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Socially Responsible Divestment

Author

Listed:
  • Edmans, Alex
  • Levit, Doron
  • Schneemeier, Jan

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.

Suggested Citation

  • Edmans, Alex & Levit, Doron & Schneemeier, Jan, 2022. "Socially Responsible Divestment," CEPR Discussion Papers 17262, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:17262
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    More about this item

    Keywords

    Externalities; Governance; Sustainable investing; Socially responsible investing; Exclusion; Exit; Divestment; Tilting;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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