Do the Principles for Responsible Investing activate fund flows to socially responsible investing? This looks like a job for system generalized method of moments

Dan Daugaard

Research output: Chapter in Book/Report/Conference proceedingConference abstractpeer-review


Socially Responsible Investing is attracting considerable interest from industry and academia. However, the published academic literature has been severely limited in scope. Fund flows are one of the under researched dimensions of ESG investing (Daugaard, 2020). This gap in the literature holds significant potential to improve our understanding of what motivates investor choices (Bollen, 2007). In particular, we can analyse SRI fund flows to evaluate whether the PRI is successful at signalling which funds have quality SRI investment processes to investors. This is important as it will determine whether the PRI is able to deliver on its mandate: creating a sustainable global financial system. More broadly, this research represents a litmus test for whether intergovernmental organisations (e.g. the UN) have a useful role in contributing to a sustainable society. In addition to the practical concern over PRI’s influence, fund flow analysis also has an important technical role in empirical finance. Fund flow analysis is a “text-book” example of endogeneity. Fund flow models typically contain all three main types of endogeneity: dynamic endogeneity, simultaneity and unobserved heterogeneity. Therefore, solving the endogeneity issues in the context of fund flows can represent a template for applying endogeneity solutions to many other areas of empirical finance. This paper applies a system GMM approach to mitigate the inherent endogeneity in fund flow analysis. The SRI fund flow data is produced by combining data from the Centre for Research in Security Prices (CRSP) Mutual Fund Database with the PRI signatory list. The findings of this research indicate the PRI is not successful at attracting flows to the funds managed by PRI signatories. These findings cast doubt on the ability of PRI to positively impact future SRI processes. Potential strategies to respond to this issue can be sourced from the literature on intergovernmental organisations (IGO’s). Strategies to increase the impact of the PRI (and other IGO initiatives) include: establishing IGO autonomy (Manulak, 2017), employing new frameworks to improve how IGO’s signal quality SRI (Bergh et al., 2014), and improving the mechanisms for collaboration — ranging from information sharing to coordinated action and conflict resolution (Galaz et al., 2012). Signalling theory also provides a useful framework to find improvements. This theory identifies the key elements of effective signalling. These elements include the signal cost, the nature of the information problem, the signal confirmation process and the desired construct of optimal solutions. Bergh, D. D., Connelly, B. L., Ketchen Jr, D. J., & Shannon, L. M. (2014). Signalling theory and equilibrium in strategic management research: An assessment and a research agenda. Journal of Management Studies, 51(8), 1334-1360. Bollen, N. P. (2007). Mutual fund attributes and investor behavior. Journal of Financial and Quantitative Analysis, 42(3), 683-708. Daugaard, D. (2020, June). Emerging new themes in environmental, social and governance investing: a systematic literature review. Accounting & Finance, 60(2), 1501-1530. Galaz, V., Crona, B., Österblom, H., Olsson, P., & Folke, C. (2012). Polycentric systems and interacting planetary boundaries—Emerging governance of climate change–ocean acidification–marine biodiversity. Ecological Economics, 81, 21-32. Manulak, M. W. (2017). Leading by design: Informal influence and international secretariats. The Review of International Organizations, 12(4), 497-522. Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581-606.
Original languageEnglish
Title of host publicationGovernance, Corporate Culture and Financial Markets
Subtitle of host publication11th Financial Markets and Corporate Governance Conference
Place of PublicationOnline
PublisherLa Trobe University
Number of pages2
Publication statusPublished - 2021
Event11th Financial Markets and Corporate Governance Conference: Governance, Corporate Culture and Financial Markets - Virtual
Duration: 7 Apr 20219 Apr 2021


Conference11th Financial Markets and Corporate Governance Conference
Abbreviated titleFMCG 2021
Internet address


  • endogeneity
  • signalling theory
  • fund flows
  • socially responsible investing
  • system GMM


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