Responsible investment refers to the practice of integrating environmental, social, and corporate governance (ESG) factors in investment management and decisions. In recent years, this approach to investing has grown in popularity. Many investors and asset managers now refrain from buying shares of companies that, among others, are carbon-intensive, have a poor human rights record, or have violated fundamental ethnical norms.
Despite the increasing interest in responsible investment, we know very little about whether and how this investment strategy impacts companies’ ESG performance. Previous academic studies on responsible investment have focused primarily on financial performance. But does responsible investment actually change business conduct? This question lies at the heart of our research project.
We examine the sustainability and ethically motivated divestments by Norway’s US$ 1.4 trillion Government Pension Fund Global (‘the Oil Fund’). Our premise is that the Oil Fund is an influential investor, given that it is a market leader in responsible investment and the world’ largest equity investor. In this case, the Oil Fund’s divestment may lead other investors to divest too, resulting in a lower stock price of the target company. This lower stock price would, in turn, make it more difficult for the company to raise money and fuel growth. Hence, we expect that the Oil Fund’s divestments would induce the target company to improve its operations, as it seeks to ameliorate its stock value.
Our project is the first economics study of the Oil Fund’s divestments on companies’ real-world behavior. We investigate whether divestments positively affect firms’ ESG outcomes, how effects differ by divestment rationale, and the adjustments businesses make in response to divestment. Through these analyses, our project aims to expand our knowledge of the role that responsible investment and financial markets can play in promoting sustainable development.
Responsible investment refers to the strategy and practice of incorporating environmental, social, and governance (ESG) factors in investment decisions and active ownership. As ESG issues rise to the top of the agendas of many investors and asset managers, research on whether and how responsible investment actually impacts real-world corporate behavior has become more relevant. For example, can responsible investing help to achieve the UN Sustainable Development Goals? This question remains unsettled in the academic and policy discourse, and it lies at the crux of our research project.
INVESTINGIMPACT is an empirical microeconomic study of the effect of responsible investment on investee firms’ ESG performance. We focus on the sustainability and ethically motivated divestitures by Norway’s US$ 1.4 trillion Government Pension Fund Global (GPFG or the 'Oil Fund’). Our premise is that the Oil Fund's standing as the world’s largest equity investor and a market leader in responsible investment makes it different from other investors. While divestments are often thought to be ineffective, the Fund's position means that its divestment can significantly and negatively influence companies' stock prices. This fall in stock price, in turn, may affect companies' behavior as they seek to decrease their capital cost.
While there is a large, related literature on corporate governance (among other fields), this will be the first economics study of the impact of GPFG divestments on firms' real-world behavior. Using a difference-in-differences design, the project will examine: 1) the direction of the average causal effect; 2) the heterogeneity of effect by divestment rationale (i.e., product vs. conduct); and 3) the adjustments that firms make to their environmental footprint in response to divestment. Through these analyses, our project aims to expand our knowledge of the role that responsible investment and financial markets can play in promoting sustainable development.