Socially Responsible Divestment

69 Pages Posted: 30 Apr 2022 Last revised: 10 Nov 2024

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Doron Levit

University of Washington - Michael G. Foster School of Business; European Corporate Governance Institute (ECGI); Center for Economic and Policy Research

Jan Schneemeier

Michigan State University - Eli Broad College of Business

Multiple version iconThere are 2 versions of this paper

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

Edmans, Alex and Levit, Doron and Schneemeier, Jan, Socially Responsible Divestment (July 12, 2023). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022, European Corporate Governance Institute – Finance Working Paper No. 823/2022, Available at SSRN: https://ssrn.com/abstract=4093518 or http://dx.doi.org/10.2139/ssrn.4093518

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Doron Levit

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Center for Economic and Policy Research ( email )

Jan Schneemeier

Michigan State University - Eli Broad College of Business ( email )

632 Bogue St
East Lansing, MI 48824
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
4,577
Abstract Views
14,820
Rank
4,476
PlumX Metrics