Socially Responsible Divestment
Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022
European Corporate Governance Institute – Finance Working Paper No. 823/2022
69 Pages Posted: 30 Apr 2022 Last revised: 10 Nov 2024
There are 2 versions of this paper
Socially Responsible Divestment
Socially Responsible Divestment
Date Written: July 12, 2023
Abstract
We study the optimal investment strategy for a responsible investor concerned with financial returns and societal impact. Unconditional exclusion of "brown" stocks starves them of capital, reducing externalities. A conditional strategy -- buying a brown firm if it has taken a corrective action -- allows it to expand, but incentivizes reform and yields the investor profits. A lower concern for profits makes an investor less likely to condition; thus, a greater concern for externalities may reduce effectiveness in curbing externalities. We derive novel implications for how responsible investing strategies are affected by ES disclosure, ES ratings, arbitrageurs, and fiduciary duty.
Keywords: Socially responsible investing, sustainable investing, externalities, exclusion, divestment, tilting, exit, governance.
JEL Classification: D62, G11, G34
Suggested Citation: Suggested Citation