Sell ​​or invest?Questions about climate change

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Public calls from climate change activists are prompting institutions from universities to local governments to major investors to divest their holdings from fossil fuel companies. This is a well-intentioned and intuitively appealing strategy that shows that what is economically beneficial may not be what is best for society. However, new research in the field of sustainable finance suggests that divestment from fossil fuels is often a trivial act that borders on greenwashing and that it does not deliver real-world positive climate and social outcomes. This suggests that investors may be distracted from actions they could take to improve their performance. Research suggests a shift to engagement investing strategies instead of divestment. But what does that mean?

The interrelated concepts of ownership and engagement currently dominate investment strategies. It is clear that governments and banks providing financing for new fossil fuel projects is counterproductive to decarbonization efforts. However, most of the ownership in major oil and gas companies is in the form of publicly traded (purchasable on exchanges) bonds and stocks, owned by large investment management companies known as asset managers who make investments on behalf of asset owners. are doing. (often pension funds or endowments). These largest asset managers can use their influence to drive change in the companies they own, through shareholder votes, resolutions, and even letter writing and conversations. All of these methods fall under the term “engagement,” a concept first established in the 1970s.

When applied to environmental and social issues, such investors can become powerful advocates for good and benefit economically. Skeptics point out that investors may use these practices as an excuse to continue investing in high-emission companies, and that actual engagement strategies are as basic as one-time requests for information. . However, research is beginning to demonstrate the power and reach of focused, targeted and ambitious engagement campaigns, and success stories with real-world impact are becoming increasingly common. Perhaps the most famous example of this is a hedge fund called Engine No. 1. The fund was able to replace four board members of oil and gas giant Exxon with energy sector experts and sustainable investment experts. 0.02% of the company’s stock.

The alternative, divestment, is morally appealing. Because it is well understood that what causes a crisis cannot solve it. So rather than trying to foster potential relationships with fossil fuel companies, divestment advocates advocate rejecting a fossil fuel future altogether. Divestment’s legacy as a tool to promote social responsibility is strong and has helped end South Africa’s apartheid regime and corporate involvement in the tobacco industry. But exiting companies deemed unethical means selling, and selling requires a buyer, and that buyer may be an owner who is more disinterested in using their voice on behalf of the climate. There is a possibility.

In fact, “paper decarbonization” (simply selling a problem asset to another owner without making any real changes) has become a major issue, and these sellers have no stake in company policy or They have lost the right to vote. Importantly, the act of selling rarely affects the company itself. Even if you sell a very large stake in a stock or bond (to another investor) in the secondary market, the price of that stock or bond will change very little, and therefore the financing decision will have no impact on the company itself. Very little to give. It depends on small short-term fluctuations in stock prices. If an investor is able to drive down a company’s stock price, the laws of arbitrage and capital markets suggest that other investors will simply buy up the undervalued asset. These factors make divestment itself a blunt tool at best and a counterproductive measure of greenwashing at worst.

However, in some circumstances, a sale may be appropriate. If investors decide that a thorough engagement campaign is futile and there is no potential for the company to have a positive impact through ownership in the future, a sale may be a last resort. Such was the case when Britain’s main investor, the Church of England Pensions Board, announced it was selling Shell, after years of ambitious but unsuccessful efforts. While selling stock in some large companies to other investors may have little effect on their cash flow, individual consumers are collectively refusing to purchase goods or services from companies deemed unethical. You can definitely make an impact by quitting. For example, the recent controversy surrounding a legal battle between Starbucks and the Starbucks union over the latter’s pro-Palestinian social media messages led to an organized boycott of Starbucks products and caused a decline in profits and stock prices. connected.

The financial system has a huge opportunity to become a tool and channel for climate action. Ignoring nuance for the sake of slogans is counterproductive to tackling climate change, so a deeper understanding of the context in which engagement and divestment are considered as tools for change is needed.

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