"Socially responsible finance: How to Optimize Impact?"
|Date||22 April 2021|
We consider a general equilibrium productive economy with negative externalities. Entrepreneurs maximize profits and investors seek to maximize their pecuniary and non-pecuniary returns. We show that a socially responsible fund is able to raise assets and improve social welfare iff: (i) it commits to finance only firms that cap their emissions and (ii) capital allocation is subject to frictions. If investors care about impact, the fund should prioritize investments in companies with acute negative externalities and facing strong capital search friction. The fund can amplify its impact by imposing restrictions on the suppliers that the firms it finances can use. Investing in sectors that pollute little under laissez-faire has by itself no impact. Nonpecuniary benefits improve welfare when they take the form of sensitivity to impact rather than value alignment.
*Co-authored with Augustin Landier (HEC Paris)
This seminar will be organised via Zoom. If you are interested in joining this seminar, please send an email to the secretariat of the Finance Group.