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ESG Investing: How to Optimize Impact?

Author

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  • Landier, Augustin

    (HEC Paris)

  • Lovo, Stefano

    (HEC Paris)

Abstract

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.

Suggested Citation

  • Landier, Augustin & Lovo, Stefano, 2020. "ESG Investing: How to Optimize Impact?," HEC Research Papers Series 1363, HEC Paris.
    • Handle: RePEc:ebg:heccah:1363
    DOI: 10.2139/ssrn.3508938
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    Citations

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    Cited by:

    1. Bianchi, Milo & Liu, Zhengkai & Wang, Gang, 2022. "Are We Becoming Greener? Life-time Experiences and Responsible Investment," TSE Working Papers 22-1382, Toulouse School of Economics (TSE).
    2. Inderst, Roman & Opp, Markus, 2022. "Socially optimal sustainability standards with non-consequentialist ("warm glow") investors," SAFE Working Paper Series 346, Leibniz Institute for Financial Research SAFE.
    3. Opp, Marcus & Oehmke, Martin, 2020. "A theory of socially responsible investment," CEPR Discussion Papers 14351, C.E.P.R. Discussion Papers.
    4. Christian Gollier & Sébastien Pouget, 2022. "Investment Strategies and Corporate Behaviour with Socially Responsible Investors: A Theory of Active Ownership," Economica, London School of Economics and Political Science, vol. 89(356), pages 997-1023, October.
    5. Krahnen Jan & Rocholl Jörg & Thum Marcel, 2023. "A Primer on Green Finance: From Wishful Thinking to Marginal Impact," Review of Economics, De Gruyter, vol. 74(1), pages 1-19, April.
    6. Rüdiger Fahlenbrach & Eric Jondeau, 2023. "Greening the Swiss National Bank’s Portfolio," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(4), pages 792-833.
    7. Popescu, Ioana-Stefania & Gibon, Thomas & Hitaj, Claudia & Rubin, Mirco & Benetto, Enrico, 2023. "Are SRI funds financing carbon emissions? An input-output life cycle assessment of investment funds," Ecological Economics, Elsevier, vol. 212(C).
    8. Pierre Lavigne & Peter Tankov, 2023. "Decarbonization of financial markets: a mean-field game approach," Papers 2301.09163, arXiv.org.
    9. Hendrik Hakenes & Eva Schliephake, 2021. "Responsible Investment and Responsible Consumption," ECONtribute Discussion Papers Series 134, University of Bonn and University of Cologne, Germany.
    10. Costantiello, Alberto & Leogrande, Angelo, 2023. "The Determinants of CO2 Emissions in the Context of ESG Models at World Level," MPRA Paper 117110, University Library of Munich, Germany.
    11. Lei Li & Kun Qin & Desheng Wu, 2023. "A Hybrid Approach for the Assessment of Risk Spillover to ESG Investment in Financial Networks," Sustainability, MDPI, vol. 15(7), pages 1-16, April.
    12. Pedersen, Lasse Heje & Fitzgibbons, Shaun & Pomorski, Lukasz, 2021. "Responsible investing: The ESG-efficient frontier," Journal of Financial Economics, Elsevier, vol. 142(2), pages 572-597.

    More about this item

    Keywords

    Sustainable Finance; Socially Responsible Investing; Impact Investing; Green Finance; ESG;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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