Socially Responsible Divestment

We study the optimal investment strategy for a responsible investor concerned with financial returns and societal impact. Unconditional exclusion of "brown" stocks starves them of capital, reducing externalities. A conditional strategy -- buying a brown firm if it has taken a corrective action -- allows it to expand, but incentivizes reform and yields the investor profits. A lower concern for profits makes an investor less likely to condition; thus, a greater concern for externalities may reduce effectiveness in curbing externalities. We derive novel implications for how responsible investing strategies are affected by ES disclosure, ES ratings, arbitrageurs, and fiduciary duty.