While the traditional goal for most investors is to maximize returns with minimal risk, an increasing number of investors also want to use their assets to fund a better world. As they become more mindful with their money and where in the market they choose to channel it—or not—divestment often surfaces as one opportunity for making an impact. But what is divestment? When and how should investors leverage it, if ever?
At its most basic, divestment is the process of withdrawing assets for social, moral, or political reasons. This means shedding investments in companies that are involved in activities or maintain philosophies that conflict with an investor’s or an investing institution’s mission, goals, or commitments to ESG accountability. In theory, divestment undermines a company or industry by reducing its financial backing and, perhaps more importantly, sending a clear public message of condemnation.
Divestment does bear some similarity to negative screening, as they’re both exclusionary approaches to shaping portfolios. However, divestment entails removing previously invested assets in a company or industry, not merely filtering companies or industries during the consideration stage. As such, divestment also often involves an element of publicity and media attention, reflective of its disruptive shift in existing attitudes.
Examples of Divestment
One of the best known examples of divestment in recent history was the widespread divestment from companies doing business with apartheid-era South Africa. Though this system of institutional racism met with resistance and protest upon its implementation in 1948, it wasn’t until the ’70s and ’80s that corporate and governmental divestment, fueled in part by campus demonstrations, began to put financial pressure on the regime. As Piers Telemacque notes in The Guardian, South Africa lost $350 million of investments in just 10 years. Although some have questioned the campaign’s efficacy, many see it as a prime example of divestment’s power over public opinion.
A more recent example erupted in 2016 around the construction of the Dakota Access Pipeline (DAPL). Opponents were angered by the potential environmental destruction, danger to drinking water, and threat to Native American cultural sites and sacred places. Wells Fargo, a major financier of the project, soon found itself a target for divestment. In early 2017, the Seattle city council voted to cut financial ties with the bank. For Wells Fargo, losing the city’s banking contract will mean a loss of about $3 billion in annual cash flow. Davis, California, has voted to divest $124 million. Other cities, including Los Angeles, are also investigating divestment options.
Divestment in the fossil fuel industry at large is the subject of much current discussion, particularly at colleges and universities. Advocacy groups like 350.org are hoping to reach beyond campuses and target cities. “Cities in particular can help pinpoint the absurdity of, on the one hand, spending huge sums to build seawalls while at the same time investing in the companies that make it necessary,” said the organization’s founder, Bill McKibben, as quoted by YaleEnvironment360.
The Divestment Debate
For all the attention divestment receives as a course of action for spurring social and environmental change, there’s also much debate about its actual effectiveness—or how, exactly, it results in impact. Some researchers would answer “What is divestment?” with “A misguided strategy.”
As William MacAskill points out in a New Yorker essay, the idea that divestment undermines companies and industries simply by reducing the value of share prices is misdirected. Instead, divestment’s effectiveness results primarily from the publicity it generates. “If divestment campaigns are run,” MacAskill said, “it should be with the aim of stigmatization in mind.”
This is where alternatives to divestment start to make more sense. After all, as MacAskill argues, one of divestment’s greatest flaws is that it takes attention away from “more directly effective activities.” In this vein, investors often turn away from exclusionary or “negative” approaches, looking instead to positively tilt investments toward companies that are environmentally friendly and socially aware as a way of financially rewarding corporations with high ESG ratings. This approach, coupled with shareholder engagement, can be effective at influencing positive change and, in many cases, has a higher probability of generating competitive returns when compared to divestment.
It’s unequivocal that shareholders can hold major sway over companies. Investors may want to consider leveraging that power to act as an internal advocate for their chosen position. Divestment may be used as a Plan B if change seems unlikely and the concern at hand is considered a deal-breaker by the investing individual or entity.