Divestment vs. Engagement: Activism in Investing
On November 16, 2017, headlines across major business and finance news outlets led with stories that Norway’s $1 trillion sovereign wealth fund proposed to sell off all oil and gas stocks from their index. This was just the latest in a series of divestment announcements, such as university endowments divesting from coal companies, weapons manufacturers, and the tobacco industry on the heels of student activism. This is a hotly contested topic among many university endowments, pensions, money managers, and banks: should we divest our holdings from certain sectors (such as fossil fuels), or actively engage with companies in our portfolio to push for social and environmental change?
That same afternoon, the Center for Responsible Business’ Peterson Speaker Series hosted a panel debate to share insights on different investment strategies for investors seeking to change corporate behavior. The panel brought together leaders in sustainable and responsible investing:
- Anne Simpson, Investment Director of Sustainability at the California Public Employees Retirement System (CalPERS) and CRB Senior Advisory Board Member
- Jagdeep Singh Bachher, Chief Investment Officer and Vice President of Investments at the University of California, Office of the President (UCOP)
- Adam Sterling, Founder of the Sudan Divestment Task Force and Conflict Risk Network, and current Executive Director of the Berkeley Center for Law, Business, and the Economy at Berkeley Law
- Wendy Walker, Managing Director and an Outsourced Chief Investment Officer at Cambridge Associates moderated the debate
Each panelist was asked to take a point of view: is engagement, divestment, or perhaps a mix of both strategies the best way to achieve meaningful social and environmental impact while upholding their fiduciary duties to their beneficiaries?
Simpson, arguing for engagement, called attention to the shift in the makeup of company shareholders from individual investors to institutional investors in the last few decades. With this change in the investor landscape, CalPERS and similar large investors must represent their beneficiaries and “act as owners” to affect change. Additionally, she argued that human welfare has become entwined with modern corporations because of their ubiquitous influence, so capital investment in and subsequent engagement with corporations will be necessary to achieve the UN Sustainable Development Goals. Simpson cited a promising example in which CalPERS engaged with Exxon-Mobil to appoint a new board member who was a climate scientist and implemented carbon emission reporting at the company shortly thereafter. She also pointed to the “We Are Still In” movement and the Montreal Carbon Pledge as testaments to the power of financial markets and corporations to achieve those goals.
Bachher, managing approximately $100 billion of assets, asserted that investing alongside environmental, social, and governance (ESG) guidelines inherently aligns with their fiduciary responsibilities. He added that investors should engage in cases in which you can affect change, but divest when there are material long-term risks such as tar sands and private prisons. As he put it, “divesting is a singular action, but investing is a long-term strategy.” Moreover, Bachher said that there are cases in which UCOP investments should reflect the values and goals of the UC community. For example, smoke-free campus policies are reflected in divesting from tobacco companies and the UC’s carbon neutral goals are reflected in divesting from coal companies. However, Bachher and his investment team must simultaneously consider the costs of divesting as well as the alternative opportunities for investments to ensure their portfolio is appropriately balanced and diversified. This means the divestment process is often gradual in order to find strategies to mitigate increased risk.
Sterling, arguing for divestment, stated that this strategy is most effective as a credible threat to force substantive action by companies. However, corporations must be given time to respond and implement change before divesting. In addition, Sterling argued that engagement is not appropriate when your goal is to fundamentally change the business model of a company (for example, changing the business model of an arms manufacturer to not include weapons is nearly impossible). In cases like these, divestment is best. Sterling ended with the advice that divestment strategies must balance blanket action versus targeting the biggest actors to make a difference.
The panel ended on an agreeable tone, with Simpson and Bachher agreeing with Sterling as he called on investors, beneficiaries, and students to continue to work together to put pressure on corporations to act responsibly and collectively work toward positive environmental and social change. Top-down governance improvements must be met with grassroots efforts to influence board rooms, public offices, and investors to achieve these goals. As MBA students and future business leaders, we have a responsibility both now and going forward to ensure we are advocates with our voice and actions for responsible corporate policies.
Rebecca Rowe graduated from Hamilton College in 2011 with a concentration in Economics and Biochemistry. She started her career working for John Hancock Financial Services, where she focused a significant amount of her time financing projects in the renewable energy sector as part of the Power & Infrastructure group. She led the company’s first investment in green bonds, and managed its $2bn portfolio of energy efficiency projects in partnership with a variety of government agencies. In 2015, Rebecca transitioned to Social Finance, a nonprofit dedicated to mobilizing private capital to improve social outcomes across the country. She worked with governments, nonprofits, and impact investors to structure outcomes-based financing vehicles to scale critical services with a focus on measurement and evaluation. Rebecca is passionate about leveraging the private sector to create positive social and environmental impact, and is excited to explore sustainable business strategies to help tackle the most intractable global challenges while on the Student Advisory Board.
Jeff comes to Haas from public sector management consulting, where he helped state and local government entities develop strategies that strengthened their financial and operational performance while improving accountability to and outcomes for their constituents. Jeff also has extensive experience in China, including in product development, seeing firsthand the environmental and social challenges of responsible supply chain management. At Haas with the CRB, he is excited to connect academic theory with commercial practice, empowering others to become better advocates for sustainability, equity, and inclusion in their future organizations.