How do we best move the needle when it comes to climate change? How do we persuade corporations to take the climate crisis seriously, and make the (often hard) choices necessary to stave off disaster?
Recent years have seen a variety of ideas emerge, broadly centered around three different strategies: divestment, engagement, and activism. This panel, hosted by the FT at the COP 26 Climate Action Hub, was titled: Which Investment Approach has the most impact: Divesting, Engaging, or Activism?, and was a timely look at these three very different approaches. So, what do these terms mean?
Divesting is the opposite of investing, it is the removal of investment capital from funds, stocks or any investment vehicle for moral and financial reasons. Of course, the climate crisis is not the first time that divestment campaigns have taken place. In the past campaigns have focused on the gambling and tobacco industries as well as Apartheid South Africa. The divestment movement has grown hugely in recent years, with the amount of capital now committed to divestment topping $39.2 trillion.
Engaging involves working with companies to encourage them to reduce emissions and to be transparent when it comes to reporting on them, such as on UN Climate Change’s Global Climate Action Portal.
If divestment and engaging are working within the system, activism is often seen as working outside of it. Activists would argue that engagement doesn’t work, and that the sort of civil disobedience tactics by the likes of Extinction Rebellion generates huge news coverage, thereby generating more awareness of the problem.
Different investors have (so far) taken different approaches. Just last month, Japan’s largest life insurer, Nippon Life, said it favours engagement over divestment, and has made more than 90 per cent of its carbon-heavy investees disclose their emissions reductions targets through active engagement. On the other hand, on the same day, the Dutch civil service investment scheme, ABP announced it would sell its €15.5 billion allocation in fossil fuel investments.
Earlier this year, a small San Francisco-based hedge fund, Engine No. 1 successfully managed to install three directors on the board of the energy giant, ExxonMobil, with the goal of forcing the company to reduce its carbon footprint. Key was persuading BlackRock – the world’s largest fund manager, who owns 6.7 per cent of ExxonMobil – which said it believed more needed to be done for Exxon to reduce climate risk, which ultimately threatens shareholder values.
Engine No. 1’s Founder, Chris James, speaking at the FT panel, said the victory was the result of being able to understand that customers and society are one and the same. “We were able to link climate risk and business risk. This was a clear example of what is good for the shareholders is what’s good for society and for the planet,” he said. “It’s clear that an economic argument has to be made in order to [get companies] to reduce emissions.”
While clearly successful in this case, this sort of boardroom activism is not always the right solution, said the second panellist, Vinay Shandal, Partner and Managing Director at BCG. “It is a challenging strategy to scale – the amount of work behind the scenes, the homework required is huge. Where it could be scalable is in the private markets. There is a risk however that private markets could become a home for bad assets.”
It is a good point: would divestment simply push capital into the hands of people who don’t care about the climate, after all the ethical investors have gone?
“The strategy has to be to create value as well as reduce emissions,” James said. “One of the challenges of the European companies [who are divesting] is what role are they going to play in energy transition [after they divest] and how do they create value? Divestment does not raise the cost of capital for it to be meaningful, and you lose your vote – no problem has ever been solved by running away from it,” he added.
A lot of this comes down to the question of whether fossil fuels will play any part in a Net Zero future. “If these assets are going to be part of our energy mix, then who is the right owner,” asked Shandal. “Do you want an owner who engages with the climate or one who doesn’t engage at all? For every dollar that is committed to net zero, there is a dollar that isn’t, and so the divestment movement is dangerous as you are putting capital in the wrong hands.”
Both panellists agreed that divestment was becoming more prevalent. “ABP are divesting over the next 10 years, while 1,500 asset managers are offloading more than $40 trillion in fossil fuel holdings,” says Shandal. “The trend is clearly focused on divestment rather than on engagement.”
How this area plays out in the next decade will be fascinating, although it is not clear if engagement or activism will eventually overtake divestment as a central strategy. One thing is clear, however, as articulated by James: “No one has the right to do nothing.”