Do the Principles for Responsible Investing Activate Fund Flows to Socially Responsible Investing? This Looks like a Job for System Generalised Method of Moments

Investors have a great appetite for their money to positively impact society and the environment. Sustainable and Responsible Investing (SRI) is a means to achieve this impact. However, there is significant cynicism of investment managers. Investors question whether investment managers are genuine about sustainability and whether their investment processes are effective. Into this maelstrom of uncertainty enters the United Nation’s Principles for Responsible Investing (PRI). As an intergovernmental organisation, they champion global sustainability concerns. Their goal is to improve investment practices by signaling to investors which investment managers have quality SRI processes. If the PRI signaling is effective it will attract more flows to the funds managed by PRI signatories. This would motivate investment managers to sign the PRI and maintain their inclusion as signatories. In turn, PRI could influence and improve the SRI processes of these investment managers. This paper applies a longitudinal analysis of the flows to funds managed by PRI signatories. The results raise doubts that PRI is effective at attracting fund flows to their signatories. Fortunately, signaling theory provides insights as to why this might be occurring as well as pathways to improve PRI’s signaling power.