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A popular call from climate activists pushes institutions, from universities to local governments to major investors, to divest their financial holdings from fossil fuel corporations. It’s a well-intentioned and intuitively appealing strategy to signal that what’s financially profitable may not be best for society. Yet, emerging research in the sustainable finance field suggests that, in many cases, fossil fuel divestment may be an inconsequential act that borders on greenwashing and diverts attention away from actions investors can take to enact real-world, positive climate and social outcomes. In place of divestment, research suggests a shift toward an engagement investment strategy. But what does that mean?

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At present, ownership and engagement—interrelated concepts—dominate investment strategies. Clearly, it is counterproductive for decarbonization efforts for governments and banks to offer financing for new fossil fuel projects. Most of the ownership of major oil and gas companies, however, comes in the form of listed (purchasable on an exchange) debt and equity, which is owned by major investment management companies, known as asset managers, who invest on behalf of asset owners (often pension funds and endowments). The largest of these asset managers are capable of using their influence to push for change in the companies they own, through shareholder voting, filing resolutions, and even letter writing and conversations; these methods all come under the term “engagement,” a concept first established in the 1970s.

When applied to environmental or social issues, investors such as these can be a powerful voice for good and can even benefit financially. Skeptics have pointed to the potential for investors to use these practices as an excuse to remain invested in highly emitting companies, with their actual engagement strategies being as basic as a one-off request for information. But research is beginning to demonstrate the power and scope of focused, targeted, and ambitious engagement campaigns, with success stories of real-world impact becoming increasingly commonplace. Perhaps the most famous example of this is the hedge fund called Engine No. 1, which was able to replace four members of the board of directors for oil-and-gas giant Exxon with energy-sector specialists and sustainable investing experts, despite owning just 0.02 percent of the company’s shares.

The alternative, divestment, is morally appealing, as it’s often understood that what creates a crisis cannot solve it; therefore, divestment proponents advocate for the complete rejection of a fossil fuel future rather than attempting to foster a potential relationship with fossil fuel companies. The legacy of divestment as a tool to promote social responsibility is powerful, as it has helped to end business involvement in the South African apartheid regime and the tobacco industry. However, divesting from a company deemed unethical means selling, and a sale requires a buyer, one who may be a more apathetic owner when it comes to utilizing their voice on behalf of the climate.

Indeed, “paper decarbonization” (whereby a problematic asset is simply sold to a different owner, with no real-world change) has become a major problem, and those sellers forfeit their ability to engage or vote on company policy. Critically, the act of selling rarely has any effect whatsoever on the company itself. Even selling a very large equity or debt stake on a secondary market (to another investor) makes very little, if any change, to the price of that equity or debt and therefore has little effect on the company itself, as their financing decisions are not dependent on small, short-term swings in share price. If an investor is able to push a company’s share price down, the laws of arbitrage and capital markets suggest other investors will simply buy up the underpriced asset. These factors render divestment by itself a blunt tool at best and a counterproductive method of greenwashing at worst.

There are certain situations in which divestment may be appropriate, however. If an investor has committed to an exhaustive engagement campaign to no avail and sees no possibility of being able to positively impact the company through their ownership in the future, divestment may be a last resort. Such was the case when the Church of England Pensions Board, a major UK investor, announced their divestment of Shell, after years of ambitious, yet unsuccessful, engagement. While selling shares of some of the largest companies to other investors may only negligibly affect their financing, individual consumers can certainly make an impact by collectively ceasing to purchase goods and services from companies deemed unethical. For instance, the recent controversy around Starbucks’s legal battle with Starbucks Workers Union over a pro-Palestine social media message sent by the latter has led to a coordinated boycott of Starbucks products, leading to a drop in profits and share price.

The financial system has a significant opportunity to become a tool for, and a channel of, climate activism. Greater understanding of the contexts within which we consider engagement and divestment as tools for change is needed, as ignoring the nuance for the sake of a slogan is counterproductive to climate efforts.

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