Environmental Activism: Endogenous Risk and Asset Prices


We examine the relative effectiveness of three environmental activist strategies: Exit (divestment of shares), Boycott (of goods), and Voice (proxy-voting). We consider a four-period economy with two firms, green and brown, where the brown firm generates pollution (e.g. carbon emissions). A costly abatement technology is available, though without activism, the brown firm’s manager, who maximizes shareholder value, will not abate even though it is socially optimal to do so. Boycott is always at least as effective as Exit and Voice is most effective, requiring the fewest activists to implement provided the brown firm is small. We find that successful divestment can create a time series in which green shares outperform brown shares, but then crash, underperforming brown shares. Over the long run in this setting, if activism is successful, brown shares underperform green shares in the long run. If activism does not succeed, activists have paid a high price for green shares and bear the cost of activism going forward.