A Theory of Socially Responsible Investment - Martin Oehmke
Speaker : Martin Oehmke (LSE)
We characterize necessary conditions for socially responsible investors to impact firm behavior in a setting in which rm production generates social costs and is subject to nancing 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 rm. Impact is optimally achieved by enabling a scale increase for clean production. Socially responsible and nancial 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 rm's social status quo but also the counterfactual social costs produced in the absence of socially responsible investors.