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.
- A Theory of Socially Responsible Investment
- Martin Oehmke - London School of Economics and Political ScienceMarcus Opp - Stockholm School of Economics, Department of Finance
- Review of Economic Studies, Vol.92(2), pp.1193-1225
- Oxford University Press
- © The Author(s) 2024. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.
- Department of Finance
- English
- Journal article
