A theory of socially responsible investment

A theory of socially responsible investment


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 surplus 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.

Item Type:Monograph (Discussion Paper)
Official URL:https://www.fmg.ac.uk/
Additional Information:© 2021 The Authors
Subjects:H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification:G – Financial Economics > G3 – Corporate Finance and Governance > G31 – Capital Budgeting; Fixed Investment and Inventory Studies
G – Financial Economics > G2 – Financial Institutions and Services > G23 – Pension Funds; Other Private Financial Institutions
Date Deposited:23 May 2023 23:04
Last Modified:23 May 2023 23:04

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