Responsible Investment and Responsible Consumption
Eva Schliephake, Research Associate at Center for Sustainable Finance at Católica-Lisbon
Hendrik Hakenes, University of Bonn
Non-technical Summary:
By: Eva Schliephake
Should households focus on responsible investment (SRI) or responsible consumption (SRC) to mitigate externalities? Traditionally, SRI and SRC have been seen as separate tools. SRI reallocates capital away from polluting industries and incentivizes the green transition, while SRC focuses on avoiding products and services that have a negative impact on the environment. However, both actions target the same polluting firms, and they face a common challenge: market responses.
When households boycott a polluting product, prices drop, making the product more attractive to less responsible consumers. Similarly, divesting from "dirty" stocks may lower their price, making them more appealing to other investors. In both cases, the impact of the responsible action diminishes because other market participants offset them.
Moreover, capital and product markets do not work in isolation, and their price dynamics influence each other. A consumer boycott reduces the company’s expected revenue, making it less attractive to investors. As fewer investors provide capital at higher costs, less output is produced. With fewer products supplied, prices increase, counteracting the initial price drop caused by the boycott. Our research shows that these opposing effects create a unique opportunity: by reducing both investment and consumption, responsible households can impact externalities with minimal effects on prices and returns, mitigating offsetting behaviours by others.
Consider air travel as an example. When consumers cut back on buying plane tickets, airlines still have their fleet of planes. To fill seats, ticket prices drop, encouraging more people to book spontaneous weekend trips. Over time, airlines would adjust their fleets, but the reduction is faster and more significant if they also faced pressure from responsible investors. Divesting from polluting firms forces them to downscale production in proportion to the reduced demand from responsible consumers, leaving asset and product prices stable.
This insight is relevant for large consumers and major investors, but it is even more important for small consumers and retail investors. Retail investors tend to be more risk-averse than global institutional investors, implying that any socially responsible investment (SRI) effort they make is likely to be offset by market reactions. However, because their overall investment exposure is small, reducing it slightly comes at a minimal cost. By combining a modest reduction in investment with a significant decline in personal consumption, small-scale actions can have a much greater impact together than either would achieve on its own.
Conclusion
Households have influence as both consumers and investors. To maximize their impact, households should always adjust their investments in proportion to their consumption boycott even if their investment exposure is small. This combined approach not only counters market responses but also ensures that the sacrifice of responsible households translates into the highest achievable impact on reducing environmental externalities.
Hendrik Hakenes and Eva Schliephake (2025). Responsible investment and responsible consumption. Accepted for Publication at Management Science.
