Advisory Partners
The FT Moral Money Forum is supported by its advisory partner, High Meadows Institute.
Partners help to fund the reports and share their business perspective on the forum advisory board. They discuss topics that the forum should cover but the final decision rests with the editorial director. The reports are written by a Financial Times journalist and are editorially independent.
Our partner profiles their business and offers a view on the topic of engagement versus divestment.
Partners’ views stand alone. They are separate from the FT and the FT Moral Money Forum.
High Meadows Institute
Time to move past the Engagement vs Divestment debate
From Divestment versus Engagement to Stakeholders versus Shareholders to ESG versus Sustainability, the sustainable investment field at times seems riven by debate and controversy over issues that are for the most part false dichotomies and two sides of the same coin. As this special report shows, when it comes to divestment versus engagement, there are strong opinions on both sides, but both have a role to play. While engagement enables investors to work directly with management and boards tying access to capital to change, divestment takes the investor off the table and relies instead on the indirect effects of limiting access to capital for targeted industries and the “political” message and influence that may have on policymakers.
Of the two, engagement is the one we favor and believe is having the most direct impact on changing corporate behavior, as we saw most recently at Exxon, which established net zero pledges after board changes driven by an activist campaign by Engine No. 1, supported by institutional investors. That said, it is clear that neither engagement nor divestment to date has driven the scale of change needed to achieve an effective and manageable transition away from a global fossil fuel-based economy. As this report explores, the challenge now is to understand how both approaches can best be integrated to create the most effective strategy to drive change within specific asset classes, sectors, and types of investments.
A key priority in this regard must be credit markets, which have been largely untouched by either engagement or divestment. To date, ESG engagement and divestment have been focused almost exclusively on public equity markets, which are a relatively minor (and diminishing) segment of global capital markets. When it comes to debt financing, while a 2020 BBVA Global Markets Research Report estimates that the current size of the green, social, and sustainable bond market is now approaching US$1 trillion, this is just a drop in the bucket of the US$128 trillion bond market.
This gap is more concerning when one considers that, according a 2017 study by the Carbon Disclosure Project, 70% of greenhouse gasses are emitted by about 100 companies, of which 38 are private or state-owned (and, hence, do not raise public equity) and rely on credit markets for financing.
In this context, the “stick,” as the report notes, is a denial of access to debt financing, since the majority of these 100 companies must raise fresh debt every year. This is where a blended engagement/divestment strategy has the greatest chance for driving the change needed for a just climate transition. On the one hand, investors need to engage more forcefully with the financial institutions that provide financing to these companies to ensure that there are policies in place to restrict financing for these firms unless they meet or demonstrate progress against certain environmental or social impact factors. At the same time, divestment can be used as the “stick” for those financial institutions that continue not to incorporate these changes into their lending and underwriting practices.
* High Meadows Institute’ views are separate from other advisory partners, the FT and the FT Moral Money Forum