Première partie of this article introduced the origin and participants in the divestment movement.
The decision to divest from fossil fuels may be driven by pressure from shareholders for environmental responsibility as well as considerations to dampen climate-related risks. With the pandemic starting in 2020, many institutions are forced to reckon with other deeply challenging systemic risks such as climate change, contributing to a new wave of climate-related divestment. The table below shows some examples of recent fossil fuel divestment commitments from various institutions.
Which Way is Better, Divestment or Engagement?
Divestment has started as a niche form of activism and now changed the conversation around fossil fuel investment, as more and more investors began to reconsider the financial sustainability of the fossil fuel sector. With tightening regulations and more stringent decarbonization targets kicking in worldwide, fossil fuel investments are facing higher risk of becoming stranded assets. This would convince more and more investors to withdraw from them for both financial health considerations and environmental concerns.
While a coordinated divestment movement from some of the most influential investors can increase the capital cost for emitters, some have criticized divestment as a “feel-good” approach with little positive impact. Larry Fink, chief executive of BlackRock, noted that divestment may simply shifts the assets from a transparent organization to an opaque one, making those assets less available to public scrutiny. As a result, in an efficient securities market, an environmentally conscious firm sells its fossil fuel shares in the market in order to maintain a climate-friendly portfolio. However, those shares will likely be obtained by another buyer that is less climate-conscious, posing no decarbonization incentives to the emitter while decreasing transparency of the investment. The relinquishing of financial stakes in a company also means the relinquishing of voice with its management.
As a result, financial institutions are looking towards engagement as a more impact-focused strategy than divestment. Engagement means using financial stakes as leverage to promote low-carbon transition in emitting companies by driving shareholder resolutions on climate-related disclosures and environmental strategies, as well as vote against management decisions that are not in line with environmental goals. Influential investors with large stakes may even apply lending requirements on fossil fuel companies by tying future financing with verified decarbonization progress and restricting environmentally damaging activities.
Ultimately, fossil fuel companies require investments to redirect their business towards a climate-friendly model. Instead of simply divesting from all fossil fuel companies, financial institutions should combine divestment from the most adamant laggards and engagement with those that show commitments to the low-carbon transition. Such moves can offer investors a more proactive role to assist companies in their transition towards clean energy and provide more robust oversight. If institutions keep genuine impact at the center of their decision-making, both divestment and engagement can be effective financial tools for climate-responsible investing.
Sources :
https://www.thecrimson.com/article/2021/9/10/divest-declares-victory/
https://ieefa.org/asset-managers-leaving-coal/
https://www.advratings.com/top-asset-management-firms
https://www.theguardian.com/environment/2013/oct/08/campaign-against-fossil-fuel-growing
https://www.ft.com/content/00af52b7-381c-4a5d-91f1-3b3d4ce04256
https://www.ft.com/content/c032f5a4-9801-47d3-abf7-d5d9826558cc
https://www.climateaction.org/news/12-major-cities-commit-to-divest-from-fossil-fuel-companies
https://www.spglobal.com/marketintelligence/en/news-insights/trending/2TEm7zwpBhGa2mb6FQFqPg2