Monday, 6 June 2022

Why boycott a company? There are better strategies

Versione stampabile

Many people care about social responsibility today. But what does it mean, concretely, to be a socially responsible consumer and investor and to care about sustainability? Boycotting the products or services of a company that is not environmentally or socially responsible is the best way to be heard?

A study that has been recently published in the Journal of Political Economy, one of the most prestigious journals in economics, tries to answer these questions. The study was conducted by Eleonora Broccardo, associate professor of the Department of Economics and Management of the University of Trento, with Oliver Hart, Nobel Prize in Economic Sciences in 2016 and professor at Harvard – currently in Trento for the Festival of Festival of Economics - and Luigi Zingales, professor at the University of Chicago. The authors will present their work at the Festival of Economics on Sunday, 5 June, at 12.30, at Palazzo della Provincia, Sala Depero.

The topic attracts a lot of attention these days as more and more people care about corporate social responsibility. In 2020, 38% of US citizens systematically boycotted at least one company. And, in 2019, about 20 billion USD were directed to funds that divest from “non sustainable” companies: that is 10 times the level of the previous decade (source: CBInsights, 2020).

In the recently published study, the authors consider that a significant part of the population is “socially responsible” and believes that their choices as consumers and investors have a remarkable impact on others and, in general, on the environment, health, and sustainability. The three economists focused in particular on environmental pollution and tried to understand how boycott and divestment actions affect companies. The results are, to a certain extent, surprising.

“Actually, boycott by consumers and investors is not very effective”, explained Eleonora Broccardo. “That is because boycott and divestment affect the price of products or shares. Price reductions trigger a mechanism that stimulates the demand from consumers and investors who are less affected by the company’s behaviour. Therefore, in practical terms, these less conscious investors offsets the action of socially responsible consumers and investors”.

An example can make things clearer: “When 10% of consumers or investors of a dirty company decide to boycott, less than 10% of the companies in that market will turn “clean”. Besides, divestment and boycott decisions will push the companies of a market to become clean only if all the consumers and investors are significantly socially responsible. If that is not the case, there will always be some dirty company in the market”.

Does that mean that things cannot change? “No, not always. A better result can be achieved when shareholders express their choices through voting. In particular, the study observed the fundamental role that many small investors can play in influencing the environmental and socially responsible policies of a company. Their contribution really makes a difference. Well diversified shareholders, those with less shares invested in the company, are better placed to convince a polluting company to invest in an expensive technology that will make it cleaner. These shareholders, with their small shares, bear only a small part of the costs but, with their votes, can generate a public good”. 

Take for example the reduction of pollution, a goal that requires a significant investment: “This, the fact that there are investments to be made, may stop those who have capital invested in the company. A wider group of small shareholders that diversify their portfolios, on the other hand, can side more openly for the company’s socially responsible choices. When it comes to social matters, small diversified shareholders are more motivated”.

Of course, they may not be sufficiently informed and be able to vote in all the companies in which they invest. But the solution is easy: the investors that are more sensitive to environmental sustainability will invest their money in specialized green investment funds that are committed to promoting clean policies.

This suggests that communication and information policies that aim to raise awareness among many small investors on environmental and social responsibility issues are an efficient strategy to consolidate and extend the investors’ support, share their views with the company they invest in, and be able to make a difference.

About the article
The results of the research study were published in the Journal of Political Economy in an article entitled “Exit vs. voice”, by Eleonora Broccardo (University of Trento), Oliver Hart (Harvard University), Luigi Zingales (University of Chicago).

The paper is available at https://www.journals.uchicago.edu/doi/abs/10.1086/720516