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Theory of Socially Responsible Investment: A Review

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ESG Integration and SRI Strategies in the EU

Part of the book series: Palgrave Studies in Impact Finance ((SIF))

Abstract

Socially responsible investment (SRI), where individuals look beyond financial payoffs to integrate environmental, social and governance (ESG) factors into their investment decisions, is not fully explained by standard models of preferences. Consequently, within the theoretical literature, economists have sought to enrich preferences by incorporating additional motivations for socially responsible behaviours. In this chapter, the authors first survey the investment literature, which introduces a ‘warm-glow’ benefit derived from the act of investing responsibly. However, within the investment literature, the mechanisms underlying this warm-glow benefit have been overlooked. Therefore, the authors draw on literature on public good provision and green consumerism to investigate the underlying social and moral mechanisms. They highlight the importance of incorporating elements of our shared humanity in order to understand economic behaviours in situations where the market mechanism is imperfect and incomplete. Subsequently, the authors propose an agenda for future research based on the two key questions dominating this literature. Firstly, would non-standard preferences which incorporate morally enriched warm-glow payoffs enable an efficient equilibrium to be achieved whereby externalities from production are internalised? Secondly, if government intervention is needed, what is the nature of this intervention under these non-standard preferences? Answering these questions would guide the efficient design of policy to catalyse SRI.

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Notes

  1. 1.

    In its fifth edition, the biennial Global Sustainable Investment Review 2020 maps the state of sustainable and responsible investment of major financial markets globally, combining regional data from the United States, Canada, Japan, Australasia and Europe.

  2. 2.

    We also provide a summary of the main literature in a table in the Appendix.

  3. 3.

    It should be noticed that there is a difference in the respective representation of firms. Renström et al. (2021) model firms as engaging in abatement activity which reduces their output of pollution, henceforth, when faced with a higher cost of capital through the pollution premium required by socially responsible investors, firms have an incentive to engage in abatement activities to lower their pollution and therefore lower the cost of capital. Given this feature of the model, we can see why SRI improves the effectiveness of subsidies, because SRI investors give them an incentive to clean up their production. On the other hand, Dam and Heijdra (2011) model government abatement and use a constant parameter to capture the pollution content of production.

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Author information

Authors and Affiliations

  1. Department of Economics and Centre for Environmental and Energy Economics (CE3), Durham University Business School, Durham, UK

    Laura Marsiliani, Lucy Naga & Thomas I. Renström

  2. Department of Economics and Management, University of Pisa, Pisa, Italy

    Thomas I. Renström & Luca Spataro

Authors
  1. Laura Marsiliani
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  2. Lucy Naga
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  3. Thomas I. Renström
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  4. Luca Spataro
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Corresponding author

Correspondence to Laura Marsiliani .

Editor information

Editors and Affiliations

  1. Department of Economics and Management, University of Pisa, Pisa, Italy

    Luca Spataro

  2. Department of Economics and Management, University of Pisa, Pisa, Italy

    Maria Cristina Quirici

  3. Department of Law, University of Pisa, Pisa, Italy

    Gabriella Iermano

Appendix

Appendix

See Table 2.1.

Table 2.1 Theoretical papers, key equations and conclusions
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Marsiliani, L., Naga, L., Renström, T.I., Spataro, L. (2023). Theory of Socially Responsible Investment: A Review. In: Spataro, L., Quirici, M.C., Iermano, G. (eds) ESG Integration and SRI Strategies in the EU. Palgrave Studies in Impact Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-36457-0_2

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