IDEAS home Printed from https://ideas.repec.org/p/ehl/lserod/122413.html
   My bibliography  Save this paper

A theory of socially responsible investment

Author

Listed:
  • Oehmke, Martin
  • Opp, Marcus

Abstract

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, 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.

Suggested Citation

  • Oehmke, Martin & Opp, Marcus, 2025. "A theory of socially responsible investment," LSE Research Online Documents on Economics 122413, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:122413
    as

    Download full text from publisher

    File URL: http://eprints.lse.ac.uk/122413/
    File Function: Open access version.
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    socially responsible investment; sustainable investing; ESG; Social Profitability Index (SPI); fiduciary duty;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:122413. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: LSERO Manager (email available below). General contact details of provider: https://edirc.repec.org/data/lsepsuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.