By Alex White, Head of ALM Research at Redington
Ethically, there’s a strong deontological case for not profiting from pollution, and avoiding the worst offenders that way. Divestment is also a lot more objective, and therefore should be less vulnerable to greenwashing than engagement or stewardship. It can also be a useful escalation tool alongside engagement.
But does avoiding the high emitters help solve climate change?
Firstly, there’s a key distinction to be made: divestment can mean not holding any high emitters or it can mean only holding the relatively low emitters within a sector. The former will reduce portfolio emissions but is unlikely to affect the divested firms; even the greenest steel firm, for instance, will have higher emissions than a brown HR firm, so they’ll never get that investment. And the latter approach may motivate the relatively high-emitting firms within each industry to implement changes but will still result in a portfolio with fairly high emissions as it won’t exclude whole industries.
We also note that divestment is not the same as boycotting. Whereas a boycott can reduce demand and impact a firm’s economics, divestment simply means selling the holding to someone else. This has a few consequences:
• It’s polarising. If we bucket investors into those who have environmental goals and those who don’t, by divesting from high emitters you simply shift the investor base towards the latter, making change marginally less likely. Instead, if all divestors held the stock and voted for measures to lower emissions, they might actually drive change. That avenue is lost once they divest.
• If divestment lowers share prices materially it creates an opportunity for a less scrupulous investor to buy cheaply, which will at least partly offset the effect. This in turn means divestment works best when there is a sizeable, coordinated body of investors – at which point they could engage with the firm more effectively.
• The high-emitting firms are typically mature with high cashflows, so will be less sensitive to the need for funding, especially from equity.
• Driving the high-emitting industries into the hands of less environmentally scrupulous investors may backfire and have serious negative consequences. While not a clear-cut comparison, Saudi Aramco’s emissions are c.3-4 times as high as Exxon’s , while revenue is only c.1.3 times as high.
There is also a question of scale. Emissions are hugely skewed, with a small percentage of companies producing most of the world’s emissions (the top 5% of companies typically emit around half of global emissions). That means any change to global emissions has to come from high emitters. For example, moving the steel industry to lower-emitting steel is likely to reduce emissions by more than removing all the emissions from law firms.
A separate argument for divestment is public shame. By creating a stigma around these areas, divestors hope to make the sector less viable – for example, by making recruiting harder. This may work; large divestments (e.g. by universities) often make headlines and may help keep the topic in focus. However, drumming up the mob is quite a blunt tool, even in a good cause, and it risks missing nuances which may be critical in a problem as complex as climate change .
When used wisely, divestment can be both a direct risk-reduction tool and an important escalation route to give engagement more bite should companies not materially change their behaviour. But when used poorly or too bluntly, divestment risks passing the buck and avoiding the problem.
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