Shareholder Engagement and Divestment are Mutually Reinforcing
Green Century° has championed fossil fuel divestment since before the divestment movement was launched in 2012, and we have long argued that shareholder advocacy cannot change a company’s core business.
As the home of one of the most active shareholder advocacy programs in the U.S., we believe in the power of investors to motivate corporate action. It’s just clear that some actors, particularly oil and gas companies, simply can’t, or won’t, be moved. A new study has confirmed our approach.
Divestment’s Engagement Value
Opponents of divestment often argue that divesting from a company eliminates a shareholder’s ability to engage and influence that company’s policies. They claim that it’s better to ‘have a seat at the table.’ However, divestment and engagement are not mutually exclusive.
A new study – ESG Engagement and Divestment: Mutually Exclusive or Mutually Reinforcing? – from Scientific Beta concluded that, when deployed together, divestment and shareholder engagement can improve companies’ environmental, social, and governance (ESG) performance.
The study found that divestment can actually make shareholder engagement more effective: “Removing the worst ESG performers from the investable universe concentrates the divesting on the ESG laggards and sends clear-cut signals to all companies and stakeholders.”
While the study found that shareholder engagement can positively affect a company’s ESG performance and create shareholder value, it also concluded that shareholder engagement without the threat of divestment as consequence of dissatisfactory engagement may be rendered toothless. “Divestment reinforces engagement. It does not preclude it.”
Divestment can also increase the cost of capital, making it more expensive for that company to complete projects investors oppose, such as expanded fracking. The divestment movement clearly is affecting the fossil fuel industry. The president of the Western Energy Alliance, which represents more than 300 companies in the petroleum industry, admitted in a recent letter to the SEC that “ESG advocacy has negatively affected the industry’s access to capital over the last few years.”
Divestment Integrates Better ESG Practices
The study also found that institutional divestment can damage the brand’s reputation and pressure the company to integrate better ESG practices. Until fossil fuel companies change their business-as-usual approach and stop spending nearly $200 million a year to block, delay, and undermine progress on the climate crisis, we need this kind of system change.
ExxonMobil’s first climate-related shareholder resolution was filed in 1990. Between 2012 and 2018, 160 additional climate-related resolutions were filed with oil and gas companies in the U.S. To what end? It’s clear that 30 years of investor pressure have failed to move the company and others like it.
We need investors – both large and small – to divest from the fossil fuel industry. Divestment works. This study reinforces that conviction.
°Green Century Capital Management (Green Century) is the investment advisor to the Green Century Funds.
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