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.
Source: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4093518