Against Divestment -- Why Walking Away Won't Make a Difference

Fund managers who invest billions of dollars on behalf of nonprofits, workers, and retirees are under a lot of pressure to show their opposition to non-sustainable energy sources by selling all their stock in fossil fuel companies. The argument is that this will send a message to the companies' boards, executives, and investors and to consumers, legislators, and the general public that these lines of business are harmful and unsustainable. The mission is "not only to expose the inviability of fossil fuels, but also to shift public consciousness on the urgent and systemic nature of the current climate crisis."

But divestment is ineffective, even counter-productive.

Companies do not care when shareholders who disapprove of their business plan sell their stock. On the contrary. By definition, when investors sell a share of stock because they think the company's prospects are poor or because the principle is more important than the economic returns, the buyer disagrees. The Investor Relations departments in big companies open up the champagne when their squeaky wheel shareholders sell their stock to investors who support the company's operations. It is almost impossible for a divestment program to be widespread enough to have any impact on the share price. Executives no longer have to respond to pressure because the ones who pressured them were gone.

Perhaps for this reason, it is not at all clear that divestment causes companies to make any changes. One of the earliest widespread divestment initiatives targeted companies doing business with South Africa, then operating under the atrocities of apartheid. Yes, apartheid ended. And there is some evidence that the publicity about the divestment campaigns helped to create or support public pressure for change. But there is no evidence that the divestment programs had much impact on the companies whose stock was sold. And some divestment programs had severe consequences for the investors.

A few large investors made thoughtful choices in the anti-apartheid initiatives. The New York City pension fund sponsored and supported a number of shareholder resolutions calling for companies to adopt the Sullivan principles, including a commitment to providing equal opportunity in their South African facilities. They sold out of a few narrowly targeted companies whose business dealings promoted apartheid.

But many of the South Africa divestment campaigns were badly conceived. The New Jersey pension fund was directed by the legislature to sell any stock in any company doing business in or with South Africa, so they ended up selling out of two New Jersey pharmaceutical companies whose primary dealings with South Africa were providing medication. The stock they sold averaged an A+ investment rating. The replacement securities were higher-risk investments. One estimate in the Wall Street Journal calculated the losses to the fund caused by the rigid divestment program to be as high as half a billion dollars -- an expense that in a defined benefit plan could have to be covered out of the state treasury.

That is half a billion dollars spent for a program that failed on economic, political, and moral grounds.

Some investors believe fossil fuel companies are a poor bet and prefer to put their money elsewhere. Fine -- that is a traditional risk-benefit analysis and that is what makes markets work. But that is not divestment. That is investment. Calls for fossil fuel divestment ask funds to forgo economic gains in pursuit of social goals. That may make sense in some circumstances, but the case for blanket divestment from an entire sector has not been made, either financially or morally.

Rigid divestment requirements replace the risk-benefit analysis that is the obligation of fund managers with a one-issue litmus test. They limit a fund's ability to diversify and they may skew investments away from particular categories, such as large capitalization companies. This creates higher risk for the people the funds are supposed to benefit, including teachers, police, firefighters, and local government employees whose retirement depends on these funds. Are states going to raise taxes to make up the pension fund shortfall? Are students and professors calling for divestment of university endowments willing to make up the difference in tuition hikes and reductions in salary to subsidize divestment programs whose effectiveness is entirely speculative?

Most important, selling out of a stock makes impossible constructive engagement with a company to work for change. Through initiatives like the Investor Network on Climate Risk, the UN's Investor Summit on Climate Risk, the Carbon Asset Risk Initiative, and others, investors who are committed to long-term returns and protecting the environment can push companies toward better use of capital to increase research and promote sustainable energy. Don't walk away from your seat at the table until your points have been heard. Submit shareholder proposals. Nominate new directors. Attend annual meetings to ask questions of the executives and board members. But do not sell the stock that gives you the right to engage on the issues you care about with the people who can make a difference.