I feel conflicted when I see a group of writers calling on fund manager Baillie Gifford to cease being a sponsor of the Edinburgh International Book Festival, citing its investment in fossil fuels. As a budding children’s author myself, I saw my peers liking this letter on social media.
But I’m also a financial journalist who wrote a book on climate change that argued that divestment is not a good idea if you really want to make a difference. This remains the case in the current energy crisis climate of ESG skepticism.
When people start thinking about carbon emissions and their investment portfolios, divestment seems like the obvious choice. You don’t want anything to do with those evil oil and gas companies, so you sell them, or invest in funds that promise not to own them. There are two reasons for doing this: one is fair enough, the other is not fair enough. The first is a pure approach: as an investor, hopefully you don’t have to get your hands dirty. Selling won’t change things, but not all investors are trying to effect change, that’s their choice.
Another is the belief that divestment will increase the company’s cost of capital: your divestment will cause a financial loss. Unfortunately, there is no evidence that this is true. a dissertation A study from the Stanford Graduate School of Business found that the impact of ESG divestment on the cost of capital is too small to have a meaningful impact on actual investment decisions in the U.S.: The study found that at least 86% would have an impact on the cost of capital of at least 1% Investors need to choose to only hold clean stocks.
Selling already existing shares also means transferring them to another investor who may be less cautious. Mark van Baal, founder of shareholder pressure group Follow This, which pushes Shell to speed up its emissions reductions, believes votes on climate change resolutions have fallen flat in part because engaged investors sold their shares to For those who don’t care.
Basically, divestment means giving up a seat at the table. Some investors have long argued that participation, rather than divestment, is the way forward. In recent years, however, greenwashing and virtue signaling have muddied the waters. Institutional investors often talk about their participation policies. They believe that they generally don’t need to vote against the board because they have so many great one-on-one conversations with the board. They’ll get there, it’s a push approach and it takes time. The current buzzword is management, which can include a wide range of things.
The problem for retail investors and asset owners is that this is difficult to measure. Are institutional investors actually achieving anything through these conversations, or is it how they should disclose their CO2 footprints in their annual reports before discussing the more important question of where the next drilling site should be?
Some investors gave up. The Church of England made headlines in June when it said it would sell out of its stakes in fossil fuel companies, having previously urged those companies to make changes. This is partly because boards are not moving fast enough, which is frustrating, and partly because they are annoyed that their names as ethical investors are being used by companies to burnish their green credentials. But while high-profile divestments can send a message, ultimately such moves are more about purism than practicality.
Others distinguish between debt and equity when disinvesting. Lothian Pension Fund, for example, takes a “deny debt, participate in equity” approach: the theory is that refusing to refinance a company’s debt will have a greater impact than selling shares.
For equity investors, one concrete way to measure the steps asset managers are taking against fossil fuel companies is through their voting records. Do they vote against board members who don’t set strict enough emissions reduction targets? Did they vote against their pay package? This allows the mind to be highly focused.
Currently, institutional investors are not required to disclose how they vote. The Financial Conduct Authority’s poll reporting team said that while there were “parts of excellence”, “the nature of poll reporting disclosures is piecemeal”. More work needs to be done to systematize it.
UK Financial Conduct Authority Inviting comments In a consultation paper before September 21, it argued that asset owners need to make it easier to understand what their asset managers are doing in terms of stewardship.It proposes a voluntary, standardized voting template, but some Hope this is mandatory. This will increase the regulatory burden on the fund management industry but help investors decide who to give their money to.
Once disclosure is required, the next step for asset owners, including retail investors, will be to force more votes from asset managers. This is particularly important at a time when U.S. asset managers such as BlackRock and Vanguard are mired in a politicized anti-ESG backlash that has seen voting declines.
Which brings us back to Bailey Gifford. Rather than asking it to sell off its fossil fuel assets entirely – the fund manager protests that it has only 2% of client funds in such companies, compared with the market average of 11% – it should be allowed to vote on climate resolutions more frequently .
The fund manager does provide an account of its voting record – for example, it pointed me to page 89 of its 90-page document on its engagement practices as evidence of its vote against BHP’s climate transition plan – but it does not Not easy to read. .
The FCA’s move to increase voting transparency is welcome. But investors need to do more to hold companies accountable. Asset owners and managers need to resist the temptation to succumb to pressure and give up on trying to drive change.
The insiders I spoke to for this column spoke rather wearily of pressure to divest from financially “naive” members of their organizations. I sympathize with them: the reality is that a targeted approach, insisting that asset managers use their votes, is one of the best ways we have yet to achieve impact.
Alice Ross is a writer for the Financial Times. Her book Investing to Save the Planet is published by Penguin Business. X： @aliceemross
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