Socialy Responsible Institutional

Socially Responsible Institutional Investment in Private Equity Author(s): Douglas Cumming and Sofia Johan Source: Journal of Business
Ethics, Vol. 75, No. 4 (Nov., 2007), pp. 395-416 Published by: Springer Stable URL: http://www.jstor.org/stable/25124003 . Accessed: 27/09/2013 15:17
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Journal of Business Ethics (2007) 75:395-416 DOI 10.1007/sl0551-006-9261-8
Springer
2007
Institutional SociaUy Responsible in Private Equity Investment
Douglas
Gumming Sofia Johan
ABSTRACT. aUocations propose institutional nizational sociaUy investments sociaUy and to two
This the
article sociaUy
studies responsible influence
institutional asset sociaUy
investor class. We
ature
elements investment
responsible internal We orga study
in private and
structure, responsible into
equity: internationaHzation. from Dutch
see also Miles et al., 2004; Spence review; no prior study has et al., 2003; Wempe, 2005), an empirical analysis of the direct inter considered investment section between and sociaUy responsible
investments private investment of
institutional
responsible different types companies, socially more an
and funds, compare equity across different asset classes investors funds). The (banks, data equity to with a imple single
there has been related private equity (although for work issue is nevertheless ). This important institutional investor capital aUocation, as weU as for private equity funds and companies for undertaking sociaUy responsible
activities.
institutional and pension investment when plan the
seeking
capital
insurance indicate is 40-50% ment chief
entrepreneurial
responsible common investment
in private decision
such
is centralised
two propose institutional responsible We
investment officer. investment SociaUy responsible common in private is also more institu among equity a greater investors international tional with investment and less common fund-of-fund focus, among private equity investments.
sociaUy in private equity structure and (1) institutional (2) organizational In the spirit of research on internationalization. investment
governance and institutional investors
elements
influence
corporate
2001; MaUin (e.g., MaUin, duce in this article a new Dutch institutional The survey 2005.
et al., 2005), intro dataset from a survey of investors that was carried out in
we
KEYWORDS: international
sociaUy institutional
responsible investment,
investment, private equity
data comprise information from 24 of which institutions, currently have a investment program (of these, sociaUy responsible include 14 equity sociaUy responsible private 100 Dutch investment 19 which investment plan on program 5 include
Introduction This the factors that study empiricaUy investigates influence investors to allocate capital to institutional investments. sociaUy responsible private equity
(of these, pro responsible private equity investment grams). The data comprise extremely specific details on the institutions' portfolio management practices, as weU as their perceptions of the importance of socially various economic, legal and institutional factors that Insti influence their portfolio allocation decisions. investors'
their
and programs), a sociaUy responsible adopting over the period 2006?2010
act as financial inter equity fund managers mediaries between investors and entre institutional firms. Private is a viable and preneurial equity Private and investors, important asset class for institutional there has been a growing trend towards sociaUy investment While responsible practices. prior work has examined the role of business 2003 ethics in entrepreneurship (see Hannafey, for a liter
tutional
tives in
positions
asset
regarding
aUocation
their objec
were sought.
strategic
More
views the perceived significantly, regarding risks and hurdles faced by such investors were sought concerns to determine in adopting main sociaUy responsible investment. The data enable an empirical
396 Douglas
assessment of institutional investor aUocations
Gumming
to
and Sofia Johan statistics and multivariate summary asset aUo empirical analyses of sociaUy responsible cations by Dutch institutional investors. Limitations alongside are discussed outlined and suggestions after the multivariate for future research are analyses. Concluding in the last section.
to investment with consideration sociaUy responsible controls for a variety of factors potentiaUy pertinent
to asset aUocation.
The and
new data indicate most
perhaps
two primary findings. First, the data indicate importantly,
remarks foUow
ismore sociaUy responsible private equity investment common to implement when the decision such an investment a is in the hands of chief plan placed or the head of capital investment officer ("CIO", as a broader to investment investments), opposed a team. When CIO is in charge, a sociaUy responsible private equity 40?50% more is approximately program to be is likely adopted. This finding of but related work supportive independent organizational structure influences investment
Testable Institutional
hypotheses investors have various motivations in
strongly that indicates
to aUocate strategies when deciding to and alternative derivatives, bonds, capital equities, are such as private equity. Portfolios investments, to trade-off risk and specificaUy designed optimaUy their investment return by aUocation of the portfolio to appropriately of assets, with consideration diversified combinations to institutional and regulatory factors, and possibly behavioral biasses and decision-making processes. FoUowing
biasses and
social responsibihty corporate (Guyatt, 2005, 2006), as discussed in detail in the first part of this article. invest Second, sociaUy responsible private equity
ments tend to be more common among institutional
upon
the
potential
processes
effect
may
behavioral
have on
investors (outside but not The

vate
that
invest
the Netherlands) in Asia. data further

investment
in Europe internationaUy and in the United States, sociaUy responsible

are also
decision-making
an
levels
institution
of asset
determining
aUocation, this
current
study
and
seeks to
projected
ascertain
indicate
pri
more
equity
programs
a potential in a more trend towards investing spec ialised form of private equity, sociaUy responsible
private equity, also sometimes referred to as sus
common
those
among
larger
greater
institutional
economic
investors
returns from
and
so
expecting
find no statisticaUy ciaUy responsible to carry out in differences the significant propensity on the investments sociaUy responsible depending investor of insurance type company or (pension fund, bank/financial that institution). We do find evidence investments. We
sociaUy among responsible institutional investment investors that is less invest common a greater
tainable private We propose
equity. two
central
elements investment
influence in private
sociaUy responsible internal organizational (1) the institutions' equity: structure and (2) the institutions' external environ ment in terms of internationalization. our two main hypotheses underlying to sociaUy responsible
asset
institutional
The
intuition
investment
classes. However,
applies not only in private equity

we focus on
proportion
expected as
in private
equity
fund-of-funds,
remove the
which
decision
is
but
also
other
fund-of-funds
sociaUy
because
responsible
it is a new
investment
"alternative"
in private
asset class that
equity
is now
investors to the fund making from the institutional The data further suggest sociaUy of-funds managers. common investment is more among responsible institutional new investors that are more Financial although
econometric
sensitive
to the is
also
scrutinized being closely internaUy by institutions' decision makers asweU as externaUy by the media for its diversification annual and consistent properties returns. ever, Some of the factors discussed directly pertinent in investment private equity. responsible First, in regards to internal organizational are more below, how only to sociaUy struc
International (2005),
to the
("IFRS")
sensitive
Reporting the statistical

specification.
Standards relation
We
proffer
are quite
evidence
similar
that the factors decisions

for other to those
that affect for private

asset classes.
sociaUy equity
responsible This section testable
investment
ture, institutions (or rather their human resource) wiU to balance have the conflicting needs of their stakeholders.
investment
as foUows. The next is organized the theoretical and propositions are The data then introduced hypotheses. article outlines
The
does not
practice
mean
of
that
sociaUy
returns
responsible
need to be
sacrificed
(Geczy
et al., 2003),
even
though
some
Socially Responsible may hold this perception (for recent survey evidence, see Guyatt, 2005). An effective socially responsible investment program should incorporate the objective to gain the maximum possible return for stakeholders in the institution, at an acceptable risk, with the idea
of combining concerns. social, Any decision moral, made legal, and environmental or the by management,
Institutional social
Investment 397
when their they recognize responsibility such stakeholders prefer policies (thereby increasing more to wfll firm value); be hkely corporations
recognize and implement the corporate social
responsibility implement
sociaUy
preferences such preferences 2002).
of
their when
are
stakeholders decisions
made
and about
responsible
investment
centraUy
board
of directors, wiU affect each stakeholder dif on important policies ferently. As such, decisions regarding investment affect and asset aUocation, which wiU are not the returns of the institution, In an institution where there is the
decision-making, where a
(Small and Zivin,
directly taken lightly.

decentralized
Hypothesis 1: SociaUy responsible investment pro grams aremore likely to be adopted by institutions
that centralize investment decision-making.
investment
general
compete
investment
with one
team
another,
comprising
each employee
employees
is more
Our
ments.
to which
the
relates to the extent second primary hypothesis an institution its invest internationalizes
On the one hand we to may be expect more investment sociaUy common
likely to seek to maximize

the most obvious
expected
returns as this is
indicator to
performance
responsible
and less likely to risk adopting poten management investment. tiaUy less profitable sociaUy responsible
In an organization where investment decisions are
centralized member directors, untested
a CIO, who a is not only through of management but also the board of it is more
are primarily based within the in which for The country they reside, particularly investments are not Netherlands. SociaUy responsible only on awareness of increasing social a as but result of by institutions, primarily the increasing public interest in social (beneficiary) is that the Thus, responsibility. pubhc perception
institutions need to 'return to society,' a sense of
in view domesticaUy investors' stakeholders
of
the fact
that
institutional
the rise
as a result
that innovative (thus probable and risky) sociaUy responsible investment policies be formulated, approved, and implemented. in the exercise The board of directors, of their their reUance on the CIO's deem discretion, to meet advice their duty of care to sufficient will of the outcome of the regardless of the program. This suggests that implementation the presence of a CIO who will take "ownership" can facUitate a and responsibility for the program stakeholders, sociaUy responsible Guyatt
non-standard
social responsibility that has been given to them by their stakeholders. And as 'charity begins at home,' to enjoy domestic stakeholders the likely want benefits that increased corporate social responsibility such brings, environmental On
that may
as increased
adherence
to
labor
and
investment
(2005, 2006)
investment
policy. argues that an impediment

approaches is the need
laws by local companies. the other hand, there are two primary
lead to a greater focus on sociaUy
factors
respon
to
to
justify
zational
decisions
hierarchy,
to those
using
above
one
in the organi
arguments.
'conventional'
Thus
if socially responsible investment does not to invest that way lose money, there is a disincentive because you have to 'stick your neck out' and do recourse when to conventional This investment
are
even
among institutions with an international focus (DoweU et al., 2000; and those First, 2003). Dunning, larger corporations an international or multinational with presence sible investment policies investment scrutiny with regard to their investment socially responsible policies (Dunning, term returns to sociaUy Second, 2003). long investments, particularly for international responsible investments over the long run, are reported as being typicaUy face public viewed number as being very of institutional see Guyatt, institutions investment in view favorable investors by a significant in a recent survey itmay viable be easier
without investment or
decisions.
of justifications is removed problem decision-making

incentives for
reduced
is
centralized. Moreover, there reputation
of corporate social respon compliance are more institutions that sibUity Ukely to comply are made with when decisions It has also centrally. been argued that corporations will adopt corporate
with
norms
(for details, for Dutch responsible Netherlands
sociaUy outside The opportunities of its size and a dearth of suit
2005). Third, to find
398 Douglas
Gumming
and Sofia Johan Other factors relevant to socially responsible private equity
investments
caveat
able local sociaUy responsible investments (with the that they may prefer to invest locaUy because of local conditions). they have greater knowledge regions around the world have different legal standards and social norms in regards to sociaUy responsible investment policies. Most notably, inAsia Different
The off
primary asset aUocation of risk
of institutional investors' objective is to achieve the most optimal trade and return. The of this achievement wfll differ in accordance For with characteristics. a example, different funding
Punning,
2003; Hanna, 2004) countries with high levels of corruption developed (Doh et al., 2003), there is comparatively weaker spirit
towards sociaUy responsible investments as weU as
and
less weU
objective specific
however institutional
weaker
America
legal standards compared to Europe and North 2003; Hanna, (Dunning, 2004). Corporate standards tend to be more lax in some accountabiUty countries (particularly less developed countries) as away to encourage foreign direct investment. WhUe there is some evidence (e.g., Angel and Rock, 2004) that global often operate at higher standards than corporations those required by local regulation, this has traditionaUy
pension fund and a bank wfll have assets and liabilities, and and solvency requirements, extent of regulatory oversight. Different institutions may exhibit differences in corporate objectives, contributor/stakeholder/beneficiary to and sensitivity regulatory
accounting rules. Hence, our
demographics, and oversight

empirical analyses
control
for
sion funds,
investor type of institutional (pen insurance companies and banks/financial are financial investors inter
the
not
been
observed
in Asia.
international
institutional
we Therefore, expect investments to be less sociaUy
institutions). Private equity mediaries
fund managers between institutional
responsible in Asia. In sum, there may be different reasons for investing a difference outside The Netherlands and finding between The North (outside Europe Netherlands)
America, and Asia. First, sustainable private equity
investors preneurial firms. Institutional the time and specialized skfll sets to carry out due in screening diligence entrepre private potential neurial
monitor
and entre do not have
to invest; institutional firms in which inves tors also do not have the time and skiUs to efficiently
and add value to the investee entrepre
will be Umited in any one country, opportunities a one smaU such as The Nether especiaUy relatively lands. This wiU tend to make sustainable investments
more international than conventional investments,
neurial
firms.
The
pronounced
asymmetries investments preneurial existence ized
ceteris paribus. Second,

where other sustainable
itmay not just be a question

opportunities are actuaUy
of
lo
cated
and agency in smaU, flliquid, and high-tech is a primary firms explanation of private investment funds with
risks, information associated with problems entre for the
information
cultural,
about those opportunities

geographical, and
is critical.
Linguistic,
transparency
factors are Ukely to be more favorable to the discovery and take-up of opportunities in Europe (outside The and North America versus Asia and less Netherlands) countries. Both these developed with respect to empirical evidence Hypothesis 2: issues are discussed in Cowton (2004).
skfll sets to mitigate that institutional jecture bases are more inchned
special con such problems. We investors with larger asset to invest in private equity
and in sociaUy responsible investments which require more extensive due diligence. in private equity can be carried out Investments as direct fund direct investments, company
investments, or fund-of-fund investments. Private
opportunities Netherlands,
investments
SociaUy responsible are Ukely to be Umited which

more
investment in The such

conven
wiU ceteris
tend
to make
than
international
fund-of-funds allocate their institutional equity assets in what to be the investors' they perceive fund-of-funds funds; therefore, top private equity remove to invest in a sociaUy the decision the institutional from investor. responsible manner are less likely As such, fund-of-funds investments to be sociaUy responsible to because they need the needs of many balance institutional investors a strict profit-maximizing and do so by foUowing
tional
investments, investors are more
responsible and North America Netherlands) and less developed countries.
paribus. Institutional likely to invest in sociaUy in Europe investment (outside The than in Asia
Socially Responsible objective.

ments in
Institutional
Investment 399 do exist from

and
We
our
control
empirical
for
tests.
fund-of-fund
invest
equity
equity
some
annual
venture
financial
capital/private
reports, but
associations
investment private SociaUy equity responsible decisions may further be influenced by the extent to are concerned about reporting which institutions
standards. We may expect increased transparency of
other
asset
information
aUocation,
such
investment
as
projected
or
and
future
current
objectives
investment decisions (adopted in 2005, invest and relevant for reports of private equity to and increased ments) vulnerabiUty public per via the IFRS to lead to a greater tendency ception investments towards socially responsible (consistent with HUlman and Kleim, 2004; Kolk, 2005; Kolk et al., and Tulder, 2001; Kolk et al., 1999; MaUin and pressure 2005; Shaffer, 1995). 2005; Mclnemey, We consider other control variables in the empir ical analyses. For instance, we control for the expected
return on socially responsible investments relative to
investment activity and projected socially responsible are not available in the public domain, and in our be could obtained opinion, only by survey. Our us to determine the survey instrument also enabled effect the IFRS had on sociaUy responsible perceived investment and enhance data activity. To verify obtained by the survey, foUow up interviews were
carried out and where possible, reference was made
to institutions' There responsible is no
web
sites and publications. clear industry definition programs.
investment
is a qual that of other investments. This expectation itative ranking of sociaUy responsible investment
returns relative to other returns (returns are based on
provided with general guidelines are not as yet bound by any leg and stakeholders, or and instead create their islation, rules regulations, we own Alternative internal policies. definitions provided
(e.g.,
of socially Institutions, while by both regulators
in our
survey
included
in
"negative
areas or
screens"
industries
the institutions' self-formed reported ranking of the on a return risk-adjusted simple 1 (low) to 5 (high) return for The the relative scale). higher expected
sociaUy cation responsible to sociaUy investments, responsible the greater As the a aUo qual investments.
excluding
investments
where volved
screens"
moral
and/or
standards
legal rights
are not
are violated,
met, or firms
or
in
environmental
in the production
(e.g., including
of weapons),
investments in
"positive
alternative
itative matter,
in our interviews most investment
investors felt that were other
fuel in
sociaUy responsible lower risk sustainable asset classes (see But we

The
opportunities than most investments 2005, for
industries, or educational class" of (an extension that within

we but have only
industries), positive
and "best screens for
investments leadership
examples exhaustive,
demonstrate specific
listed meant
evidence). rank risk and return,6

return ranking.
Guyatt, do not
consistent
sociaUy responsible areas or industries). The

here to are iUustrate of course the not "ingre
separately quantitatively and just use the risk-adjusted

data and summary statistics
survey
dients"
are described
discussion of
variate empirical
in the next section. tests are provided

research.
Thereafter
multi by a
and followed
of a sociaUy responsible investment program to guide the survey respondents. The institutions were to in left this study decide if their surveyed
future
investment policies and practices, sociaUy responsible if any, fell within the scope of an integrated sociaUy investment that is consistent program responsible with industry definitions instrument we (Social used Investment Forum, 2003).9 The data dataset from 100
Data Methods We Dutch Dutch and survey instrument in this article a new
to obtain and
the detailed international
introduce
this article
investors. The data assembled for institutional are derived primarily from a survey of institutional investors carried out between
required investment sociaUy responsible activity by Dutch is a 13-page questionnaire, institutions comprising 32 questions. Robustness is achieved chiefly by in a way that calls for numeric framing questions
responses, or a simple "yes" or "no" response. In
about
domestic
2005. This use of surveys February 2005 and May was necessary for the research questions considered in this article. Data on past and current institutional asset aUocation and investment levels in private
view
of the fact that the potential respondents, while are from different branches of financial institutions, a glossary of terms was provided in the finance,
400 Douglas survey

may across not
Gumming
and Sofia Johan & Verzekeringskamer (1) Pensioen (Pensions and insurance of The supervisory authority Netherlands, PVK); Bank (DNB); (2) De Nederlandsche Financiele Markten (3) Autoriteit (The Nether lands authority for the financial markets,
to ensure uniformity
necessarily An be overview used sectors.
in defining
in ofthe the
terms which
same manner col
information
lected primary While

towards
is summarized variables used
in Table
I, which
defines
the
in this study. it is easy to see why institutions

responsible investment,
are moving
we have to
sociaUy
AFM);
(4) The Dutch private equity and venture capi tal association and the European (NVP)
venture capital association; and
acknowledge investors do not investment
majority currently have sociaUy responsible sur programs. Of the 100 institutions
that
the
of
institutional
veyed, only 24 currently have a sociaUy responsible investment program for any asset class (of these, 14 include invest sociaUy responsible private equity ment programs). However, investment program adopting a sociaUy responsible over the period 2006?2010 (of these, 5 include so investment pro ciaUy responsible private equity on Reasons for the hesitance the part of grams). 19 institutions plan on
(5)Web Pursuant
persons,
sites of Dutch to
financial the
institutions. contact
to approx
identifying
survey instrument
appropriate
was sent
the
imately
1114 Dutch Pension funds,
institutions, Funds, industrial
comprising: including company funds, and
(a) 797
to enter the sociaUy responsible institutions invest arena may ment include the perception that with social responsibility, corporate optimal returns may be forfeited. the main holder at the end of the day, have Institutions, and maintaining of stake goal creating some stakeholders deem social
pension funds; occupational pension and (b) 205 Insurance companies; Universal (c) 112 Banks, including Securities Mortgage
providers.
pension
Banks, banks, service
credit banks,
institutions, and other
Savings financial
value. While
to be an important factor, others may responsibility see it as separate from their main aim of obtaining ability needs may easily achieved by some institutions and board (or rather the managers of directors of these institutions) than by others. resource The human in formulating factor and stakeholder implementing grams is also institutions investment pro responsible in this Also, many analyzed study. are able to hide behind the cloak of sociaUy to caUs by their stakeholders can responsibility. They easily justify about cloak policies
who
the best
financial
returns.
The be more
to balance
was chiefly solicited with Participation that the aggregated survey results would
inated to respondents. Only one
the promise be dissem

was
questionnaire
disseminated tion, CIO

details
in hard
and addressed or an equivalent

for available. an are
to each institu copy by mail to the institution's specificaUy manager of private

where such
equity
contact
investments
institution
One
limitation
confidentiaUty increase social their

the
to evade
is the possibility acknowledge from a detailed and

concern does
to obtaining data through a survey we of sample selection bias. While we believe that this is a possibility, the responses the responses,
exercise. First,
secrecy
same
by
seek
the need
increased
to protect
transpar
stakeholders
analysis of the data obtained from

not arise in this
received, that this

survey
ency. This reason why responses
of confidentiality in this study we have confidentiaUy
is also the main reUed on survey by respondents.
data were tutional funds,
provided
Potential The
sample selection bias
funds, and other financial respondent 25 insurance Limitations weU the finance
company comprising pension industrial pension funds, occupational pension insurance companies, banks hfe and non-life institutions in our service providers. Our sample of includes 56 pension funds, and 19 banks (see Table II). companies,
gathered investors
for a final
sample
of
100
insti
the population of insti respondents, potential were identi tutional investors in The Netherlands, various sources including, but not limited to the foUowing:
fied from
sample size from each sector of industry from which we derived data, as as the limited information about comparable
deviation observations
Variable Definition Median Minimum Mean Standard name Maximum Number of
TABLE I
Variable definitions and statistics summary
sociaUy responsible investment 5. sociaUy responsible investment 2005, plan program at as or on 2006-2010 in adopting one Social A investment responsible dummy 1 for 0 100 0.43 to 0.50 0.00 1.00 equal variable Social 0.00 0.39 0 100 1.00 private A responsible 0.19 dummy 1 equity for variable to equal j^ Social A investment responsible dummy 1 for 0 to 0.24 variable 100 equal 0.46 0.00 1.00 at as program ^ 2005 2005 institutions that program have currently a^ program institutions 2005-2010 that currently have a
planon adopting 2006-2010 in one investment 2005, Si program at as or sociaUy responsible private g equity
Fund-of-fund The investment 100 institutions'total ofthe 0 0.62 percentage 8.00 0.00 1.49 assets ^ | Netherlands 2006-2010 for expected investments expected for 2006-2010 > invested in the private equity assets Europe The Netherlands sociaUy responsible private equity a U.S. investment equity private 100 institutions'total 0 the of 0.41 0.00 percentage The 1.00 5.63 Asia investment private equity institutions'total the 0 0.05 100 of percentage 0.25 0.00 2.06invested in private in assets equity excludingThe 2006-2010 invested in fund-of-fund private equity _p_. ? Netherlands The private domestic 100 institutions'total the of 0 0.25 percentage 9.00 0.00 1.27 investment program at as 2005 ^ The 2006-2010 U.S. for expected Asia 2006-2010 for expected (outside The European Netherlands) 100 11.25 ofthe 0 institutions' 0.69 0.00 total 1.58 percentage 2006-2010 for expected ? 0 Social 0.00 0.35 1.00 100 private A responsible 0.14 dummy 1 equity for variable to equal investment equity invested in private the assets & equity
investment 2005 institutions S that program have currently a investment 2005-2010 institutions that program ? have currently a>
private investment equity assets invested private in equity in
deviation observations
Variable Median Definition Minimum Standard Mean Maximum name Number of
I ?
Continued
TABLE
descriptive table in 100 Dutch selected and variables This statistics presents dataset the institutional of data investors, based coUected 2005. in on Dummy
variables have 0 of minimum and values the take that 1, percentage maximum reflects observations of value mean 1.
insurance institutional investor company responsible investment program relative o^ International Financial Reporting new (millions 300 Assets The Euros) of 800 4,753.00 9,060.41 100 50,000 by total the ,? managed assets bank/financial institutional investor responsibUity sociaUy a ? 0 0.50 1 100 fund A 0.56 Pension dummy 1 for variable equal to a fund 3* pension investor (relative the of attractiveness returns to the risk)sociaUy of a to adopting program a'-> O such single not Officer (in 5L responsible investment program to a a Chief institutional investor miUions s>; adopting Standards (2005) (IFRS) for the adopting 5 high) and of standards the importance = of 0 100 1 Insurance dummy A for 0.44 variable 0.25 to equal company an to P Chief 0.00 0.27 0 1.00 100 0.08 Officer A Investment dummy 1 for variable equal to institutional Rank of (1 The 100 institutional attractiveness low 3 investor's 2.49 1.16 5.00 1.00 rank returns = Investment Bank/financial institution 100 A 0 dummy 1 0.39 variable for 0.19 to equal one a financial The International institutional (1 reporting investor's low 2 100 2.23 0.92 rank 1.00 5.00 =
2005 g^ Euros) of
decision invest to |institutions responsibUity that the aUocate high) 5 sustainable investment the to of and comparative =
Socially Responsible academic private work on institutional investor behavior in
Institutional
Investment 403
makes statistical reliable equity, however, of our sample relative to the population comparisons of other types of investors in private equity intrac
table.
and 19 which private equity investment programs), a on investment plan sociaUy responsible adopting over the period 2006-2010 program (of these, 5 include ment sociaUy programs). investment programs by type of sociaUy responsible investor institutional insurance fund, (pension and bank). The picture in Figure 2 does company, suggest there to invest is a material difference in in socially responsible invest of Dutch institutions. types comparison
These
responsible private equity invest in Figure 2 shows the investment
Second,
the survey.
a broad
For
array of respondents
the data show
replied
the median
to
example,
and the average respondent asset size of 800,000,000 4,665,000,000, being indicating respondents were of a variety of asset sizes. The possibUity of sample selection bias is further reduced by the presence of institutions that do not currently aUocate any of their
assets to private equity, and do not plan to aUocate
not
the
propensity ments across different Tables

correlation
III and IV provide

matrix, respectively.
tests and a
univariate
any up to 2010, current allocations tutions further

difference versus realise
institutions
that plan to increase in the near future and also insti
tests indicate
relations between
the variables without
that plan to reduce aUocations by 2010. We a statisticaUy did not find significant
between non-respondents. that we cannot average However, absolutely assets we rule of respondents unfortunately out the possi
for other factors. The simultaneously controUing statistics univariate and tests in Tables III summary and IV indicate sociaUy responsible private equity investment is observed more often for European investments ments (outside The Netherlands), in the United States from Dutch and invest institutional
bility
the
of a response
data.
bias due
to the unique
nature
of
investors. SociaUy responsible is observed investment more often when institutional rank the investors importance of the IFRS as being more important. investment is also observed more
Summary The
statistics that the 100 institutional

funds, insurance
data indicate
pension
investors
companies,
comprising
SociaUy responsible often among larger institutions, and among institu tions that centralize decision-making responsibility as well via a CIO. Note that sociaUy responsible is observed more often for private equity investment
fund-of-funds investments, but fund-of-fund
financial institutions invested on assets in 1.09% of their average private equity as at on and of their assets in 1.44% 2005, plan investing over the 2006-2010 private equity (Table II period on Panel B). Of these 100 institutions, 19 plan (over banks, and other the period 2006-2010) investing on average more than 2.5% of their assets in private equity, 10 plan on than 5% of their assets in private investing more and 6 than 7.5% of equity, plan on investing more their assets investment as at 2005. equity institutional funds in private equity. Total private equity accounted for approximately 10.5 biUion to private The proportional aUocations Netherlands aUocations States are consistent to private with investor equity and (see, e.g., Gompers
size (and hence the effect is shown to be different in the multivariate tests below). In the next section we provide multi variate of the determinants of sociaUy analyses responsible
asset classes)
investments
are also correlated with
investment
that
in private
equity
control
(and other
for a wide
simultaneously
range of variables. Tables III and IV provide useful preliminary in into the relations between the variables. These sights
summary statistics also enable assessment of potential
problems
regards to,
with
for
the multivariate
example, coUinearity
empirical
across
tests
explana
in
in The
in the United
Lerner, 1999) and Australia (see, e.g., Cumming et al., 2005). cur Figure 1 indicates 24 (of 100) institutions a have investment rently pro sociaUy responsible 14 include gram (of these, sociaUy responsible
tory variables or some other type of misspecification error. For be example, due to the high correlation tween the regional variables, such variables are not in included the multivariate regres simultaneously sions presented in multivariate models
below in the next
the are
next
section.
Alternative discussed
presented
and
section.
404 Douglas
Gumming TABLE
Summary
and Sofia Johan II

statistics
Panel
A.
Characteristics financial
of
the
institutional of in
investors
in assets of
the
dataset Number tions with of a institusociaUy investNumber sociaUy program adopt one of institutions with investment or planning to a
of Type institution
Number institutions the dataset
Average (miUions Euros)
responsible ment program
responsible in 2005
in 2006-2010
Pension
fund
56 25 19 Bank
2,942.86 5,008.00 9,752.63 4,753.00
23 14 13 7 10 5 29 43
Insurance company
AU
tional
types of instituinvestors
100
Panel
B.
Asset
aUocations
(percentage
of
assets
invested
in different
asset
classes)
Current Type of financial PubUcly

institution traded equities
(as at 2005) Bonds

currencies
Cash/ Index
funds
Private
equity investments
Other types
of alternative
Other
Pension fund Insurance company Bank AU types of institutional investors
33.38 23.80 27.32 29.83 Planned
50.89 55.72 48.43 51.63 (for the period 2006-2010) 51.73

59.02
4.32 9.56 5.11
1.60 0.48 0.58 5.78 1.13
1.17 0.73 1.36 1.09
7.43 6.23 16.05 8.77
1.21 3.48 1.16 1.77
Pension fund
Insurance company
31.51
24.71
2.86
2.52
1.97
2.16
1.67
0.62
0.73 9.53
2.60 8.37
All Types
tional This
of instituinvestors surrimarizes with Other a
24.95 Bank 28.56
47.59 52.77
2.68 2.74
1.05 1.85
1.86 1.44
21.34 0.53 1.16 11.48
table
the
data
by
the
characteristics investment
of program
the
institutional (Panel A),
investors and their funds
in
terms
of and estate.
assets future
and asset
number aUocations
of
institutions (Panel B).
types
sociaUy responsible of alternative
current and real
investments
primarily
encompass
hedge
Multivariate The multivariate
empirical
analyses
empirical tests in this section focus on logit regression analyses of the probability that an investor has a sociaUy responsible private institutional In Table V Panel A, we equity investment program. aU 100 institutional investors in the dataset, or not of whether regardless they invest in private In V Table Panel B we consider of any type. equity the subset of 35 institu of logit regression analyses consider
to be (2005) or expect in V Table (2006?2010) private equity. inModel Panel B also considers (11) bivariate logit two the that steps: (1) analyses involving probability tional investors that invested an institutional investor (2) the probability in sociaUy invested Model invests in private that an institutional equity, and investor is
are
private equity. The responsible is a useful robustness check (11) specification to ascertain whether in there are statistical differences that invest in private equity versus
the subset of firms
Socially Responsible
Institutional
Investment 405
SRI
(2005)
SRI (Planned New Programs 2006-2010) |
| ?SRI Excluding Private Equity a SRI for Private Equity
Figure 1. SociaUy responsible

institutional investors.
investment
(SRI) programs for private equity and other asset classes among
100 Dutch
any concern with potential relations studied, as indicated nitions across robustness variables, in Table the 17 I. The regression checks for potential
in the endogeneity by the variable defi provide specifications further
alternative models
and other are available upon request from the authors. ported in respect Table V provides interesting evidence of the three primary regards to Hypothesis indicates hypotheses 1, note outlined above. evidence
coUinearity across the re not explicitly specifications
In
Company
Ban3^;^3C,al
AllTypes of Institutional Investors
regression invest private equity sociaUy responsible common to ment when the decision is more more an in investment is such plan implement placed the hands of investment a CIO, team. When as opposed to a broader a CIO is in charge, a so equity investment program
Figure 2. SociaUy responsible investment (SRI) programs by type of institution (Current as at 2005 or Planned for 2006-2010).
ciaUy responsible is approximately As discussed
correct for that do not, and to econometricaUy in Heckman differences the those potential spirit of thereafter considers 1979). Table VI (1976, logit an the that insti of regression analyses probability those responsibility any asset class, not only private equity. Each ofthe to show (17 in total) are provided regression models to alternative in the sample, robustness subsets alternative definitions ofthe dependent variable, and alternative explanatory variables. The variables are as (see also Table data in terms of the questions defined investors in the survey was above I). The structure ofthe put to the institutional also designed to mitigate tutional investor invests in social for
hkely to be adopted. 4 and text), (note accompanying to investments may be perceived sociaUy responsible a some returns in expected involve sacrifice by an investment personnel within investors, and when above
private 40?50% more
compete with each other on the basis of organization to their returns performance, they are less hkely in sociaUy investments. invest By responsible a CIO takes contrast, when to be investments of type investment responsible to be adopted. likely In regards to Hypothesis cate
ments
for the responsibihty carried out, sociaUy are much more programs 2, the regressions private
among
indi invest
that sociaUy
are more
responsible
common
equity
institutional
ON
proportions test
Number Median Mean of Mean of Median for dummy variables)

SociaUy Difference No responsible private equity Difference private responsible sociaUy of equity of 2006-2010) (or difference planned for or of investment program (current at investment 2005 (current program at 2005 means test medians test Log (assets) 19 12336.84 6500.00 800.00 81 2974.07 3.10*** p < 0.001*** U.S. private equity 1.67 19 0.00 81 1.13 0.12 3.98*** p < 0.000*** | Difference proportions tests of medians and means, for having 2006-2010) StatisticaUy investment sociaUy *** responsible a private equity the **, 10%, at 1% significant *, 5%, respectively. program. and levels, difference This table (or presents of for population 2005 the medians institutional plan tests that do investors proportions, have and at not on as means, Bank 19 0.00 0.21 81 0.00 0.19 0.24 0.25
III ?
TABLE
European (outside The19 Chief Investment 2.39 0.30 81 1.88 0.00 3.55*** p < 0.000*** Officer 19 Pension 19 fund 0.47 81 1.00 0.58 1.00 -0.82 -0.84 81 0.02 0.32 0.00 0.00 2.62** 4.21***
?"*
lands
domestic International
19 0.00 81 0.34
Financial
0.2353Fund-of-funds private equity 81 0.88 1.35 19 0.45 0.00 2.35** < 0.000*** p | 81 3.00 19 0.00 Rank of attractiveness of 81 3.00 2.89 19 2.40 p 3.00 1.76* < on 0.52 0.171 81 1.92* 0.00 0.16 0.213 19 0.03 < investment Asia private O equity p 2.63
2.14 p
<0.77 0.00 0.23 81 0.32 0.72 19 Insurance 2.00 company 0.146
1.89*
<
0.677
??
observations observations
private investment equity Netherlands) private
Reporting js Standards
equity ?j investment investment gf g. investment
^ responsible investment returns to sociaUy ^ responsibility
(1) (2) (3) (4) (5) (6) (7) (9) (8) (10) (11) (12) (13) (14)
(15) -0.65 0.09 0.10 -0.07 0.11 -0.06 0.03 0.07 0.14 -0.16 -0.09 -0.14 Insurance company
(14) Pensionfund -0.04 -0.10 -0.08 -0.05 0.02 (13) Log (assets) 0.17 0.18 0.46 0.40 -0.02 0.26 0.36 0.12 0.31 0.37 -0.17 0.27 1.00 0.09 0.07 0.11 0.18 -0.26 0.18 -0.11 -0.33
matrix TABLE IV Correlation This table defined Table highlighted 5% in coefficients bold correlation variables the selected Correlations level presents I. and as significant at are across
Investment
Officer
responsibUity
0.42 0.06 0.05 0.22 0.26 (10) 0.29 International 0.22 0.07 -0.10 0.23 0.19 0.25 0.21 1.00 Reporting Financial -T Standards (9) Fund-of-funds private equity investment (outside ^ (6) The 0.03 0.44 0.52 0.19 0.20 1.00 European Netherlands) private (5) The Netherlands domestic private equity -0.07 0.03 -0.01 1.00 o |* (7) 0.28 0.00 0.50 0.61 U.S. 0.25 1.00 private investment equity (4) Social ^ responsible private 0.46 investment 0.63 0.83 equity 1.00 -0.01 -0.01 0.24 0.16 0.34 0.45 0.19 0.02 0.09 0.17 0.53
0.20
0.00
of
attractiveness
of
returns to sociaUy (8) Asia private equity investment
0.00 0.07
0.32
1.00
0.05
-0.14
0.32
0.41
1.00
(3) Social 0.48 0.56 1.00 responsible private o5 equity (1) Social responsible investment program 1.00 (2) Social investment responsible 2005 2005-2010 program ? program 2005 equity investment g ?1 2005-2010 investment program responsible investment *|
0.74
1.00
'g: investment
font. underline
ii te*
J?* Rank 0.020 1.875* 0.046 1.096 of attractiveness
Marginal /"-Statistic
Marginal /-Statistic Marginal /-Statistic Marginal /-Statistic /-Statistic Constant -0.966 -4.144*** -0.824 -2.821*** -0.741 -0.969 -4.083*** -0.794 -2.421** -0.661 -2.868*** (6) (5) (4) (3) Model (1) (2) Model -2.626*** Log (assets) Pension 0.085 fund 3.454*** 0.069 2.591*** 1.167 0.137 1.376 0.130
Marginal
0.080 0.049 0.072 0.136 1.692* 0.590
3.356*** 1.361
0.056 0.097
2.164** 0.101 1.086
0.044 1.348
2.464** ?
?V TABLE responsible
-0.069
effect effect effect effect effect private -1.685*
equity
investment -1.303 -0.095 Insurance company 0.110 0.798 0.201 1.041 0.173 0.992 0.793 0.107 0.154 0.887 0.818 0.088 s -0.025 -0.788
stainable/sociaUy
Chief European
Investment 0.386 (outside The
Officer -0.006
0.496 0.075 0.111 2.180**
2.044**
0.661 1.710* -0.172 0.040
0.621 1.818* 2.423**
2.190** 0.021
0.459
1.893* 0.475
0.512
1.414
0.096
0.03
31.801*** 57.978*** 31.434*** 51.570*** 52.608*** 30.549*** Chi-square statistic Loglikehood function -33.348 Adjusted R2 (pseudo 0.530 0.314 0.541 -22.837 -32.906 -19.633 -24.596 -22.318 0.323 0.596
0.393
A.
Full
sample The
dutch 100 of
institutions U.S. Asia private equity investment 0.145 0.998 0? 0.262 private 1.549 f 0.015 0.632 investment private equity equity domestic Netherlands) private investment equity Reporting 5 Standards equity /-\ ^ investment responsible returns to socially '-^ investment investment responsibility variable 100 100 Number of observations Number observations of 19 19 14
Netherlands
dependent Model diagnostics where 1=
1) Model R2 for
4^O
equityequity private investment in socially private responsible
private equity private equity private equity private equity SteP 1: Probability of Step 2: Probability of
Marginal ('-Statistic
Marginal (-Statistic
Marginal
Marginal (-Statistic (-Statistic Constant -0.716 -1.155 -2.477 -2.207** -1.349 -1.376 -2.103** -2.173 -3.490 -3.315*** -4.451 -2.786*** 2.018**
0.211
0.060
0.567
0.188
1.944*
ubsample
(9) subsample
effect effect effect effect
Model
(10)
subsample Chief Investment Officer 0.470 2.506** 0.404 2.125** 0.450 1.983** 0.700 1.448 S
Model
(11)
V TABLE
Continued Model
of institutions in of institutions in institutions of in of institutions in
investment Reporting
European -0.113 -0.088 (7)-(10)) (Models Subsample B. Panel bivatiate of investments private (Model and (11)) equity logit estimates selection with sample
(outside -1.4814 -0.711
The 0.204 -0.063 -0.188
1.764* -1.950* -0.392
Pension fund 0.151 0.528 0.324 0.962 0.037 0.110 0.279 0.920S Insurance 0.256 0.083 0.862 0.289 0.194 1.064 0.579 0.159 company
-0.271
0.002
-1.983**
0.016
? " 1.955* 1.837* Rank 0.237 0.245 1.621 0.207 1.851* of 0.375 attractiveness returns
Attractiveness returns private of to 0.013 3.506*** ? to socially responsible investment SJ. public equity """* versus -0 339 ? responsibility ? Standards
of observations Number where 19 19 35 19 35 100 Number 35 observations of
The
-0.025
domestic
investment Netherlands
?y Netherlands) investment investment U.S. 574 0 227** 2 investment J? ? Asia 0.680 ? 0.217
= variable 1 dependent diagnostics Model
s3 3
I'
Go
cts
so that the economic ? V TABLE Continued
significance
in the spirit of Heckman (1976, 1979) whereby in the first step the probability that the institution private invests in equity is estimated, while in the second step the probability that the institution makes firms of included The and Dutch excluded variables. 100 institutional with collinearity total population of comprises presented described investors Tables in The the II. and I not logit standard values are . the is shown statistical institutional in investors (l)-(5), of regardless sample the whether they investing Models plan private in In not policy equity. adoption of investment responsible socially or are on includes a means 2005, either adoption has place taken institution plans (6) at the 2006-2010. as adopt or within policy period to the Model In such sometime practice the to adoption 2005. refers only a at current as independent The responsible is investments Table in equity private I. socially estimated. variables defined potential problems independent the coefficients to robust as on variables are associated alongside logit estimates investment regression table the This probability of presents adoption responsible policy socially private in by Dutch equity institutional investor. 100 a Panel all considers A institutional Panel the 2006-2010 B will (7)?(10). of considers period be subsample (11) investors private invested in Models that the Model in equity B Panel bivariate involves 2-step a regression
significance.
*,
**,
***
Significant
difference
for
the
sample
of
all
other
Chi-square 9.331 21.223*** 19.618** 14.282* function Loglikehood -19.466 -13.520 -14.323 -16.990 -46.219
for (pseudo R2 Adjusted Model 0.193 1) 0.440 0.406 0.296
10%, 1% the 5%, levels, and at group respectively. 0c>
statistic
a*
4^ i??
Marginal Marginal ^-Statistic ^-Statistic Marginal (15) (16) (17) (14) (13) (12) Model -0.622 -1.451 effect effect effect effect effect Pension fund 0.227 1.481 0.269 1.631 1.195 0.210 0.233 1.516 0.203 1.143 0.189 1.313 ? 1 Insurance 1.341 1.726* 0.219 0.286 1.353 0.220 1.555 0.257 0.275 1.480 0.262 1.566 company 9.783 16.930** institutional Tables in I described investors The II. and logit values standard presented the they that coefficients; rather, not effects marginal significance are economic so within the period 2006-2010. In Model (17) adoption only refers to the current practice at as The 2005. independent variables are as defined in Table I. The coefficients on the 10.424*** 22.805*** This table presents logit regression estimates of the probability adoption of socially a responsible investment policy in any asset class by a Dutch institutional investor. In Models (12)?(16), of adoption responsible sociaUy policy investment includes a 2005, place taken has adoption either the policy institution plans to at such adopt as sometime means or a 19.545*** independent variables included robust potential problems are with associated collinearity population to of total excluded and The variables. firms 100 of comprises Dutch **, *** Significant difference sample for the -0.871 -2.361** Log (assets) 0.071 1.740* 0.066 1.531 0.038 0.776 0.073 1.793* 0.077 1.707* 0.048 1.409 |' -1.185 -2.755*** -1.029
effect TABLE VI Logit for analyses regression sustainable/sociaUy investment responsible
International Financial 0.033 0.504 0.014 0.201 0.021 0.294 0.048 0.688 0.018 0.247 0.113 1.915* ft statistic ^ Chief Officer Investment 2.327** 0.406 3.219*** 0.476 2.957*** 2.252** 2.415** 0.459 0.400 0.441 0.233 0.047 Fund-of-funds investment -0.073 -1.363 -0.173 -2.191** -0.229 -1.809* -0.102 -1.575 -0.157 -1.962** -0.088 -1.631 ^ Chi-square
is
shown (outside The European 1.975** 0.156 1.698* 0.071 0.144 1.598
alongside
the
statistical
significance.
*,
of
Loglikehood function -63.440 -59.866 -58.559 -63.120 -52.994 -56.929
Adjusted R2 for (pseudo 0.072 0.124 R2 0.143 0.167 0.076 0.120
Rank of attractiveness of returns 0.121 2.344** 0.027 0.648 ? & Number 100 of observations ? 43 Number 29 of observations socially ^ resopnsible to investment where The Netherlands -0.373 -0.021 U.S. 0.412 investment 1.717* ^ ?. Asia investment 0.229 0.867 Netherlands) investment Reporting Standards ^ domestic investment ?responsibility Model js diagnostics variable dependent 1) Model = 1
412 Douglas investors that invest internationaUy. investment is
Gumming
and Sofia Johan to invest in sociaUy responsible propensity ments. Model 17 indicates that an increase invest in the
In particular,
with
among a 10% greater international (outside The Netherlands) Europe
sociaUy responsible common 1?2% more
approximately institutional investors investment focus in (see Models A and B).13
6, 8, and 11 in Table V Panels economic of a 10% change is as low as significance 0.4% inModel 6 and as high as 2.7% inModel 11. are AU of these estimates statisticaUy significant at at least control
institutional
2, 5, The
of the IFRS by 1 (on a ranking of the importance scale of 1-5, where 5 is the most important) increases the likelihood that an institutional investor will a investment program by adopt sociaUy responsible 1.1%. The
standards investments again, these are as
data
more
therefore
closely to
suggest
connected private
that
reporting
to pubUc but very
opposed statistical
investments, are not
the
10% level variables

investor
of
for
significance, other factors
and that
robust influence
to
differences
pronounced Many of
in the data. the models other are control statisticaUy

are
investment
allocations.
variables significant
more
in
the and
Table
V Model
3 indicates
private equity investment for private equity investments Dutch institutional institutional regardless
equity.
that sociaUy responsible not is statistically different in the United when considered they
consider
regression worth mentioning.

equity investment
SociaUy
programs
responsible
private
common
investors, are investors or not

we when
States by aU 100 Dutch together in private

subsample
of whether institutional separately, the
invest
the
investors and those insti larger institutional in the data expecting risk greater economic returns from invest sociaUy responsible adjusted among tutions
ments. An increase in the rank ofthe relative returns
However,
of Dutch equity
investors data
that invest indicate that
in private
responsible private 5?6% more mately
among investors with a 10% greater international investment focus in the United States. By contrast, there is no evidence from that any specification sociaUy is statisticaUy private equity investment responsible related to cross-border in Asia investment decisions and/or for domestic
of the
equity common
investment
sociaUy is approxi institutional
to sociaUy responsible investments by 1 (on a scale of 1 is the lowest) increases the probability 1-5, where of a sociaUy investment 1?3% responsible by on the specification of the model (see depending no Models 5 and 7-10). We find statisticaUy signifi cant differences to carry out sociaUy in the propensity on the type of investments responsible depending financial fund, insurance company or bank/ in any specification in Tables V institution) that sociaUy responsible and VI. We do find evidence is approximately investment 1?3% less common investor (pension institutional investors in fund-of-funds that invest (seeModels of a 10% 8?9 this
In regards
description
in The Netherlands. investments to the control variables, recaU in the

data above that there was uni
among
variate
investment investors
correlation
is more that are
evidence
common more
that sociaUy responsible

among sensitive to institutional the IFRS.
greater proportion and 13?16, but the statistical significance is not robust in some of the other evidence is expected cations), which the decision-making from
to the fund-of-funds managers.
it appears However, affect the association IFRS to an institution sociaUy relation in Table
tions
that other factors between
independently the importance of the
as fund-of-funds the institutional
specifi remove investors
responsible these variables between context with
to invest in and the propensity investments: the private equity is not robust in a controls for other factors
multivariate
to of Table VI by comparison FinaUy, note that the factors that give Table V that the evidence for investment decisions rise to sociaUy responsible private
asset
V, Panels A and B. As such, the data offer that institu evidence suggestive but not conclusive
are sensitive to reporting standards and pubUc
equity
This
are quite is widely
similar viewed
to those
unexpected
for other
result, as
classes.
is a somewhat
perception
investment
of their sociaUy responsible

activities. It is nevertheless
private
equity
private classes.
noteworthy
that Model
(17)
in Table VI
investment, including public that the just private equity) related (at the 10% level of
(for aU stock markets IFRS
types of and not
is statisticaUy to the significance)
ofthe fact that the IFRS to related appears to be somewhat more closely but these investments than private other equity, in the differences were not statisticaUy pronounced not It is that factors data. captured possible regulatory the data could better explain differences across
equity We did make
as a distinctive
asset
note
by
Socially Responsible asset classes, but that issue is beyond the scope of this article and the new dataset used herein. This issue, along with other related issues is discussed further in
the next section.
Institutional such
sensitive
Investment 413 to expect

sociaUy
it is natural
to the
the market
asset
to be more
class. There
responsible
is ample why
such
scope for further research to consider when, and how private fund managers implement
programs.
Extensions
and
future
research
Conclusions This article introduced the first international dataset The for the first time the factors study investigated that influence investors to allocate cap institutional to ital sustainable sociaUy responsible private equity a new detaUed dataset investments. We introduced from a survey of Dutch institutional investors. Per
most importantly, there was very strong evi
on sociaUy responsible private equity investments. As the data obtained in this article are new and unique to obtain from institutional and extremely difficult investors,
number of
there
are of
course
We
limitations
in
gathered
the
observations.
nevertheless
sufficient factors
cations
detaUs in the data to control that could

to different
affect
asset
institutional
classes
for a variety of investor aUo

and to sociaUy
haps
dence
responsible
in the data
investments
introduced
are
herein
more
that
likely
sociaUy
among
investments. And aswe have discussed in responsible the article, we do not have any reason to believe there are biasses with in regard to sample selection
the data we were able to obtain.
institutions hands internal sonnel The
that centralize
of a CIO.
in the decision-making use of an Institutions that make per social
on Dutch institutional analysis focussed to sociaUy responsible investor aUocations private investment in The Netherlands, equity Europe (outside The Netherlands) (our data cannot distin in Europe due to guish between specific countries Our the confidential United between
evidence,
model among investment competitive are 40?50% less likely to consider in their decisions. responsibility data indicated investors institutional sociaUy strong evidence are more likely
that Dutch to invest in
nature
States and Asia specific

although not
of the data considered), the we cannot (again, distinguish provided

that
Europe States, and Asian investment
in responsible private equity in The and the United (outside Netherlands) in contrast to domestic Dutch investments investments. is more That socially responsible likely in Europe (outside The and the United States relative to within likely reflects investment has shown less widely sociaUy
among
investments
regions). We
conclusive,
suggestive
regulations
might in regards
have
different to social
effects for different
asset classes work
Netherlands) The Netherlands tunities.
responsibility. could consider expanding the data in terms of more different asset classes, as well as closely investigating for time periods different and different possibly countries
Further
Similarly, prior work investment is responsible

generaUy among Asian countries.
oppor that socially regarded responsible

institu
FinaUy,
investment
the
data
indicated
common
and Ralston, (in the spirit of Manignan a see et also for discussion of 2002; al., 2005, Mayer in institutional differences in the investor decisions versus the United United Kingdom States). Given propensity the increase in institutional investor to adopt socially responsible investment in asset other programs classes), private equity (and further research could also investigate the factors that give rise
selves
is more
larger
tional
investors
and those investors

returns albeit from less such robust,
expecting
for
greater
There the view
risk-adjusted was also some,
investments. support
that sociaUy responsible investment was more institutions that consider adherence among IFRS to be more OveraU, we across factors
investing in
likely to the
to private
such
equity
investment
fund managers
alternatives
to them
to their
important. did not find pronounced that lead to sociaUy

equity versus other
differences responsible
asset classes.
offer
private
institutional article
investors.
The is an
data
introduced
in this
Further or
suggest there institutional investors
demand increasing by to invest responsibly, and as
empirical institutional investors different shed more Ught on topic.
research on other
asset classes and/ countries would
414 Douglas Notes

For capital, recent see, e.g., hterature Black on and and
dimming
and Sofia Johan

parent and business for practices that are based on ethical and the value Whether mission reflects an values envi to
private GUson
equity (1998),
venture
Cumming
and Johan (2006), Gompers and Lerner (1999), Manigart et al. (2000), Mayer et al. (2005), Sapienza et al., (1996), Wright and Lockett (2003).
For bUity and recent hterature on corporate investment, social responsi see, e.g., sociaUy responsible
communities, employees, to deliver is designed sustainable as as at to weU shareholders." society large, as social ethical described investing, investing, or aware SRI based investing, investing, socially respect ronment. It investing concerns individuals, pension other approach into investment businesses, funds, that integrates decisions. universities, social Social and
environmental include
investors
hospitals, religious
foundations, and
Cowton (2002, 2004), DUlenburg et al. (2003), Sparkes and Cowton and Lewer (2004), Guay (2004), Waring et al. (2004), MiU (2006), and Lockett et al. (2005).
Most sis of notably, social capital see Maula and et al. (2003) for an acquisition knowledge context venture of corporate capital. In our data in the next section), (described the institutional returns asset (see, investors quite classes, e.g., Ali ranked highly consistent and Gold, sociaUy to be and with 2002; recent analy in the
corporations,
institutions,
Social investors organizations. consciously nonprofit to work to achieve in ways their money spe put designed a better, more cific financial just and goals whUe buUding investment sustainable Social economy. investing requires managers to overlay and a quaUtative onto analysis the of corporate poU
some responsible comparable empirical
of
cies,
practices, of profit
impacts
traditional
quantitative
analysis
potential."
investment with other
All types
gate response and
of pension
bias. As of
funds were
2004,
included
funds
to miti
in the
aU pension
evidence
DerwaU
Netherlands
company
had
pensions
assets at
having
442 biUion,
assets of over
with
141
Dutch
biUion.
Koedijk, 2005; DoweeU Plantinga and Scholtens,

note that recent provide 2005; view sample related people of evidence investments (Guyatt, optimistic a A
et al., 2000; Geczy et al., 2003; 2001; Schroder, 2003). As weU,

indicates sociaUy diversification BeUo, 2005, benefits investment be that more responsible benefits for a less
significant see also although of the diversification responsible could
1miUion have how Pension funds with assets below ever been excluded (954 in total) primarily because the possibiUty of sample selection bias is mitigated by the
breadth survey surveyed, of asset size of the Of assets questionnaires. 524 have pension the between funds 797 that were pension 10 million sent funds and
associated funds).
with 5
sociaUy argument go
responsible tralized
to work
decision-making Investors felt that
sociaUy cen with corporations and Ramus, 2003). (Montgomery more to rank, risk was difficult for
1 biUion. A majority
100 miUion. 34 Pension
of
those
Funds
have
control
assets
assets
less than
between
1 biUion
5 biUion Those scribed or with as
and
within
5 biUion, whUe
their control. within with an
12 have more
this but
than
de
since the benchmark

vary drasticaUy, a matter of tain one See, www.nvp.nl Pubhc investors and
against which
differ at different we were
risk is ranked could

points only in able time. to As ob
institutions institutions unrestricted benefit
category in
office to have the
the Netherlands, Netherlands been and included.
implementation, for
services
ranking e.g.,
risk-adjusted www.evca.com data.
returns for
expectations. data and
mutual While ure
European
their
companies wiU inclusion to 1916, they
not the not
increase are of we
for Dutch pressure being forced criteria In some may
result in institutional eventuaUy to what extent to declare social and are factors (e.g., in their investment some insti
provided institutions the asset target size
deemed study.
fig approximate as Dutch As that in the the case
for
the
purposes funds, insurance
this
of of
pension of the
beUeve companies any surveyed,
breadth sent sample assets
environmental decisions. tutional
that were possible 32 have
countries already have
investors
to make
the U.K.) a declaration.
survey selection
questionnaires bias. Of the
mitigates number
The Social Investment Forum (2003, page 9) defines SRI as foUows: "SociaUy responsible investing (SRI) is an
investment mental process consequences that of considers investments, of rigorous the social both and environ and positive
between 100 miUion and 1 biUion, 27 have more than 1 biUion and 29 have less than 100 miUion. 1 and EU bank branches have not been Non-EU
included.
13
within the context negative, It is a process of identifying certain that meet standards
financial
analysis.
The
size) the
10%
merely of the
change
to illustrate effect.
is
The
simply
the effect
hypothetical,
is modeled
and
in companies and investing Social Responsi of Corporate
selected (the in
economic
significance as Unear tests (such
bUity (CSR) and is increasingly practiced

As the Prince of Wales Social Business Leaders means "Corporate ResponsibUity
internationaUy.
Forum open explains: and trans
econometric
specification.
Diagnostic
as UkeUhood
a non-Unear
ratio tests) did not suggest a preference

specification, and the Unear specification
for
Socially Responsible
seemed fications See most are for the data. appropriate avaUable upon request. supra note 1. Alternative speci
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Socially Responsible Institutional Investment in Private Equity Author(s): Douglas Cumming and Sofia Johan Source: Journal of Business

Journal of Business Ethics (2007) 75:395-416 DOI 10.1007/sl0551-006-9261-8

Institutional SociaUy Responsible in Private Equity Investment

Gumming Sofia Johan

studies responsible influence

institutional asset sociaUy

responsible internal We orga study

structure, responsible into

equity: internationaHzation. from Dutch

investments private investment of

responsible different types companies, socially more an

institutional and pension investment when plan the

insurance indicate is 40-50% ment chief

responsible common investment

two propose institutional responsible We

investment, private equity

and programs), a sociaUy responsible adopting over the period 2006?2010

new data indicate most

two primary findings. First, the data indicate importantly,

hypotheses investors have various motivations in

strongly that indicates

investors (outside but not The

the Netherlands) in Asia. data further

in Europe internationaUy and in the United States, sociaUy responsible

tainable private We propose

applies not only in private equity

Reporting the statistical

that the factors decisions

that affect for private

responsible This section testable

preferences such preferences 2002).

(Small and Zivin,

directly taken lightly.

likely to seek to maximize

centralized member directors, untested

in view domesticaUy investors' stakeholders

policy. argues that an impediment

of justifications is removed problem decision-making

centralized. Moreover, there reputation

(for details, for Dutch responsible Netherlands

sociaUy outside The opportunities of its size and a dearth of suit

2005). Third, to find

primary asset aUocation of risk

demographics, and oversight

we Therefore, expect investments to be less sociaUy

institutions). Private equity mediaries

fund managers between institutional

and entre do not have

asymmetries investments preneurial existence ized

ceteris paribus. Second,

itmay not just be a question

risks, information associated with problems entre for the

about those opportunities

SociaUy responsible are Ukely to be Umited which

investment in The such

investments, investors are more

responsible and North America Netherlands) and less developed countries.

Socially Responsible objective.

Investment 399 do exist from

to institutions' There responsible is no

sites and publications. clear industry definition programs.

of socially Institutions, while by both regulators

in our interviews most investment

investors felt that were other