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  • Writer's pictureGustavo Bernal Torres

Socially Responsible Divestment

New research paper, from Alex Edmans, Doron Levit and Jan Schneemeier.

  • 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.

  • However, many asset owners, rating agencies and commentators mark asset managers down if they hold brown stocks. These accusations dissuade asset managers from doing their own research and finding out whether a company is taking corrective actions. If they learn that a company is transitioning, and so they buy stock but the improvement isn't yet captured in ESG ratings or other data, they're accused of greenwashing.



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