worse scores than non-PRI investors if they have underperformed recently, are retail-client facing, and joined the PRI late. We also find no evidence that US PRI signatories improve the ESG scores of portfolio companies after investing in them. This raises concerns about greenwashing (i.e., overstating an institution’s commitment to sustainable investing) among US PRI signatories. The difference in findings between the US and non-US PRI signatories appears to be driven by a combination of factors: (1) commercial incentives to become a PRI signatory being higher in the US than elsewhere; (2) more regulatory uncertainty in the U.S. as to whether ESG investing is consistent with institutions’ fiduciary duties; and (3) less ESG market maturity in the U.S. and hence less pressure for ESG implementation.
Overall, our results highlight that—at least in the U.S.—end investors need to look beyond the PRI label alone when evaluating investment managers on their sustainability credentials and the true alignment between their responsible investing commitments and actions. One may wonder about the ability of responsible investing to drive change in corporate ESG practices in the U.S.