Some mutual funds make a point of only investing in ethical companies (eg avoiding arms companies, polluters, human rights violators, etc).

Or other organisations pressure funds to stop investing in particular industries/companies. (example).

Some organisations involved in ethical investments are particular big. For example the New Zealand Super Fund is worth $20bn, and frequently recieves pressure to divest in certain firms.

The question is - does divesting from unethical firms have any impact on those companies?

No doubt that consumers boycotting what the company is producing would have an effect, as that directly effects their revenue.

Similarly refusing to loan money, or provide additional capital to ethically questionable companies would limit their ability to do business.

But as far as I can see not owning shares in particular companies simply reduces demand for, and thus value of those companies, improving the return on investment for people who are willing to own those shares.

Does boycotting ownership of ethically questionable companies/industries have any effect on those companies/industries?

  • $\begingroup$ Great question. I'm going to think about it some more. On one hand, the price of a stock depends on the firm's fundamentals and any consumer preferences will be built into those fundamentals. No arbitrage in the stock market will then mean that these small boycotts will be washed out. On the other hand, if I interpret this as a model of market restrictions, then it could perhaps indeed have an effect. I'm not sure, though. $\endgroup$
    – jmbejara
    Commented Mar 6, 2015 at 23:14

2 Answers 2


In a world where capital markets are infinitely deep there shouldn't be any price response to capital and so we wouldn't expect any consequences on firm behavior. There is some good empirical evidence for slow moving capital so that's probably not true. Ethical investing is likely to drive up capital costs at least some. In which case your question boils down to two questions, "can an non-ethical company become an ethical one" and one that may seem quite different, "what is the elasticity of demand for capital with respect to the price of capital?" Tobacco and munitions companies can shift into other business but they can't get ethical investment funds without abandoning that business. Other businesses like fair-trade coffee and certified conflict-free diamonds, may allow ethical investing in the current business with higher costs. The former group really only have one choice, to shrink in response to expensive capital. The latter group have a second option, to shift into ethical investing business models that may be more expensive but less expensive than the increase in the cost of capital.

Let's ignore that first channel for a minute. Let's just consider a world with some ethical industries and some non-ethical ones. One day some people wake up and become ethical investors and this causes a change in the demand for non-ethical securities. If firms have an inelastic demand for capital (lower right graph, moving from $S_2$ to $S_1$) then the quantity of capital demanded changes relatively little from the ethical preference shock and so the total capital invested in the non-ethical industry changes very little ($Q_2$ to $Q_1$). Instead returns go up a lot ($P_2$ to $P_1$) for those investors who remain invested in non-ethical industries.

On the other hand, if capital demand is quite inelastic (lower left graph, moving from $S_2$ curve to $S_1$)), the return on capital changes very little ($P_2$ to $P_1$) but the total capital invested in non-ethical industries falls a lot ($Q_2$ to $Q_1$). In that world the ethical industries crowd out the non-ethical ones because the profits aren't there to preserve their capital supply.

Now consider production shifting. If substitution into ethical practice is more expensive than paying a higher cost of capital, this won't be an important channel. Firms are better of taking their licks in the capital markets. However, if substitution is cheaper (like when capital demand is inelastic and and substitution easy) then behavioral adaption will become the dominant channel.

In practice, according to Does Ethical Investing Impose a Cost Upon the Firm? A Theoretical Perspective by James J. Angel and Pietra Rivoli (1997), the actual effects on capital costs and quantities are quite small, suggesting that neither industry shrinking nor industry transformation are important under prevailing circumstances. If more money shifts into ethical investing this could easily change.


The effect is more sustainable reporting, which leads to setting strategic targets for environmental and social improvement.

The ethical investment funds make their investment decisions based on results published on the sustainability or integrated reports, which creates pressure for companies to report on their sustainability efforts. The drawback of this reporting is that it is often forward looking and harder to audit than financial statements. However, reporting comes usually together with target setting that, in the long run, continually improves the environment. Take a look at the executive summary of an Australian government report regarding ethical and sustainable funds reporting and disclosures, and the idea of making it mandatory.

It is important to note, though, that these funds will still invest in polluting industries, such as oil, mining, etc. However, they will invest in the companies within these industries which minimize their social and environmental impact.


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