Sustainability: Time Value, Social Distance, and Efficiency Effects
Anne Anderson, Lehigh University
David H. Myers, Northeastern University
Abstract:With the recent explosion of interest and articles in the areas of sustainability, it is time for some clarity. The clarity is necessary to hold coherent conversations, both practical and theoretical, about the definitions of this related spectrum on non-traditional investing. To understand the different motivations, we posit that beyond the traditional wealth-maximizing motivations of sustainability, there are two new dimensions that investors consider when making social decisions: social distance and efficiency. Sustainability decisions that parallel altruistic philanthropy and ethical obligations are made with a strong orientation towards social distance. Sustainability decisions that parallel the economic dimensions, value-enhancing, are made with a strong orientation towards efficiency. Additionally, along these two dimensions we place a spectrum of sustainability investment decisions from philanthropy to microfinance to socially responsible investments and corporate social responsibility.
Introduction
Over the past forty years we have witnessed the transition from Ethical Investing to Socially Responsible Investing (SRI) to Environmental, Social, and Governance (ESG), to Sustainable Investing, Mission Related Investing, along with Corporate Socially Responsibility (CSR), and Impact Investing. In this article, we propose a theoretical road map to understand the various definitions of each and plant the debate in a more traditional financial economics asset pricing context.
The transition that has been witnessed over this period has been driven by an increase in transparency and the wealth of research on the understanding of investing. With the South African divestment movement in the eighties, we saw the advent of research and reporting by such firms as IRRC on corporations doing business in South Africa. The addition of the Sullivan Principles in 1977 provided definition and context on the social impacts that corporations and their shareholders could have with respect to divestment. These seeds of information and understanding caught the wind of public discourse to spread ethical investing from mainly a religious organization base to public pension plans and endowments.
The next leap came in the expansion of the commercialization of data with MSCI KLD research and indices and the expanded investment opportunities with Calvert and other investment funds. These provided lower costs of entry to investing in socially responsible firms both in terms of information costs since the research was already done and investment costs with diversified funds providing intermediation and divisibility efficiencies. These efficiencies were magnified during the nineties from general information and trading efficiencies with technology advances which drove the creation of exchanged traded funds, lower trading costs, and faster information dissemination.
The 21stcentury provided more education, research, and acceptance in the area of sustainability. The UNPRI and Millennial Goals were coupled with more research firms such as EIRIS, MSCI KLD, and others. The explosion of assets, UNPRI and SIF report trillions of dollars, following double or triple bottom line investing this century, has predictably created more differentiation among the firms competing for the those funds. With the need to distinguish their services, a plethora of terms have been created. Now there is a need for clarification of definition and understanding of these terms. Sustainable, mission related, and impact investing are the most common categories in the industry. Sustainable has now replaced socially as the S in SRI. The United Nations has moved on from the Millennial Development Goals to the Sustainable Development Goals.
To bring clarity, we address the issue of the motivation economic agents have to engage in sustainable investing. We provide a simple lexicon that focuses the discussion and debate. We posit that there are two additional dimensions beyond wealth maximization from which decisions are made: social distance and efficiency. Along these two dimensions, we can place the spectrum of investing from ethical and socially responsible investment decisions at both individual and organizational levels of analysis from philanthropy to microfinance to socially responsible investments and corporate social responsibility; all now residing in some form under sustainability.
Research in the domain of socially responsible behavior focuses primarily on the content of organizational CSR (Jenkins, 2005; Orlizky, Schmidt & Rynes, 2003) or on the corporate or personal benefits derived from responsible investing or socially responsible programs in organizations (Porter & Kramer, 2002) rather than on the examination of internal states which serve as antecedents to such behavior. However, some work in the domain of corporate social responsibility research proposes that unless we better understand the drivers of (and barriers to) such ethical choices, the duration or sustainability of such choices is undermined (Weaver, Trevino & Cochran, 1999; Basu & Palazzo, 2008). Our model opens an avenue of theory and testing of the variables that may help clarify the drivers of long-term sustainability decision-making in some economic situations.
The approach is to first examine the literature that provides the foundations for the model of sustainable investing. Second, a brief description of the two key variables that underlie the model and interpretations of those variables with sustainable investing decisions. Next, we review the path sustainable investing takes with respect to the two variables. Finally, the future approaches to research and implementation is discussed, again in relation to the two key variables, social distance and efficiency.
