Working Paper: CEPR ID: DP14351
Authors: Marcus Opp; Martin Oehmke
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.
Keywords: socially responsible investing; ESG; SPI; capital allocation; sustainable investment; social ratings
JEL Codes: G31; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| socially responsible investors (O35) | clean production technologies (Q55) |
| relaxing financing constraints (G32) | production scale of clean technology (Q55) |
| socially responsible investors (O35) | higher welfare (I31) |
| socially responsible capital is scarce (O16) | allocation according to social profitability index (SPI) (H43) |
| optimal allocation of socially responsible capital (G11) | overall welfare (I31) |
| increased socially responsible investment (O35) | greater clean production (O44) |
| increased socially responsible investment (O35) | greater welfare outcomes (I31) |