Divestment vs engagement: At odds, or a recipe for success?

If a company fails to meet ESG criteria, should asset managers get tough and divest, or use their influence through active engagement to help shape a better future?

With very little evidence of impact, and both strategies resulting in sacrifice, this puzzling dilemma is often deliberated within the realms of environmental, social and governance (ESG) investments.

Is divestment effective?

Bill Gates told the Financial Times in 2019 that  “Divestment, to date, probably has reduced about zero tonnes of emissions.” Gates’ perspective was that investors wanting to make a change should instead back disruptive technologies that slow carbon emissions and help people adapt to a warming world.

Critics of the divestment strategy argue that in selling off shares, investors lose their power of influence. If real change is the bigger picture, then what good can come of effectively walking away from a problem, only for it to arise elsewhere? They campaign for a more holistic approach that pushes companies to act in a socially sustainable way. 

But perhaps the greatest value lies in a combination; selecting each strategy on its own merits based on the asset class, sector and type of investment. 

The case for engagement

Larry Fink, chief executive of BlackRock, used his 2022 annual letter to highlight that “divesting from entire sectors — or simply passing carbon-intensive assets from public markets to private markets — will not get the world to net zero.” He voiced a concern that selling off carbon-intensive assets will only result in them being taken up by private owners, who face less scrutiny when it comes to environmental impact. 

Many investors see engagement as being most effective if it is part of a broader movement. This thinking has brought about the Net Zero Asset Managers initiative (among other coalition groups), representing firms with $61 trillion of assets, and allowing members to choose among three methods for calculating how much of their portfolios are aligned with a net-zero goal. The flexibility offered accommodates different operating models. Though the results are so far uneven in terms of member commitment, NZAM plans to offer further guidance on reporting, particularly on private equity, derivatives, infrastructure assets and index-linked products.

Targets and timeframes

Asset managers increasingly report the introduction of more tangible targets and timeframes to those companies failing to meet objectives, with divestment only being the final step. The thinking is that investors should work in partnership with companies to encourage them to be more ambitious around their sustainability goals and how to achieve them. Responsible investors can collaborate to increase pressure on a company; use their voice at the ballot box to vote against management on key resolutions to demonstrate their feelings; and can attend AGMs for the chance to have direct, public dialogue with boards and top executives. All are valuable escalation techniques.

The divestment and engagement argument certainly seems to be giving way to a more nuanced conversation. What is increasingly apparent is investor need for clear and accessible targets, and evidenced results.

Engagement tracking is commonly an area of difficulty- fragmented data, a lack of communication across teams, and ​​little continuity in monitoring processes and software are just a few of the issues faced. 

These are the very reasons we developed SI Engage. Get in touch to find out how our system will advance your data collection, reporting, collaborations and overall ESG performance.

Image credit to Vecteezy.com.

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