A theory of socially responsible investment

Marcus Opp and Martin Oehmke

No 14351, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 welfare 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.

Keywords: Socially responsible investing; ESG; Spi; Capital allocation; Sustainable investment; Social ratings (search for similar items in EconPapers)
JEL-codes: G23 G31 (search for similar items in EconPapers)
Date: 2020-01
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Citations: View citations in EconPapers (34)

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Working Paper: A theory of socially responsible investment (2021)
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