Unbelievable! Why Equity Divestment is the Worst Strategy for Green Investments!

I felt conflicted when I saw that a group of authors called Baillie Gifford, the fund manager, be abandoned as a sponsor of the Edinburgh International Book Festival on the basis that it has invested in fossil fuels. I’m a first-time children’s author myself, and I saw how my peers liked the letter on social media.

But I’m also a financial journalist and have written to book on climate change who argued that divestment wasn’t a great idea if you really wanted to change things. In the current climate of energy crisis and ESG skepticism we find ourselves in, this is still the case.

When people start thinking about carbon emissions and their investment portfolio, divestment seems like the obvious option. You want nothing to do with those evil oil and gas companies, so you sell them or invest in funds that promise not to hold them. There are two justifications for this: one is fair enough and the other isn’t. The first is a purist approach: the desire not to get your hands dirty as an investor. Selling won’t change things, but not all investors are looking to implement change and that’s their choice.

The other is the belief that divestment increases the cost of capital for companies: that one’s divestment will cause financial harm. Unfortunately there is no evidence that this is true. A document from the Stanford Graduate School of Business found that the impact of ESG divestments on the cost of capital was too small to significantly influence real investment decisions in the United States: to impact the cost of capital by at least 1%, he uncovered, at least 86 Percent of investors must choose to hold only clean stocks.

Selling existing shares also means passing them on to another investor who may be less scrupulous. Mark van Baal, founder of Follow This, a shareholder pressure group pushing Shell to cut emissions faster, he believes the vote on climate change resolutions has flatlined in part because committed investors have sold their shares to those who simply don’t care.

In essence, divesting means giving up a seat at the table. Some investors have long argued that engagement, rather than divestment, is the way forward. However, greenwashing and virtue signaling have muddied the waters in recent years. Institutional investors talk a lot about their engagement policy. They often don’t need to vote against boards, they argue, because they have lots of one-on-one conversations with them instead. They’ll get there, it’s a tough approach, it takes time. The buzzword at the moment is management, which can include a wide range of things.

The problem for retail investors and asset owners is that this is difficult to measure. Are institutional investors really getting anything through these conversations or is it a quick question about how they should probably disclose their CO₂ footprint in their annual report before tackling the more concrete question of where the next drilling site should be?

For equity investors, one concrete way to measure what measures asset managers are taking to counter fossil fuel companies is through their voting record

Some investors give up. The Church of England made the front pages in June, when he said he would sell off fossil fuel companies altogether, after previously pushing them to change. This was partly due to frustration that boards were not moving fast enough, and partly out of annoyance that their name, as an ethical investor, was being used by companies to burnish their green credentials. But while headline-grabbing divestments may send a certain message, ultimately such a step is a purist rather than practical approach.

Others distinguish between debt and equity when it comes to divestment. The Lothian pension fund, for example, takes a “deny debt, commit equity” approach: the theory is that it will have a bigger impact if you refuse to refinance a company’s debt than if you sell the shares.

For equity investors, one concrete way to measure what measures asset managers are taking to counter fossil fuel companies is through their voting record. Are they voting against council members who don’t set sufficiently ambitious targets on emissions reductions? Do they vote against their compensation packages? This can sharply focus minds.

Institutional investors are not currently required to disclose how they vote. The Financial Conduct Authority’s grade reporting team says that while there are “pockets of excellence”, “the nature of disclosure of grade reports is sporadic”. More needs to be done to make it systematic.

The FCA invites comments by 21 September on a consultation document arguing that it must be easier for asset owners to find out what their asset managers are doing in terms of management. It proposes a voluntary and standardized voting model, but some I want this to be mandatory. This would increase the regulatory burden on the fund management industry, but would help investors decide who to give their money to.

Once disclosure is made necessary, the next step for asset owners, including retail investors, would be to pressure asset managers to vote more. This is even more important as it comes at a time when US asset managers such as BlackRock and Vanguard, caught up in the politicized anti-ESG backlash, are voting less often.

This brings us back to Baillie Gifford. Rather than ask him to sell his fossil fuel holdings altogether – the fund manager has protested that he holds just 2% of client money in such companies, compared to a market average of 11% – it would make more sense to convince him to sell all its holdings in the fossil fuel sector. vote more often on climate resolutions.

The fund manager provides an account of his voting record – he directed me to page 89 of his 90-page document on his engagement practices to prove that he had voted against BHP’s climate transition plan, for example – but not It’s exactly easy to read. .

The FCA’s initiatives towards greater voting transparency are to be welcomed. But investors need to do more to hold companies accountable. And asset owners and managers must resist the temptation to bow to pressure while washing their hands of trying to bring about change.

Insiders I spoke to for this article referred rather wearily to pressures to divest coming from financially “naïve” members of their organizations. They have my sympathy: the reality is that a targeted approach, insisting that asset managers use their vote, is one of the best ways we have so far to make an impact.

Alice Ross is a contributor to the FT. Her book, “Investing to Save the Planet,” is published by Penguin Business. X: @aliceemross