Second, there are cases where improving a firm’s social impact does not help financially.
Third, increasing wages or selecting suppliers with better environmental practices might bring a financial benefit in the long term; however, short-term pressures on the firm might make business leaders averse to making such investments.
My work so far has concentrated on the ESG issues where firm-level action is actually producing value both for the company and for a positive social impact.
With this paper, I am expanding the tent to incorporate ESG issues where that might not be the case, asking what is the role of investors in enabling companies to increase their social impact.
Silverthorne: What would be the incentives for companies competing in the same industry to cooperate?
Serafeim: I identify two characteristics of investors that are likely to engage with companies at the industry-level on issues of environmental and social importance: they have a long time horizon and a significant common ownership of companies within the same industry or supply chain.
Large index investors have built teams that engage with companies in their portfolios, and large asset owners have been among the leaders in engaging with companies on environmental and social issues.
In fact, I suggest that two other types of investors, socially responsible investment funds and individual investors, play a key role in addressing free-rider problems at the large institutional investor level (i.e., temptation of one asset manager to free ride on the engagement efforts of other asset managers) and providing direct incentives for engagement to large institutional investors.
Serafeim: There are many such collaborations around the world.
As more of these collaborations become effective, an increasing number of companies will be able to engage in activities that create a more positive social impact.