Socially Responsible Finance: How to Optimize Impact?

Résumé

We consider a general equilibrium productive economy with negative externalities. Entrepreneurs maximize profits, and investors seek to maximize their pecuniary and nonpecuniary returns. We analyze how in equilibrium, the size and investment policy of a socially responsible fund (SRF) vary with investors’ preferences, production technologies and capital market frictions. If investors care about impact, the SRF should prioritize investments in companies with acute negative externalities and facing strong capital market friction. The SRF can amplify its impact by imposing restrictions on the suppliers used by the firms it finances. This lowers emissions even in industries that are not directly financed by the SRF. The nonpecuniary benefits of investors improve welfare when they take the form of sensitivity to impact but can deteriorate welfare when take the form of value alignment.

Mots-clés

Impact investing, ESG funds, emission externalities, carbon footprint;

Codes JEL

G11: Portfolio Choice • Investment Decisions
G23: Non-bank Financial Institutions • Financial Instruments • Institutional Investors
M14: Corporate Culture • Diversity • Social Responsibility
O44: Environment and Growth
Q51: Valuation of Environmental Effects