Socially Responsible Divestment

We study divestment strategies followed by a responsible investor concerned with financial returns and social impact, but unable to commit to future trades. Exclusion starves brown firms of capital, reducing externalities, but provides no incentives for corrective actions. Conditional investment rewards reform, but helps the firm expand and increase externalities. Reform arises only for intermediate social concerns. Stronger concerns can backfire: the investor excludes even after positive signals of reform, making conditional investment non-credible. Greater disclosure of environmental and social performance can also backfire, because stock prices then more fully reflect reform costs, thereby weakening managers' incentives to undertake reform.