The Allocation of Socially Responsible Capital

Abstract

Portfolio allocation decisions increasingly incorporate social values. The most common of these strategies are misguided. We develop a tractable framework in which commercial and social investors compete, and identify alternative strategies for social investors that result in higher social welfare and higher financial returns. From the enterprise perspective, increasing profitability can have a greater social impact than directly increasing social value creation. 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.