ESG Investing: How to Optimize Impact?

Augustin Landier () and Stefano Lovo ()
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Augustin Landier: HEC Paris
Stefano Lovo: HEC Paris

No 1363, HEC Research Papers Series from HEC Paris

Abstract: Can a self-proclaimed Socially Responsible Fund (SRF) whose objective is to maximize assets under management improve social welfare? We study this question in a general equilibrium two-sector model incorporating financial intermediation, negative externalities due to firms’ emissions, and investors' social preferences, which are of two kinds: (a) private benefits from investing in low-emission footprint equities (``value alignment''), and (b) utility from causing improvement in social welfare (``impact''). We analyze the equilibrium size and strategies of the SRF. When investors with value-alignment preferences are in large proportion in the population we show that the SRF invests in the low-emission sector, while requiring invested companies to use low-emission suppliers. This ``Scope 3 strategy'' attracts both types of investors and indirectly induces lower emissions by acting on the supply-chain. In some other scenarios, the SRF adopts a dual-fund strategy that separates the two types of investors: One fund, focussed on the clean sector, caters to investors with value-alignment preferences, while another, which invests in the higher-emission sector, appeals to impact investors by imposing reduced direct emissions to invested companies.

Keywords: Sustainable Finance; Socially Responsible Investing; Impact Investing; Green Finance; ESG (search for similar items in EconPapers)
JEL-codes: G11 G23 M14 O44 Q51 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2020-01-30
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1363

DOI: 10.2139/ssrn.3508938

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