Pension Funds and Socially-Responsible Investment in Corporate Debt Securities: An Empirical Investigation

This paper examines the extent of socially-responsible investment conducted by pension funds in corporate debt securities. Behavioural theories of the firms suggest a link between corporate social responsibility and business risk, particularly over the longer-term. Therefore, institutions such as pension funds with a longer-term investment horizon should be more likely to engage in socially-responsible investment compared to investment funds with a short-term horizon. Using data on the holdings by pension funds and investment funds of debt securities issued by North American and European companies, we investigate whether there are any differences in the treatment of corporate social performance by these different institutional groups in their holdings of corporate debt securities. Our results show no significant difference in the corporate social performance of the borrowers whose securities both pension funds and investment funds hold. In addition, our findings indicate that both investment groups reflect broader environmental, social and governance factors in their debt market investments with corporate social performance having a significant impact on credit spreads for securities. However, pension funds place greater weight on social and environmental factors compared to investment funds when pricing debt securities. Our analysis demonstrates that financial flows in debt markets are influenced by social and environmental factors and that pension funds are a key conduit. Consequently, capital allocation decisions by pension funds could play an important role in changing corporate behaviour to achieve more sustainable outcomes.