Yan, Almandoz & Ferraro (2021). The Impact of Logic (In)Compatibility: Green Investing, State Policy, and Corporate Environmental Performance

Shipeng Yan – Faculty of Business and Economics, The University of Hong Kong
Juan (John) Almandoz – IESE Business School
Fabrizio Ferraro – IESE Business School

Theresa Harrer – Hanken School of Economics
Johnny O’Rourke – Alliance Manchester Business School

Article link: https://journals.sagepub.com/doi/10.1177/00018392211005756

Recently, we have observed a few critical perspectives on the concept of institutional logics. A dominant concern suggests the concept is misleading because it to some extent implies that everything is an institutional logic. Our first question therefore is: How does your paper address this recent critique in the organization and management literature around institutional logics?

Almandoz: While we do not address this question directly in the paper, we are familiar with the emerging criticism within the literature in institutional logics. Part of the criticism is that some people view the concept of institutional logics as seemingly endogenous. If everything is covered in an institutional logic (values, assumptions, practices, meanings…), what is then left to explain? My response is that an institutional logic can be a very malleable concept and can encompass a wide variety of constructs. In our paper we applied it to the green logic and argue why we think that the green logic can be viewed as an institutional logic. So, anyone who uses institutional logics as a framework must explain very well the rationale for the use of this literature and must explain what characteristics would be expected in their empirical setting. The framework of institutional logics is very powerful in part because it is flexible. I personally think of it not so much as a theory but as a meta theory that sets the context for theory building. In the original forms of institutional logics, we talk about family, religion, community, market, state, etc. Most people can see intuitively how those are very different settings and how the logics within them are very different from one another. However, one must be careful in using this framework, because not everything is an institutional logic. So, yes, maybe it is over-used in some cases, and that is another aspect of the criticisms to the literature. In the end, however, it is up to the authors to explain what is it that they use in this concept, and what they are trying to explain with it. Concerns about endogeneity are not unique to this literature and they have to be addressed appropriately.

Yan: From my personal point of view, I think it’s more of a methodological issue in the sense that it’s not about the theory per se. It’s actually about how you do empirical research using a logics perspective. If you look at some of the logics papers that are published in the top tier journals in the field of management, many of them have been quite careful in validating logics before moving on to arguing about the relationships between the logics. But then if you observe very unique logics in a context, which you believe will help you develop new theories, then I think it is key to really show the readers that these distinctive logics exist. And you need to show evidence. This means that in many of the logics papers it mandates an element of mixed research designs, as you need a certain level of qualitative data to substantiate the logics. Even if it isn’t a mixed method paper you need such an empirical underpinning to make it work. So, I would address the critique less from a theory perspective, but more from a research design point of view.

Ferraro: I would like to add that, over time, we did refine our understanding of what the logics and the practices were. I think in the final version of the paper this distinction is clear and we have two tables that outline a) what the logics are, and b) what the practices are. Our contribution to this debate in the literature may be that this distinction, if outlined clearly, allows us to discuss the idea of compatibility and incompatibility, which we observe at the level of practices rather than at the level of logics. In the past, a logic often was either operationalized at a level where it was not a logic anymore. Or it became such a straitjacket that it would make it difficult to do empirical research, because you had to have the state, the family, the community, and the market.

Elaborating on the developmental aspect in your paper, how did your research question evolve over time?

Yan: In general, our research question, or at least the direction of it, remained really stable. That is a bit different compared to most academic projects. In most projects, the questions and the directions get changed quite a bit. In our case only the specific emphasis has been refined over time. We began with the direction to understand whether the responsible finance sector would make an impact and we already used an institutional lens in the first draft of the paper. The reason for the refinement of the emphasis of the question was in many ways affected by the learnings from other research projects. In my case, for instance, the earlier (2019) ASQ publication helped me to cultivate the research question for this paper and to put into context the state and the different state regulations. I was also influenced by my work on Islamic Finance, which is published in Organization Science. This work triggered me to think about the interplay between the state, the market and societal value. In the Organization Science paper, it was about the interplay between market and religion, but in this ASQ paper it specifically was about the environmental and state logic.

Almandoz: The research question also changed from our interaction with the reviewers. One of the things that we were initially criticized for is that the paper was engaging in advocacy. We adapted the paper based on that, so it became more neutral. Another reason why the research question developed was the interaction between us authors. In the beginning, for me the big Aha was to realize that the stronger the environmental regulation, the less impactful was green investing in promoting environmental practices. This made us think that there could be a trade-off between the coercive versus the voluntary influences of the state on environmental practices. But I think over time, we realized that we did not have enough evidence to say that a strong regulatory regime could ever have negative consequences in terms of environmental practices. Over time, thus, our tone of the argument changed towards legitimacy driving the impact. We think that in countries where the state has the legitimate role to promote environmental practices, it is it more difficult for another sector like finance to have a major impact.

Ferraro: I agree with Shipeng that the question did not change. And even some of the core hypotheses did not change dramatically. But I think our theorizing did. We were encouraged to clarify what the theorizing was at the level of logics and practices – which we did. For instance, the final figure is an attempt to make this conceptualization visual and more general, was developed in the process. In some ways, the first submission was a bit more empirical. We had to develop the mechanisms more.

You mentioned that you were initially criticized for being too normative or advocative. It would be quite interesting for us and hopefully other readers of this blog to understand how you addressed the reviewer comments. Can you elaborate on how you responded?

Almandoz: The way we began the paper was by saying how green investing was very much needed in society. We seemed to have taken a position in how we presented Al Gore and green investing. That is still in the paper but more nuanced. One of the reviewers basically came back at us and said “okay, well, I agree with the position that you’re taking, but maybe there’s not so much need to engage in advocacy in this paper. Rather, let the numbers and your theories speak for themselves.”Over time, the paper became more theoretical and less about the phenomenon. It also highlighted more the interaction effect between the state and private enterprise on environmental practices.

Yan: I think part of the reason was also because we were really trying to validate the environmental logic. It is not in the 2012 book [on institutional logics], which is why we needed to build up first. So we have been referring to a lot of history to substantiate it. And I think probably inadvertently, when we were trying to set up the hook for the paper, the very early version was a bit more empirical, because we focused on the phenomenon. It became an assumption that addressing our issue is very important. Maybe this part made some of the reviewers slightly uncomfortable. In hindsight both [phenomenon and empirics] really mattered.

One could argue that your data ends before the green investment momentum really picked up in a political discourse, even in the societal discourse. Your data period ends shortly before 2013 and, for instance, does not account for the publication of the Paris Climate Agreement in 2015. What does this mean for the findings of your paper?

Ferraro: It is clear that post 2015, and I would actually say even post 2019 up until now, we are really looking at a very different cultural environmental space. In some ways it would therefore be interesting to explore the same question post 2015. At the same time, in our paper we theorize cultural mechanisms: we are really aiming at capturing a normative effect. [Logic] compatibilities are legitimacy mechanisms, and I would argue that it is more appropriate to explore them when there is a legitimacy context in society, compared to periods where the legitimacy of green investing has already been established. What we were trying to capture was exactly this early moment where something new was happening, and then we could observe these logics interacting with each other. I would not say that the transition [to fully legitimate] is done. In fact, I think that there would still be conflict, because reorienting the means of the financial sector towards different ends is not going to be easy. There still is going to be a tension with financial performance and returns. What is different is that now it is more clearly established that this tension can be managed.

Yan: I think we capture a moment where change is slowly starting to unfold. In our discussion section we also had a part about that. The incompatibilities between green investing and environmental regulation, that kind of incompatibility has been declining over time. This shows that the legitimation process has been happening. And our data happens to capture that.

Almandoz: We are very conscious of the fact that we stop in 2013. Thinking about the impact of green investing on sustainable practices in society raised interesting questions about the role of strong environmental policies in acting as constraints or enablers of the influence of this type of investment. Our research indicates that the state may not be the only legitimate actor in this space since we observe that the presence of strong regulation has less of an effect over time on the environmental impact of green investing.

As a final reflective question, what do you consider are the wider implications of your findings and future opportunities for research?

Yan: I believe the finance and state approach address different environmental issues and it will require very fine-grained level data to explore these different approaches. They may differ in their nature, because for example, the state could be very powerful in addressing some of the fundamental ground level thinking, and the finance sector could be particularly useful in addressing certain types of environmental issues. Disentangling the different approaches definitely requires a lot of theorizing work, because the question is not which one is doing better. It is just that they are addressing different issues. It is apples and oranges. One approach is addressing apples, the other approach is addressing oranges. Another research opportunity is that we are arguing for a cultural normative influence from the field level and then all the way down to the corporate level. We tried our best to show it in the best design, the best method and with the best possible data. But I think it would still benefit from an inductive qualitative analysis, just to look at how that downward process unfolds.

Almandoz: One of the things that is interesting is the complementarity or tension between the influence of rational rules and regulations, on the one hand, and that of culture and norms, on the other. We argue that green investing has both direct ownership and indirect cultural-normative influences on companies in society, and we argue, given the small share of green investing, that the normative cultural effect is probably much greater. When you look at society at large, and not just at the behaviors of corporate entities as we do in the paper, the impact of norms and regulations from the state is likely to be much more important than the normative or cultural impact arising from green investing. The Paris Agreement is probably having both effects in societies. Following that agreement, some rules and regulations might emerge in states to address certain gaps. But the agreement is likely to have a cultural influence over all the countries as well. It is very interesting that you have all these mechanisms going on simultaneously. It is interesting to reflect on how institutions influence one another – compatibility or incompatibility of institutions – and how those influences might strengthen societies or weaken them. What happens when an institutional order, such as the state, is underdeveloped, or when it is too dominant? I think it is interesting to think about society as a whole and observe how institutional logics relate to one another.

Ferraro: I think there is a lot of empirical work to be done. In the last five years, we have seen an explosion of new data sets. And the quality of the existing data sets has improved a lot. In fact, we are seeing a lot of papers in finance also touching on similar topics. If we are talking about the space of understanding responsible investing, or the transition in the financial sector, there is definitely a lot of work being done across different fields. As organization theorists we can continue to contribute, but I guess we need to play with the best tools that are available. And sometimes our processes are a little bit slower than what they should be. One thing that is interesting might also be to leverage more micro experimental evidence.

Yan: Regarding the explosion of different ESG data. That reminds me of the fact that I am based in Hong Kong, and during my teaching, as well as doing research, I noticed that the persistent weakness of our research is that we still do not look closely enough into more emerging contexts. The emerging market contexts are oftentimes coupled with a lack of high-quality, fine-grained level data which would allow us to look at where environmental, social issues are more severe. I think it’s quite important if we want to be serious about developing useful, practical, and impactful theory, or if we want to address the environmental crisis or any other kind of social issues. Developing on the ground, high quality data will be crucial.

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