We present a theory of sustainable investment in which active engagement and low-cost capital provided by socially responsible intermediaries are keys to green transition. A financing pecking order emerges: green entrepreneurs initially borrow from responsible investors before issuing sustainability-linked debt to purely profit-motivated investors. When responsible investors prioritize societal well-being, competition for limited social capital intensifies, eroding its funding advantage and crowding out green investments. Our model offers new perspectives on how financial constraints related to sustainable investments influence the return on social capital, the importance of its supply in reducing carbon emissions, and the need for welfare-improving regulatory measures to ease market competition.
