A Theory of Socially Responsible Investment

49 Pages Posted: 21 Oct 2019 Last revised: 4 Nov 2020

See all articles by Martin Oehmke

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 4, 2020

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

JEL Classification: G31, G23

Suggested Citation

Oehmke, Martin and Opp, Marcus M., A Theory of Socially Responsible Investment (November 4, 2020). Swedish House of Finance Research Paper No. 20-2, Available at SSRN: https://ssrn.com/abstract=3467644 or http://dx.doi.org/10.2139/ssrn.3467644

Martin Oehmke

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Marcus M. Opp (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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