Investors as Stewards of the Commons?

by George Serafeim

Overview — This paper lays out a framework suggesting that index investors and adequately funded asset owners are a potential mechanism to build and sustain pre-competitive collaborations for addressing environmental and social issues. With long time horizons and significant common ownership of companies within the same industry or supply chain, investors could serve as vehicles for the establishment and/or stability of collaborations between companies.

Author Abstract

Over the past few years, there has been a significant increase in the number of initiatives seeking to mobilize investor voice toward positive social impact. In this paper, I provide a framework outlining the role of investors as stewards of the commons. While companies are increasingly addressing environmental and social issues that also improve their economic value, for some of these issues individual company action is costly. At the same time, for a further subset of those issues, company action coupled with collaboration between companies is value enhancing. However, collaboration between companies is notoriously difficult and fragile requiring commitment mechanisms. I suggest that a small set of large institutional investors, importantly, but not exclusively, index investors, could provide this commitment mechanism. Common ownership of competitors within industries and long-time horizons in ownership of shares are key characteristics for investors that could act as stewards of the commons. Social pressure fueled by small socially responsible investment funds and nonprofit organizations and customer pressure from individual investors are critical in mitigating free-rider problems among asset managers and sustaining engagement practices. Finally, I explore the limits and anticompetitive concerns to the theory of change presented here.