ESG Investing: How to Optimize Impact?

64 Pages Posted: 30 Jan 2020 Last revised: 3 Jul 2023

Date Written: 2020


Can a self-proclaimed Socially Responsible Fund (SRF) whose objective is to maximize assets under management improve social welfare? We study this question in a general equilibrium two-sector model incorporating financial intermediation, negative externalities due to firms’ emissions, and investors' social preferences, which are of two kinds: (a) private benefits from investing in low-emission footprint equities (``value alignment''), and (b) utility from causing improvement in social welfare (``impact''). We analyze the equilibrium size and strategies of the SRF. When investors with value-alignment preferences are in large proportion in the population we show that the SRF invests in the low-emission sector, while requiring invested companies to use low-emission suppliers. This ``Scope 3 strategy'' attracts both types of investors and indirectly induces lower emissions by acting on the supply-chain. In some other scenarios, the SRF adopts a dual-fund strategy that separates the two types of investors: One fund, focussed on the clean sector, caters to investors with value-alignment preferences, while another, which invests in the higher-emission sector, appeals to impact investors by imposing reduced direct emissions to invested companies.

Keywords: Sustainable Finance, Socially Responsible Investing, Impact Investing, Green Finance, ESG

JEL Classification: G11, G23,M14,O44,Q51

Suggested Citation

Landier, Augustin and Lovo, Stefano, ESG Investing: How to Optimize Impact? (2020). HEC Paris Research Paper No. FIN-2020-1363, Available at SSRN: or

Stefano Lovo

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics