Week 10

Question 1

Classic debate pertaining to socially responsible investments

Answer 1

• Socially responsible investors should divest from polluting companies - these companies will then become green

Question 2

What prevents socially responsible investors from forcing reform of companies

Answer 2

• Other investors may fill in the gap
• Only works if financial capital is limited
• Heinkel, Kraus and Zechner(2001) show that divestment can raise the premium on dirty stocks
• After divestment responsible investors, the risk of those stocks is borne by fewer investors, raising their cost of capital
• Firms may reform as a consequence

Question 3

How large can the risk aversion effect be?

Answer 3

As long as there is significant financial capital, not very large

Question 4

How can financial constraints incentivize the move to clean production

Answer 4

• Companies can monetize socially responsible investors’ concern - this can induce them to become socially responsible