A theory of socially responsible investment

Oehmke, Martin ORCID: 0000-0001-9902-0711 and Opp, Marcus (2024) A theory of socially responsible investment. Review of Economic Studies. ISSN 0034-6527 (In Press)

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Abstract

We characterize the conditions under which a socially responsible (SR) fund induces rms to reduce externalities, even when prot-seeking capital is in perfectly elastic supply. Such impact requires that the SR fund's mandate permits the fund to trade o nancial performance against reductions in social costs relative to the counterfactual in which the fund does not invest in a given rm. Based on such an impact mandate, we derive the social probability index (SPI), an investment criterion that characterizes the optimal ranking of impact investments when SR capital is scarce. If rms face binding nancial constraints, the optimal way to achieve impact is by enabling a scale increase for clean production. In this case, SR and prot-seeking capital are complementary: Surplus is higher when both investor types are present.

Item Type:	Article
Official URL:	https://academic.oup.com/restud
Additional Information:	© 2024 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions D - Microeconomics > D6 - Welfare Economics > D62 - Externalities Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Costs; Distributional Effects; Employment Effects
Date Deposited:	18 Mar 2024 14:24
Last Modified:	25 Apr 2024 08:45
URI:	http://eprints.lse.ac.uk/id/eprint/122413

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