International Research Seminar in Finance: Ethics and Externalities

On 6 May Harshini Shanker from the London Business School gave a talk on a “Ethics and Externalities” in which she discussed how investors’ moral values shape their decisions about where to put their money, especially when it comes to companies that create environmental harm, like carbon emissions. She argued that not all investors think or act the same: some care most about the outcomes (like reducing total pollution), while others care more about doing the right thing, even if it doesn’t change much.

The paper shows that when investors act together and care about actual environmental results (utilitarians) and work cooperatively (Kantian), they can push companies to cut emissions dramatically. These investors see themselves as part of a community working toward a cleaner world, so they’re more willing to put pressure on companies to offset their pollution, even if it means accepting lower financial returns.

By contrast, investors who simply avoid “bad” companies out of principle (deontologists) have less impact because their moral stand doesn’t help change company behaviour. The research highlights that clear and reliable information about companies’ pollution is crucial: better data helps like–minded investors coordinate and push for real change.

The big takeaway is that if more investors make decisions with both environmental outcomes and cooperation in mind, financial markets can become a powerful force for cutting carbon emissions and other environmentally damaging activities. Policymakers and companies can  help by designing rules and disclosures to encourage this kind of ethical, climate–friendly investing and move us closer to a sustainable future.