State Pension Funds and Corporate Social Responsibility: Do Beneficiaries\u2019 Political Values Influence Funds\u2019 Investment Decisions?

Andreas G. F. Hoepner,Lisa Schopohl

doi:10.1007/s10551-018-4091-z

Abstract

This study explores the underlying drivers of US public pension funds’ tendency to tilt their portfolios towards companies with stronger corporate social responsibility (CSR). Studying the equity holdings of large, internally managed US state pension funds, we find evidence that the political leaning of their beneficiaries and political pressures by state politicians affect funds’ investment decisions. State pension funds from states with Democratic-leaning beneficiaries tilt their portfolios more strongly towards companies that perform well on CSR issues, and this tendency is intensified when the state government is dominated by Democratic state politicians. Moreover, we find that funds which tilt their portfolios towards companies with superior CSR scores generate a slightly higher return compared with their counterparts. Overall, our findings indicate that funds align their investment choices with the financial and non-financial interests of their beneficiaries when deciding whether to incorporate CSR into their equity allocations.

Highlights

With holdings of USD 1.1 trillion in corporate stocks and an average ownership share of 7–8% of the total US equity market over the last decades,1 US state pension funds are a major market force in the US and global financial markets (Tonello and Rabimov 2010)
These findings indicate that funds with Republican members tilt away from companies with strong corporate social responsibility (CSR) performance, irrespective of whether these funds might be subject to higher pressures by Democratic state politicians
This study explores the underlying drivers of US public pension funds’ tendency to tilt their portfolios towards companies with superior CSR performance

Summary

Introduction

With holdings of USD 1.1 trillion in corporate stocks and an average ownership share of 7–8% of the total US equity market over the last decades, US state pension funds are a major market force in the US and global financial markets (Tonello and Rabimov 2010). Their market power is highly concentrated in the largest state pension plans, providing these funds with enormous influence through their holdings of equity positions in large publicly traded companies.. We focus on a sub-group of these funds that due to their strong beneficiary focus and relative independence in decision-making should be most prone and able to incorporate ethics in general and CSR in particular into investment processes (Ryan and Schneider 2002; Cox and Wicks 2011): large, internally managed public pension funds.

Methods

Results

Conclusion