LBS professor calls for decarbonisation by tilting

Investors should encourage firms operating in ‘brown’ industries to decarbonise by tilting rather than via blanket divestment, according to London Business School Professor of Finance Alex Edmans.

Professor Edmans comments came during a panel on the opening day of Economist Impact’s second annual ‘Sustainability Week’. He spoke alongside fellow panellists John Browne (BeyondNetZero), Elizabeth Lewis (Blackstone) and Jean-Francis Dusch (Edmond de Rothschild).

Professor Edmans says: “The way to encourage the economy to decarbonise is to give incentives for ‘brown’ industries to reform. This involves being willing to hold best-in-class companies within those industries, rather than outright exclusion.”

Drawing on his research with co-authors Doron Levit and Jan Schneemeier, Professor Edmans highlights that, while blanket divestment from, for example, a fossil fuel company, would reduce the stock price and impede the firm’s ability to raise capital, it also provides no incentive to reform as it will be divested anyway.

Instead, Professor Edmans suggests that rather than divesting from a brown sector in its entirety, a more effective response might be to ‘tilt’ by retaining investment in “a best in class firm”.

“Why? This now gives an incentive for an energy company to be best in class, to have a transition plan that they’re putting into practice. And so this incentive - that you will be held by investors if you are a reforming company - provides the impetus for change,” he says.

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