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Title: A theory of socially responsible investment

Author(s): Martin Oehmke and Marcus M. Opp

Publication Date: January 2020

Keyword(s): capital allocation, ESG, social ratings, Socially responsible investing, SPI and sustainable investment

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Oehmke, M and Opp, M. 2020. 'A theory of socially responsible investment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14351