A theory of socially responsible investment

Martin Oehmke and Marcus Opp

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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

Keywords: socially responsible investment; sustainable investing; ESG; Social Profitability Index (SPI); fiduciary duty (search for similar items in EconPapers)
JEL-codes: D62 G23 G31 Q52 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2025-03-31
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Published in Review of Economic Studies, 31, March, 2025, 92(2), pp. 1193 - 1225. ISSN: 0034-6527

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:122413

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