Investing for Impact in General Equilibrium

Abstract

Trillions of dollars are now invested with both implicit and explicit altruistic goals. To address the unique concerns arising from these goals, I develop a tractable general equilibrium model that combines investment, production and altruistic considerations. I use this model to examine the drivers of investor impact and the optimal portfolio allocation for altruistic investors. The complex nature of investor impact gives it a heavy-tailed cross-sectional distribution. Consequently, investors only substantially deviate from the market portfolio for the most impactful opportunities. Thus, investing for impact does not entail pure `impact investing'. Investors with high urgency make substantial allocations to philanthropy, while more patient investors tilt towards assets with strategic value, such as financial returns that are correlated with positive developments in their impact opportunity set. The associated mission-correlated premia may be the main non-standard consideration for many altruistic investors.

Keywords: Altruistic investing, impact, responsible investment, impact investing, ESG, sustainable investing, socially responsible investing, impact, climate, investor impact, enterprise impact, asset pricing, heterogeneity, altruism, sustainability, ambiguity, model uncertainty. moral uncertainty

JEL Classification: G00,G10,G11,G12,Q01,Q51,Q54,Q56