Socially Responsible Divestment

The end of ESG

“…Exit involves divesting from an ESG laggard, driving down its stock price. Ex post, this increases its cost of capital and hinders its expansion; ex ante, the company might boost its ESG performance to avoid being sold (Edmans et al., 2022). However, this channel works for all measures of performance, not just ESG ones.…”

“…Regulators, the media, and investors are cracking down on ESG funds for not being ESG enough—for holding stocks in brown industries, and for sometimes voting against ESG proposals. But blanket divestment is often not the most effective way to improve corporate ESG behavior (Edmans et al., 2022) and many ESG proposals do not create long‐term value (Gantchev & Giannetti, 2021). Even setting aside these concerns, funds should absolutely be held to account for doing what they say.…”

Presidential Address: Sustainable Finance and ESG Issues—ValueversusValues

“…The idea is that while divestment campaigns may affect stock return performance in the short run, managerial compensation structures do not depend on short-run performance, rather they are designed to reward managers over the long term, and hence managerial incentives are not likely to be affected by divestment campaigns. Edmans, Levit, and Schneemeier (2022) also consider managerial incentives and show theoretically that although excluding firms can minimize negative externalities for a portfolio, there exist no incentives for firm management to pursue corrective changes because the firm will be excluded regardless. Their model indicates that portfolio tilting would be a better approach because it would allow investors to engage the firm's management in taking corrective actions.…”

“…See, for example,Baron (2007Baron ( , 2008,Fama and French (2007),Benabou and Tirole (2010),Heinkel, Kraus, and Zechner (2001),Albuquerque, Koskinen, and Zhang (2019),Chowdhry, Davies, and Waters (2019),Pastor, Stambaugh, and Taylor (2021),Pedersen, Fitzgibbons, and Pomorski (2021),Baker, Hollifield, and Osambela (2022),Goldstein et al (2022),Berk and van Binsbergen (2022),Edmans, Levit, and Schneemeier (2022),Oehmke andOpp (2022), andZerbib (2022).10 Pedersen, Fitzgibbons, and Pomorski (2021) is one example of a theory with both value and values ESG investors.11 For additional work on ESG investor motivations, seeBonelli, Briere, and Derrien (2022),Bonnefon et al (2022), Brodback, Guenster, and Mezger (2019), and Heeb et al (2023.…”

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“…In contrast, the positive portfolio tilt approach does give the investor these opportunities. In a recent working paper, Edmans, Levit, and Schneemeier (2022) point out that, although using the exclusion approach minimizes the externalities faced by a portfolio that screens out problematic firms, such an approach also provides no incentives for the problematic firm's management to pursue corrective changes because the firm will be excluded regardless. On the other hand, employing a portfolio tilting strategy provides the firm's management with incentives to pursue those changes so they can achieve capital to expand their business.…”