The divestment dilemma

The divestment dilemma

November 30, 2015 - by David Woods - 2 comments

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Last year Oikocredit signed the 2014 Global Investor Statement on Climate Change as part of the UN’s climate summit in New York. This was just a small step to show that we’re serious about acting on climate change. Now, one year on, the UN’s climate conference, COP21, begins in Paris today. Since signing the statement, we’ve been doing more as an organization to combat the effects of climate change (although we must acknowledge that on a global scale Oikocredit’s influence is limited) and have been following what others are doing around the world as well.

What we’ve seen over the past year is the topic of divestment (moving away from investments that are unethical) making headlines. Campaigns like Fossil Free are encouraging investors to stop profiting from oil and gas. Divestment is presented as a way in which we can increase our voice as environmentally-aware investors: we can argue to companies we invest in that they must be more environmentally-friendly in how they do their business, while only investing ourselves in companies that meet environmental and ethical standards. With over USD 7 trillion now in socially responsible investments in the US alone, the voice of divestment is finally making itself heard.

Does divestment work?

But does it work to combat issues such as climate change? Well, up to a point. In a financial sense: not really. In a sense of enhancing social and environmental awareness: sort of. Look at the lobbying to make oil companies reduce investment in fossil fuels; look further back at the pressure put on companies doing business in South Africa in the 1980s. Does self-interest enable companies to make a virtue of necessity, or is there really significant impact from environmental and social lobbies? The empirical long-term evidence isn’t clear.

On the other hand, on the financial impact, pressure from environmentally and socially aware investors could be working counter-intuitively. By reducing the number of people willing to hold ‘unethical’ stocks of, for instance, arms manufacturers or tobacco companies, the financial returns on such shares have to rise as they seek willing buyers — so holding ethical stocks can reduce your financial return while holding ‘bad’ stocks will make you richer. This is why churches sometimes have a real difficulty in investing in Oikocredit: their rules require them to seek the best financial return, not the best environmental or social one. I hear again and again from ethical investors that they aspire to deliver full market returns.

Environmental criteria

So what’s the answer? For a fundamentalist like Oikocredit, it’s relatively easy. All the partner organizations we invest in are screened according to environmental, social and governance criteria. It’s part of our mission to make impacts in a sustainable way. And for our bond portfolio, which we keep for reasons of liquidity and risk management, we pick the stocks we invest in, and we usually don’t invest in quoted companies. All investments in this portfolio are screened by Ethibel — and since we’re not seeking to maximize return, it works for us.

What can companies or countries do?

For bigger institutional investors, it’s much more difficult, and I don’t think there are easy or clear answers. If companies or even whole countries want to mitigate the effects of climate change, will divesting from environmentally harmful sectors such as fossil fuels provide the answers? Should more companies look for greater environmental/social returns, rather than financial ones? Just this past week one of Oikocredit’s major Dutch investors released a statement saying it’s going to end financing to harmful sectors such as coal and increase investments in renewables in an effort to combat climate change. But is this enough?

What are your thoughts on this? Divesting isn’t a problem that we face at Oikocredit, but what ideas do you have of new ways to handle the divestment dilemma?

Comments

  1. Aryt AlastiAryt Alasti Wrote on December 2, 2015 at 9:16:24 AM

    Multiple analyses have shown that pensions funds in California, New York, Massachusetts, Vermont and Europe have lost big money on fossil-fuel investments, as has the Gates Foundation. The Rockefeller Brothers Fund is quite pleased with their financial results thus far, after having made progress with their divestment process. With more oil supply imminent from Libya, Iraq and Iran OPEC unlikely to cut back on supply, coal companies going bankrupt, gas companies not yet having addressed the full liabilities which are inherent in infrastructures' fugitive-methane situations, and various initiatives underway to reduce demand, the prospects for significant price increases in the foreseeable future are small. The Gates Foundation has unloaded a large quantity of fossil-fuel stockholdings, without calling that divestment, as has Harvard. It's not actually a problematic decision if the critical considerations are financial.

  2. David WoodsDavid Woods Wrote on December 3, 2015 at 4:10:18 PM

    Thank you for this useful additional information about divestment, Mr Alasti - and I agree, divestment can come in many ways and be called many things - some managers will divest with large gains and make a virtue of it, while some will be less fortunate. And the consequences of those actions will either mean companies are weakened, and jobs lost, or simply that investors with different priorities buy those stocks. It will be interesting to watch as the momentum builds up!

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