In 2020 Cambridge college introduced that it could strip its £3.5bn endowment fund of all fossil gasoline investments by 2030. Shedding its near-£100mn of publicity to the vitality sector was essential to align its funding technique with local weather science which confirmed the necessity to lower carbon emissions to internet zero to keep away from disaster, it defined. By divesting, mentioned vice-chancellor Stephen Toope, Cambridge was “responding comprehensively to a pressing environmental and moral need for action”.
Activists had campaigned for years for Cambridge to make such a transfer, even disrupting the Oxford-Cambridge boat race. Only two years beforehand, nonetheless, the college had dominated out divesting from oil and gasoline shares.
The college made clear how tough the choice to divest fossil gasoline property had been when it disclosed its choice in 2020. A prolonged accompanying report which explored the arguments famous that there was settlement over the pressing want to chop emissions. It added, nonetheless, that there had been “intense debate” over whether or not full divestment was the easiest way or if Cambridge ought to as a substitute attempt to change corporations’ behaviour as an engaged shareholder.
The college shouldn’t be alone in puzzling over which technique will show simpler. It is a query requested by quite a few asset homeowners, funding managers, local weather activists and others. Both methods include trade-offs and proof of their results is elusive.
Those that favour divestment at scale argue that this creates the ethical opprobrium wanted to immediate policymakers to introduce harder regulation. The divestment motion additionally unites individuals round motion on local weather change, says Richard Brooks, local weather finance director at Stand.earth, a Canadian marketing campaign group.
“It allows people to make a connection with the target — being oil and gas and coal companies — and that was a way to bring people into working on climate change issues,” he says. “What we’ve seen is an explosion of climate advocacy that came out of the fossil fuel divestment movement.”
Divestment campaigns will not be new. Supporters level to the impact of the boycott by western corporations of apartheid-era South Africa, in addition to the bans many massive traders have on holding shares in tobacco, weapons or playing. Some, although, query whether or not shunning an organization will change behaviour.
“Divestment, to date, probably has reduced about zero tonnes of emissions,” Bill Gates, the philanthropist, advised the Financial Times in 2019. Activists had not disadvantaged these corporations of capital, he mentioned. He argued that it could be higher to put money into applied sciences to sluggish emissions or to assist individuals adapt to the consequences of local weather change.
Other critics additionally level out that traders who promote shares in fossil gasoline corporations lose the power to affect these teams.
“When you choose exit, you don’t have any voice in the future,” says Luigi Zingales, an entrepreneurship and finance professor on the University of Chicago Booth School of Business who’s co-author of Exit vs Voice, a research revealed in 2020.
Anne Simpson agrees. “We must keep our eyes on the prize, which is the real economy,” says the worldwide head of sustainability at Franklin Templeton, the asset supervisor. “The question is are you trying to transform the economy or are you trying to come up smelling of roses in your own portfolio?”
In the Exit vs Voice research, Zingales and co-authors Eleonora Broccardo and Oliver Hart argue that exit is much less efficient than voice in influencing an organization since divesting could depress the inventory’s worth. “That very action creates an incentive for people who don’t care [about social or environmental concerns] to buy on pure return,” says Zingales.
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When we requested FT Moral Money readers which technique they thought was the best, one put the identical level extra bluntly: Divestment “merely moves the problem elsewhere”. Most readers, the truth is, mentioned engagement was the very best method. “Engagement all the way,” wrote one, whereas one other mentioned engagement was “the only way to deal with this”.
Some, although, noticed worth in divestment. “Divestment (or the threat of it) has a key part to play in achieving the Paris goals,” one responded. Another wrote: “Divestment has the potential to remove the social licence to operate from industries or sectors which are at risk of becoming socially unacceptable.”
Some wish to transfer away from a dualistic debate. More could be achieved, they are saying, by which technique to make use of and when, by combining approaches and tailoring methods to totally different asset lessons, sectors and sorts of investments.
ShareAction, which campaigns for accountable funding, is amongst these to name for a nuanced method. “It has been a hot debate for about a decade but it has not advanced very far,” says Catherine Howarth, its chief government. “There are still endless conferences where the panel discussion is ‘Engagement versus divestment — which works?’ It is such a false dichotomy.”
Making an exit
On March 1, a gaggle of campaigners met at an internet social gathering to mark a milestone. Supporters of the fossil gasoline divestment motion celebrated the truth that greater than 1,500 establishments with property that whole $40tn had dedicated to divestment of fossil gasoline shares. This was a pointy rise from $15tn a yr earlier.
At current, the motion is targeted on the producers of oil, coal and gasoline, relatively than on the industries that use them. “The fossil fuel sector is the largest source of greenhouse gas emissions and that is the sector we need to transform,” says Brooks of Stand.earth.
What made the March milestone potential, mentioned US local weather campaigner Bill McKibben on the time of the announcement, was that “hundreds of thousands of people around the world have joined in, finding a way to make a real difference in the climate fight on their campus, in their church or through their pension fund”.
His remark is a sign of the sorts of establishments which have embraced divestment. By far the most important group is faith-based organisations, which signify greater than 35 per cent of the full, in accordance with a database of divestment commitments maintained by Stand.earth in partnership with 350.org. Next are instructional establishments (15 per cent), philanthropic foundations (12.5 per cent) and pension funds (12 per cent).
Among notable names which have introduced full or partial divestment plans are two funds that handle the wealth of the descendants of John D Rockefeller — the Standard Oil baron — Harvard and Oxford universities, the Church of England, the $16bn Ford Foundation and Norway’s $1tn-plus sovereign wealth fund.
Environmental or ethical issues apart, some traders have discovered sound financial causes to exit fossil gasoline. The dangers of remaining invested embrace being caught with stranded property — these which can be of low or no worth or are laborious to promote.
Scottish Widows, the UK pension fund, cited this concern in March when it introduced a method of environmental, social and governance divestment. This contains not investing in any firm that derives greater than 10 per cent of its income from tobacco or 5 per cent from thermal coal and tar sands. Pressure from traders, regulators and shoppers might, it mentioned, flip such operations into stranded property.
When it involves vitality and pure assets, Oxford college’s stranded property programme factors out that shares in these sectors are uncovered to dangers starting from local weather change to potential litigation, in addition to the introduction of carbon pricing and higher competitors as clear applied sciences grow to be cheaper.
It is more and more potential to design funding methods that deal with these dangers. For instance East Sussex Pension Fund, with Osmosis Investment Management as its adviser, has addressed local weather dangers in its passive holdings with a portfolio that excludes fossil fuels.
Evidence of the ache that divestment may cause traders is blended. Long-term declines within the oil, gasoline and coal sectors have meant that divestment has not at all times dented returns. In its most up-to-date report, the Divest Invest community in contrast the S&P 500 index with and with out the inclusion of fossil gasoline corporations. Between 2012 and 2021, it discovered, the latter outperformed the previous.
Increases in vitality costs after Russia’s invasion of Ukraine have led to rallies in lots of vitality shares, nonetheless, which has modified the calculation within the brief time period at the least.
Some funds have mentioned that divesting from controversial sectors has value them over time. After the Norwegian oil fund shunned tobacco, for instance, it estimated that the hit to its returns was equal to missed earnings of $1.94bn between 2006 and 2015. Calpers, the California pension fund, calculated final yr that it had missed out on $3.7bn in beneficial properties from tobacco shares since 2001.
Some consider that divestment can enhance danger to a portfolio by decreasing diversification. “This makes it harder to achieve the returns we need to pay benefits to the teachers of California,” says Aeisha Mastagni, a portfolio supervisor on the California State Teachers’ Retirement System, which opposes a invoice the California senate handed in May that, if handed by the meeting, would forestall it from proudly owning shares in fossil gasoline producers.
The fossil gasoline divestment motion, nonetheless, is pushed extra by politics than economics, impressed by campaigns such because the one which centered on ending apartheid in South Africa. Rather than take down anybody company or elevate the price of capital for focused corporations, the concept is to stigmatise them, placing stress on policymakers to introduce restrictive laws, says Brett Fleishman, head of finance campaigning at 350.org.
“We never thought a bunch of institutions divesting would hurt Exxon’s bottom line,” he says. “We wanted to make it popular for politicians to do the right thing by institutions making powerful statements by divesting from fossil fuels.”
A number of proponents of divestment have moved into the political area. Brooks factors to the election of Chloe Maxmin, a Democratic senator, who co-founded Divest Harvard. In 2020 she unseated a Republican in Maine with a promise to introduce a inexperienced new deal. “She led the push to get the state pensions fund to divest from fossil fuels,” he says. “So we have legislators who cut their teeth on the divestment movement and [who] are now part of government.”
Zingales acknowledges that divestment can elevate the political stakes. “The divestment campaign is much more effective in creating awareness than an engagement campaign,” he says. “But the irony is that we are where we are because at the political level we’re not doing very well.”
The guidelines of engagement
Despite the obvious momentum behind divestment, Larry Fink, chief government of BlackRock, determined this yr to make a vocal case for engagement. The head of the world’s largest asset supervisor used his annual letter to argue that “divesting from entire sectors — or simply passing carbon-intensive assets from public markets to private markets — will not get the world to net zero.”
BlackRock had not adopted a blanket coverage to divest from oil and gasoline corporations, he mentioned, as a result of some have been remodeling their companies to be much less carbon intensive and wanted to be inspired. “Driving capital towards these phoenixes” could be important to reaching a internet zero world, Fink mentioned.
As his remark signifies, there’s concern that stress from traders for corporations to dump carbon-intensive property can result in these property being snapped up by non-public homeowners equivalent to hedge funds, which face much less environmental scrutiny. This could make divestment much less efficient, notably given the expansion in non-public capital.
Those who consider that engagement is healthier than divestment additionally diverge after they determine how greatest to make use of the instruments traders have at their disposal. For some, engagement is ineffective until traders additionally wield a stick.
“If we don’t see companies stepping up to the plate to change their business, we’re going to make investment decisions . . . that could lead to divesting,” says Carol Geremia, president of MFS, an energetic supervisor primarily based in Boston. “We do have timeframes that we’re explicit around.”
Abrdn, the UK asset supervisor, has additionally set targets and timeframes for its portfolio corporations which relate to their progress in the direction of reaching internet zero emissions. If these will not be met, Abrdn says, it should contemplate offloading the inventory.
“The divestment approach is very much a last step but at the same time we want to show that we’re serious,” says Fionna Ross, a senior analyst in ESG at Abrdn. “If these things are not achieved, we will ultimately divest from that company.”
For others divestment shouldn’t be an possibility. “The question is not whether your heart is in the right place but whether you will have any impact on the problem you are trying to solve,” says Simpson. “That’s where the divestment case on equities is found wanting.”
What she and others argue is that till all the company sector has met its emissions objectives, engagement with corporations stays vital. “Risks associated with climate change cannot be divested away,” says Mastagni. “We need a more holistic approach.”
This begs the query as to what different sticks traders can use. One possibility is to make use of their votes at annual conferences to switch managers or members of the board of administrators.
“Directors care deeply about the vote they receive. That definitely does send a message,” says Mastagni. “So you’ll see an increase from Calstrs in terms of the number of directors that we’re not supporting.”
She says the fund’s engagement begins with behind-the-scenes discussions asking corporations first to reveal their emissions ranges after which to take motion to cut back them. “We can do that privately or we can do that more publicly,” she says.
A change within the make-up of the board of administrators was the aim of Engine No. 1, a US funding agency that campaigned to push ExxonMobil to maneuver to a lower-carbon mannequin. It received three board seats after a battle wherein it mentioned the oil firm’s deal with fossil fuels put it at “existential risk”.
In 2021 Exxon mentioned it deliberate no “huge shifts in strategy” after dropping the shareholder vote, however Chris James, founding father of Engine No. 1, mentioned this was not what occurred. “After losing the board fight, of course management doesn’t want to say that changes were a result of the outside pressure,” he says.
James describes the modifications at Exxon as “dramatic”. “They have gone from talking about net zero pledges as beauty contests to actually making net zero pledges,” he says. “Before the campaign, there wasn’t a business strategy where carbon was anything other than a byproduct of their oil and gas activities. Today managing carbon is one of the three pillars of their business.”
Beyond influencing particular person corporations, many traders see engagement as being best whether it is a part of a broader motion. It is for that reason that lately a number of investor coalitions have been shaped. These embrace the Net Zero Asset Managers initiative, Europe’s Institutional Investors Group on Climate Change, and Climate Action 100+, a gaggle representing 700 traders with greater than $68tn in property. CA100+ pushes corporations to chop emissions, strengthen governance and enhance climate-related monetary disclosures.
However, whereas Engine No. 1’s Exxon marketing campaign was hailed as a big victory by the sustainability neighborhood, the outcomes of collaborative engagements look like blended. In the second spherical of its internet zero firm benchmark assessments, CA100+ discovered that simply 17 per cent of its focus corporations had set medium-term targets. The identical proportion had quantifiable methods in place to achieve their internet zero objectives.
“That body has been in place for several years now and to have a record like that points to the difficulty with relying on an engagement-only strategy, particularly with fossil fuel companies,” says Brooks.
Some level out that engagement shouldn’t be for the faint-hearted. “You have to do it right, it takes a long time. You have to be sophisticated about it and you need to have a portfolio manager in the discussion,” says Bob Eccles, a professor at Oxford college’s Saïd Business School and an knowledgeable on company sustainability.
“We are in the foothills of a very long climb,” says Simpson, who’s a member of the CA100+ international steering committee.
Others take a extra pessimistic view. “The focus on shareholder returns still takes priority,” wrote one FT Moral Money reader. “Unless this changes, engagement just prolongs conversations.”
A 3rd manner
As traders grow to be extra desirous about utilizing their cash to place the worldwide financial system on to a extra sustainable, equitable footing, some say they shouldn’t be certain by a binary alternative between divestment and engagement, however ought to apply totally different methods to totally different asset lessons.
For instance, whereas non-public fairness was as soon as often called an business the place company raiders used a slash-and-burn method to prices, its worth creation mannequin — primarily based on bettering the efficiency of portfolio corporations away from the short-term pressures of public markets — is effectively suited to shareholder engagement, Eccles argues. “Private equity is a place where you can take assets and clean them up,” he says.
While seeing tangible outcomes from divestment and engagement requires time, effort and sometimes collective motion, there’s one asset class that allows traders to wield an instantaneous lever for change: debt.
For bond traders, the stick is the denial of funds at a vital second, since most corporations want to lift contemporary debt yearly. Investors can deny an organization funds by refusing to refinance or roll over company debt until sure environmental or social situations are met, equivalent to accelerating the transition to renewable vitality or reaching a workforce gender stability.
Andreas Hoepner of University College Dublin compares this to a house owner trying to refinance their property who finds that the financial institution insists on house insulation as a situation of a contemporary mortgage. “You would insulate your house because you need someone to refinance it,” says Hoepner, a professor of operational danger, banking and finance.
Asset homeowners have begun to know the facility they wield via bond investments. In 2020, for instance, Lothian Pension Fund launched an method it known as “engage your equities, deny your debt”. This included a refusal to provide new funding — whether or not via new bond issuance or new fairness issuance — to corporations whose methods weren’t aligned with the Paris Agreement treaty on local weather change.
Recognising asset homeowners’ urge for food for utilizing debt as a software of affect, corporations have issued bonds whose contracts tie them to sustainability objectives. Green bonds, for instance, have funds ringfenced for environmentally pleasant actions, equivalent to the event of renewable vitality applied sciences. Meanwhile, SDG- or sustainability-linked bonds are common objective bonds with contracts that impose monetary penalties if the corporate fails to fulfill social or environmental targets in a set time.
The benefit for corporations is that the phrases of the bonds make them extra engaging to sustainability-focused traders. “I’ve heard CFOs saying that this actually brought down their coupon, or that the coupon was the same but they could pick their investors — both of which are a significant advantage for the business,” says Hoepner.
Beyond the binary debate
Whether they favour divestment, engagement, denial of funds or a mix of methods, traders have to be ready to just accept that their actions could not yield tangible outcomes, at the least within the brief time period.
This is especially true for the divestment motion since it may be laborious to disentangle the impact of an advocacy marketing campaign from different forces which may have pushed corporations to vary behaviour or governments to introduce new insurance policies.
“It is something that we struggle with as an organisation,” says Fleishman at 350.org. “It’s very hard for us to say whether the momentum we have today was due to the divestment movement.”
Moreover, with asset homeowners searching for to realize totally different types of social or environmental affect via totally different asset lessons and sectors, funding professionals must arm themselves with new data and to create a extra joined-up method.
ShareAction’s Howarth sees extra work forward for a lot of institutional traders. “Half the time there is a flat contradiction between what’s going on in the equity teams and what’s happening in the bond teams,” she says.
Influencing totally different sectors also can imply taking totally different approaches. While Brooks is a proponent of divestment from corporations whose enterprise is the manufacturing and transportation of fossil fuels, he believes engagement can work for corporations in different sectors. “There’s a better record of moving through engagement when [fossil fuels] is not their core business,” he says.
One FT Moral Money reader argued that divestment could possibly be efficient however solely in industries equivalent to petrochemicals, plastics, chemical compounds and prescription drugs, that are “slow to adopt readily available alternative technologies that have proven themselves to be better for human health and the environment”.
While proponents of each divestment and engagement typically maintain sturdy views, the selection between one and the opposite is beginning to give solution to extra nuanced methods that use each — and add the specter of denial of funding to the combo.
Determining how greatest to make use of funding funds to handle local weather change will stay a extremely complicated enterprise. But whereas the “need for action” drove Cambridge in the direction of divestment, others trying to reply could now have choices that transcend a binary alternative between divesting and fascinating.