A theory of socially responsible investment

Martin Oehmke (LSE) talks to Tom Goslingabout his paper A Theory of Socially Responsible Investment, co-authored with Marcus Oppof the Stockholm School of Economics.

The paper develops a model of socially responsible investment anchored in the corporate finance decision faced by a firm.  With a choice between dirty and (more expensive) clean technology.

Martin explains how socially responsible investors can induce the firm to pivot to the cleaner choice. To have impact socially responsible investors have to care about reducing externalities (rather than just investing in clean firms) and have to be prepared to offer something profit seeking investors do not: in effect accepting a lower than market return. The requirement for responsible investors to trade-off returns for impact is a central finding of the model. But profit seeking investors still matter, and in combination profit seeking and responsible investors may cause greater scaling of green production than responsible investors by themselves. Impact funds need to be clear about the trade-off they are making between externality reduction and returns. 

Host: ⁠Tom Gosling ⁠⁠Contributor: Martin Oehmke

Read the paper: A Theory of Socially Responsible Investment

To learn more about the Initiative in Sustainable Finance (ISF), visit ⁠ISF's website⁠.