Socially Responsible Divestment

49 Pages Posted: 30 Apr 2022

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, Foster School of Business; European Corporate Governance Institute (ECGI)

Jan Schneemeier

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2022

Abstract

Blanket exclusion of "brown" stocks is seen as the best way to reduce their negative externalities, by starving them of capital and hindering their expansion. We show that a more effective strategy may be tilting -- holding a brown stock if it is best-in-class, i.e. has taken a corrective action. While such holdings allow the firm to expand, they also encourage the corrective action. We derive conditions under which tilting dominates exclusion for externality reduction. If the corrective action is unobservable to the market, the investor is unable to tilt even if she has perfect information -- doing so would lead her to hold a company that has taken the action but the market thinks it has not, leading to accusations of greenwashing. Even if managers can costlessly disclose a signal of their actions, they will only do so under certain circumstances, and even a manager intending to take the action will only disclose a noisy signal.

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 (April 26, 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 )

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European Corporate Governance Institute (ECGI) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
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Doron Levit

University of Washington, Foster School of Business ( email )

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Seattle, WA 98195
United States

HOME PAGE: http://https://sites.google.com/view/doronlevit

European Corporate Governance Institute (ECGI) ( email )

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

Jan Schneemeier

Indiana University - Kelley School of Business - Department of Finance ( email )

1275 E 10th St
Bloomington, IN 47405
United States

HOME PAGE: http://www.jan-schneemeier.com

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