The Allocation of Socially Responsible Capital

Format:Print
| Language:English
| Pages:58

Abstract

Portfolio allocation decisions increasingly incorporate social values. We develop a tractable framework to study how competition between investors to own socially valuable assets affects social welfare. Relative to the most common social-investing strategies, we identify alternative strategies that result in higher impact and higher financial returns. From the firm perspective, increasing profitability can have a greater impact than directly increasing social value. Whether investors and firms exhibit positive or negative assortative matching depends on the nature of social preferences. We present empirical evidence that socially-guided mutual funds allocate their capital inefficiently from the perspective of generating impact and financial returns.

Keywords

Socially Responsible Investing; Assets; Resource Allocation; Social Issues; Decision Making; Strategy; Framework

Citation

Green, Daniel, and Benjamin N. Roth. "The Allocation of Socially Responsible Capital." Working Paper, July 2021. (Revise and Resubmit, Journal of Finance.)