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 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.

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)
Pages: 48 pages
Date: 2021-11-26
New Economics Papers: this item is included in nep-env and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/118891/ Open access version. (application/pdf)

Related works:
Working Paper: A theory of socially responsible investment (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118891

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