Given the growth in Responsible Investing (RI) as an important investment strategy, particularly over the past several decades, we examine why growth in this strategy has differed across countries. In our working paper, Cultural Values and Cross-Country Differences in Responsible Investing Sectors, we employ a sample of 44,296 open-end mutual funds from 25 countries that have RI or conventional objectives and find wide variations in the importance of the RI sector across the world. For example, during our sample period, the market share of RI equity funds in Norway constituted about 48% of the total equity mutual fund assets under management, while in Australia the comparable figure is 11% and, in the U.S., a little less than 5%. Thus, the question arises as to the reasons for these wide disparities.

We propose that the size of a country’s RI mutual fund sector depends on the country’s cultural norms under the assumption that many investors’ primary motivations are driven by societal values. Moreover, if some people are willing to give up returns for these goals, as has been posited in theoretical work and confirmed through survey, experimental and empirical evidence, then we expect the size and growth of the RI market to also be affected by a population’s wealth and other economic conditions. Finally, given previous evidence that individuals’ investment choices have been affected by both their economic and environmental experiences, we hypothesize that common personal experiences with the environment may affect aggregate investment choices in a country.

Based on these three major themes of commonality within a country (societal values, economic conditions, and environmental experiences), we develop and test hypotheses regarding the distribution of the RI industry around the world. We employ the Morningstar designation for the funds (although we note that the testing of these hypotheses becomes complicated because of the lack of a singular definition of responsible investing since the term encompasses many different investment styles and objectives). Using quarterly data on total net assets and returns from Morningstar Asset Flows (2,006 RI funds and 42,290 conventional funds across 25 countries), we document that the substantial growth in the number of RI funds and their assets under management is predominantly concentrated in developed countries. For example, in many emerging market countries, RI funds represent less than 1% of equity fund assets, while in many developed countries, equity RI funds can present a significant proportion as detailed in the above examples.

In most countries during our sample period, RI fund assets grew at a faster rate than conventional funds. Consistent with prior literature on the size of the conventional mutual fund industry, our findings suggest that capital market and economic development are also important factors for the adoption of responsible investing through mutual funds. Relatedly, we find that the RI sector is larger in countries with higher levels of income or wealth, measured by GDP per capita, which suggests that RI investments resemble luxury goods consistent with evidence from previous studies. That is, with greater resources individuals could be more inclined to allocate capital to RI funds from a “doing well by doing good” motive or relatedly, they may be more “willing to pay” (WTP), by giving up returns. (It should be noted that the question of whether using RI strategies results in higher or lower returns has been examined by researchers for decades, yet the question still remains unresolved. We do not try to resolve that question.)

In our primary analyses, we examine whether the differences in the development of countries’ RI sectors can be attributed to variations in cultural norms. Our evidence suggests this to be the case as we find that the size of the RI sector has a strong association with a country’s cultural norms, even after controlling for other potential explanatory variables, such as country wealth, fund performance and equity market risk. Given that measuring a society’s cultural norms is not straightforward and analyses have taken different approaches, we use multiple measures. Our primary measure is based on the Hofstede dataset, which provides dimensions of national culture. Using these cultural variables in our tests, we find that the RI sector is larger in countries with higher scores on long-term (versus short-term) orientation, lower scores on motivation toward achievement and success (decisiveness versus consensus-oriented) and higher scores on individualism (less collectivism). The result for long-term orientation appears quite consistent with RI characteristics as it indicates a population that is generally more future-oriented as opposed to maintaining traditions and norms. Similarly, the lower scores on the decisiveness attribute can be considered consistent with RI tenets as the other end of the motivation toward achievement and success spectrum represents a societal preference for cooperation, caring for others and quality of life, which are attributes that would be consistent with the ideas of responsible investing. The less obvious of the cultural attributes that have a significant relationship to the size of a country’s RI sector is the result on individualism, which is characterized by an attitude of independence and freedom from control. That is, in individualist societies people are more likely to consider themselves and their direct family while in collectivist societies people belong to ‘in groups’ that take care of them in exchange for loyalty. If one considers, however, that Western societies are characterized by a high level of individualism, the results are perhaps less surprising.

We use alternate cultural norm databases for robustness. First, we take a more holistic approach to capture cultural norms in a society by constructing one measure to capture multiple social norms. To do this, we employ data from the World Values Survey and include the responses to those questions that are most closely related to the Hofstede dimensions as well as responses to other questions that we expect to relate to responsible investing. Consistent with the results using the individual Hofstede measures, we find that the size of the RI mutual fund industry is significantly increasing in the constructed cultural measure based on the World Values Survey. In an additional robustness test, we employ cultural measures from the Global Leadership and Organizational Behavior Effectiveness (GLOBE) research project and again find the size of the RI mutual fund industry in a country to be related to the country’s cultural measures. Our findings of similar results with alternative measures alleviate general concerns about the potential fragility of cultural measures. Overall, our results support the hypothesis that a society’s cultural norms are important determinants of responsible investing. In addition, we find some evidence that personal environmental experience, as captured by abnormal temperatures, is related to the size of the RI sector.

Our paper contributes on several dimensions. We contribute to the extensive responsible investing literature by providing insights into the growth of the RI mutual fund industry across the world and the association of the country’s cultural dimensions with the size of its responsible investing sector (relative to the country’s GDP and conventional mutual fund industry). By focusing on mutual funds, which include retail investors as well as institutional investors, and developing the novel thesis that the degree of responsible investing in a country should be related to the country’s social norms and cultural attributes, we provide insights into how these norms can be reflected in investment approaches. Our hypothesis that cultural values are an important explanatory factor in a society’s choice of investment strategy is also consistent with previous arguments and evidence that culture affects individuals’ preferences and beliefs, and these preferences, in turn, affect economic outcomes.

Our work is consistent with, and builds on, earlier work that has provided evidence that investors are willing to forgo financial returns in order to invest based on social signaling and in accordance with their social preferences, e.g., a willingness to pay. It also builds on work that finds that investors’ beliefs and firms’ socially and religiously expressive characteristics help explain individuals’ responsible investing decisions. In particular, we contribute to this literature by analyzing determinants of the RI industry around the world.

Finally, our research contributes to the discussion on how to measure the extent to which investors in a given country are altruistic in the sense that they care about the utility of others.  By examining the size of the responsible investing mutual fund industry relative to the size of the conventional fund industry (or alternatively, relative to the country’s GDP), we provide evidence that could be interpreted as the extent to which a society is altruistic.

This study’s implications for the mutual fund industry are tangible and important. We note that we have purposefully ended our sample period before some aspects of responsible investing became political issues, thus, allowing us to make more straightforward inferences. First, we show that the popularity of RI funds in general depends on the wealth of potential investors. Second, we provide evidence that a country’s cultural norms play an important role in investors’ choices of RI versus conventional funds and we identify those norms that are associated with making these responsible investment decisions.