Social Fund investments lead to less charitable donations -TAU study

Investment firms have marketed ESG (Environment, Society and Government) social investments as a way for investors to achieve financial returns while also making a social impact.

 A person holds inflatable Earth as climate activists including Extinction Rebellion and Fridays for Future stage a protest demanding more action whilst G20 climate and environment ministers hold a meeting in Naples, Italy, July 22, 2021. (photo credit: GUGLIELMO MANGIAPANE / REUTERS)
A person holds inflatable Earth as climate activists including Extinction Rebellion and Fridays for Future stage a protest demanding more action whilst G20 climate and environment ministers hold a meeting in Naples, Italy, July 22, 2021.
(photo credit: GUGLIELMO MANGIAPANE / REUTERS)

A new Tel Aviv University study has found that the increase in investments into “social funds” – funds that invest in projects aimed at reducing poverty, unemployment and physical deterioration in underprivileged areas – are impacting the number of direct donations to charities.

TAU researchers studied the investment behavior of roughly 10,000 clients on an investment app, discovering that investors switching to recently-introduced social funds subsequently reduced their donations in charitable organizations – which consequently support causes similar to those in a social fund.

The study was published in the peer-reviewed academic journal Management Science.

Investment firms have marketed ESG (Environment, Society and Government) social investments as a way for investors to achieve financial returns while also making a social impact. For example, such funds eschew investments in certain industries, such as oil or defense, and direct them into more sustainable industries, like renewable energy.

“On the one hand, investment firms could use social funds as a marketing ploy to attract investors," according to study co-author Prof. Shai Danziger of TAU's Coller School of Management. 

"For example, say you’re told the ESG fund invests only in companies with a low carbon footprint – that doesn’t mean that you’re investing in companies in the field of renewable energy," he said. "It can mean that you’re investing in technology giants like Apple – that is, companies that are not necessarily causing damage.”

In 2018, global social investment assets exceeded $30 trillion, an increase of 34% since 2016. During that same period, total donations to nonprofits in the US – society’s traditional avenue for advancing social goals – dropped 1.1%.

 TRADERS AT work in the Saudi Investment Bank in Riyadh. (credit: REUTERS/FAHAD SHADEED) TRADERS AT work in the Saudi Investment Bank in Riyadh. (credit: REUTERS/FAHAD SHADEED)

Until now, the causal link between the popularity of social investments and the decline in charitable giving had not been examined, making this TAU study the first of its kind.

Despite the drop in donations, researchers also found that most of the investors in the social funds had not previously donated to charities – meaning that in a broader sense, social funds entice more people to fund social causes.

“Our findings show that after investing in a social fund, investors reduce their traditional contributions to environmental and social nonprofits,” explained Danzinger. “On the other hand, since 79% of investors in the ESG fund did not make any charitable contributions before investing, the overall effect must be assessed.

“Ultimately the question is whether ESG contributions to society outweigh the decrease in investor donations.”