Socially Responsible Finance: How to Optimize Impact

Abstract Can a socially responsible fund (SRF) improve social welfare while maximizing assets under management? We consider a two-sector model integrating financial intermediation, emissions’ negative externalities, and investors’ social preferences with regard to value alignment and impact. In scenarios with a high proportion of value-aligned investors, the SRF invests in clean sectors and compels recipients companies to use low-emission suppliers from the polluting sector, which appeals to both investor types. Alternatively, the SRF adopts a dual-fund approach, with one fund targeting clean sectors for value-aligned investors and another focusing on reducing direct emissions in polluting sectors to attract impact investors. (JEL:G11, G23, M14, O44, Q51)