Socially Responsible Finance: How to Optimize Impact?

Stefano Lovo

May 12, 2023, 14:00–15:30


Room Auditorium 4

Finance Seminar


Can a self-proclaimed socially responsible fund (SRF) improve social welfare despite its primary goal of asset accumulation? We consider a general equilibrium model with emissionnegative externalities, financial intermediation, and investors who care about both pecuniary and non-pecuniary performance. We show that by investing in clean sectors and requiring SR recipients to deliver Scope 3 performance, the SRF can attract both value-aligned and impact-driven investors, maximizing its size. The SRF portfolio’s low footprint attracts valuealigned investors, while capping the emissions of recipients’ suppliers and industrial customers reduces emissions in polluting sectors not financed by SR capital, improving social welfare and attracting impact-driven investors’ capital. However, this strategy may not necessarily maximize impact. Our model suggests that a large enough SRF could achieve first best social welfare by starving capital the polluting sector and hence reducing its size, but this would substantially decrease the SRF’s financial performance and prevent the fund from maximizing asset accumulation.


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

JEL codes

  • 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