A theory of socially responsible investment

Oehmke, Martin ORCID: 0000-0001-9902-0711 and Opp, Marcus (2021) A theory of socially responsible investment. Financial Markets Group Discussion Papers (845). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We characterize necessary conditions for socially responsible investors to impact firm behavior in a setting in which firm production generates social costs and is subject to financing constraints. Impact requires a broad mandate, in that socially responsible investors need to internalize social costs irrespective of whether they are investors in a given firm. Impact is optimally achieved by enabling a scale increase for clean production. Socially responsible and financial investors are complementary: jointly they can achieve higher surplus than either investor type alone. When socially responsible capital is scarce, it should be allocated based on a social profitability index (SPI). This micro-founded ESG metric captures not only a firm's social status quo but also the counterfactual social costs produced in the absence of socially responsible investors.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2021 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions 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
Date Deposited:	23 May 2023 23:04
Last Modified:	01 Oct 2024 04:04
URI:	http://eprints.lse.ac.uk/id/eprint/118891

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