Universities and pension funds are grappling with their role as agents for positive change on climate issues and whether divestment is an appropriate, responsible and effective response.
Here are 10 reasons divestment is a completely ineffective solution to address climate change.
- The notion that divestment is effective ignores historical fact. Many seem to have romanticized and glamorized divestment as the precipitating event that ended apartheid. This ignores historical fact. It wasn't until governments got involved that pressure truly was applied and results were achieved in South Africa. Joshua D. Coval, the Jay O. Light professor of business administration, Harvard Business School, presented the research supporting this point in November at a panel at the school. It was governments that finally brought about change, not divestment.
- Divestment damages investment portfolios. I have been involved in numerous divestment initiatives (tobacco and South Africa, among others) where we measured the damage to investment portfolios, both in loss of return and the resulting higher risk characteristics. The losses and higher risk were material and stunning. No professional grounded in fiduciary responsibility could recommend pension fund trustees responsibly incur the kinds of losses and increased risk that we know result from divestment.
- The notion that you can build fossil-fuel-free portfolios that will act the same is not borne out in robust research or evidence. The research suggesting that you can build fossil-fuel-free portfolios is not grounded in the appropriate foundations and realities we know to be true in modern portfolio management. The notion that certain stocks with unique idiosyncratic factor exposures and risk profiles, unique geographical footprints and assets, unique cost structures and cost of capital, unique management teams and strategies can be treated as fungible assets is not borne out in industry research we know to be true.
- You lose your voice to effect change if you don't own the companies' shares. Institutional investors that don't own shares don't vote proxies, don't have rights to engage management and they don't elect boards of directors. From the companies' perspective, directors and management have a duty to shareholders first and foremost, and regulators second. So, from the perspective of management, selling the shares relieves management and the board of the responsibility to address your concerns. Boards in America are judged on whether they exercise duty of care to shareowners. So if you aren't one, that's a problem. The same is true of regulators. Based on my experience, the chair of the Securities and Exchange Commission has no time for meetings to hear about the complaints from those who don't own the shares of the companies about which they wish to complain. This is another aspect where the logic of divestment is completely flawed.
- The shares end up in the hands of people who do not care about the issue. Broad-scale divestment trades out shareowners with a conscience for owners with a lesser conscience. Resulting owners are effectively “drones” — pilotless, voiceless owners without a conscience. This was confirmed in South Africa, where divested shares were largely bought by the Chinese who didn't care about human rights abuses.
- Divestment leaves the company unharmed. There seems to be a misconception about divestment that we have somehow punished the company by petulantly selling its shares. This is wrong. The company is no worse off. We have not deprived the company of any capital, or raised its cost of capital or operating cost. This was borne out in South Africa. Studies show the companies were unharmed and the stocks appreciated remarkably.
- Pension funds and universities bear no legal or financial resemblance to a foundation that chooses divestment to make a social statement. Unlike a foundation that has the luxury of writing checks, in effect “tithing” to worthy charities roughly 5% of its asset base each year, pension funds have defined contributions, not variable. Universities have mission-critical obligations of financial aid, competitive faculty salaries and the replenishment of physical plant. Both are regulated entities overseen by federal and state law and authorities with the need to meet payroll, pay pensions, pay health-care bills for millions of people. Universities must also raise debt in the public debt markets, the cost of which is subject to rating agencies' opinions of their financial sustainability. Pension plans are generally grossly underfunded and most universities are not wealthy like Stanford; they are financially strapped and find it difficult to meet their mission-critical objectives. They do not have the luxury to use their investment portfolios for money-losing social causes.
- Where in our lives and in any place we hold dear — our schools, our communities, our political system — have we ever learned that turning your back and walking away is the best and first solution to a problem? It is analogous to having a problem with your next-door neighbor and your first response is to put a “for sale” sign in your front yard. Is this how we have learned to work out our differences? When the planet is ruined in 50 years and your children ask you what you did to prevent it are you ready to look them in the eye and say “I did my part. I walked away; I sold my shares in protest!”
- None of the well-respected institutions that are advocating on behalf of the planet and climate change support divestment. The U.N. Global Compact, the Carbon Disclosure Project, the Global Reporting Initiative, the International Integrated Reporting Council, the Investor Network on Climate Risk and CERES, which are at the vanguard of global sustainability initiatives, do not advocate divestment. These organizations advocate disclosure and transparency because ”what gets measured gets managed.” In fact, the cutting edge of corporate sustainability is not only not divestment, it is the polar opposite; the integration of non-financial and sustainability factors into investment analysis so that we can properly value assets, cash flow and value creation from sustainable sources.
- Divestment leaves you unable to employ the means for change that we know really work. We know that corporate activism and engagement really work. As evidenced by the last decade since Enron Corp. and WorldCom Inc. went bankrupt, when long-term owners collectively engage companies, a lot can be accomplished. Progress on declassifying boards, the reduction in supermajority voting requirements, majority voting, proxy access, “say on pay,” executive compensation transparency and claw-backs, the existence of the Public Company Accounting Oversight Board and improved auditor independence, the elimination of broker voting all are evidence that corporate engagement works. None of these things existed a decade ago and they are now pervasive in corporate governance standard practice.
Legislatively, the Sarbanes-Oxley Act of 2002 and Dodd-Frank Wall Street Reform and Consumer Protection Act of 2008 represent a massive change in the corporate governance of companies and the regulation of financial institutions. What we have witnessed here is that real change can come about when you work from within the legal, legislative and regulatory frameworks.
We have institutions in our society that are responsible for public policy, such as legislators, regulators and standard setters, who ultimately have to set standards and oversee corporate sustainability. These institutions need to be engaged and be held accountable. Working from within, as an investor with proxy votes that influence corporate decision-making, is far more powerful in advancing corporate sustainability than stepping outside the sphere of influence by divesting.
Christianna Wood — CEO of Gore Creek Capital Ltd., a Denver-based investment consulting firm — is chairwoman of the Global Reporting Initiative, a trustee of Vassar College and chairwoman of Vassar's trustee investor responsibility committee. Ms. Wood formerly was the senior investment officer, global equity, at the California Public Employees' Retirement System.
