A Theory of Socially Responsible Investment
38 Pages Posted: 21 Oct 2019 Last revised: 20 Nov 2019
Date Written: October 10, 2019
We characterize conditions under which socially responsible investors can impact firm behavior. Impact requires a sufficient relaxation of financing constraints for clean production, which can only occur if socially responsible investors internalize social costs irrespective of whether they are investors in a given firm. Socially responsible and financial investors are complementary: jointly they can achieve higher welfare than either investor type alone. Scarce socially responsible capital should be allocated based on a social profitability index (SPI) that captures not only on 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
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