A Theory of Socially Responsible Investment

46 Pages Posted: 21 Oct 2019 Last revised: 20 Mar 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: March 18, 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 welfare 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 (March 18, 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
327
Abstract Views
1,284
rank
100,916
PlumX Metrics