A Theory of Socially Responsible Investment

By Martin Oehmke, Marcus M. Opp. Social Science Research Network, 2020

179 citations recorded by the source corpus.

We characterize the conditions under which a socially responsible (SR) fund induces firms to reduce externalities, even when profit-seeking capital is in perfectly elastic supply. Such impact requires that the SR fund's mandate permits the fund to trade off financial performance against reductions in social costs—relative to the counterfactual in which the fund does not invest in a given firm. Based on such an impact mandate, we derive the social profitability index (SPI), an investment criterion that characterizes the optimal ranking of impact investments when SR capital is scarce. If firms face binding financial constraints, the optimal way to achieve impact is by enabling a scale increase for clean production. In this case, SR and profit-seeking capital are complementary: Surplus is higher when both investor types are present.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/542f33aa251b16bf0a88fdc838674111e74bc8ec

Citations in the corpus

• Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds (2018, unknown): “The model reproduces the central asset pricing effect in Henkel, Kraus, and Zechner (2001), Fama and French (2007), Pedersen, Fitzgibbons, and Pomorski (2019), Oehmke and Opp (2020), Pastor, Stambaugh, and Taylor (2020), among others.”