In the world of sustainable investing, a quiet revolution is underway as strategies shift from simple divestment to active engagement.

This modern approach empowers investors to drive real-world change while maintaining financial goals.

Embracing engagement allows for more profound and lasting impacts on corporate behavior.

Defining the Core Strategies

Divestment involves selling off investments from companies that conflict with ethical or ESG principles.

It is often seen as a clear statement against industries like fossil fuels.

Engagement, on the other hand, means retaining ownership to influence companies from within.

This strategy uses shareholder rights such as voting and dialogue to push for improvements.

Stewardship complements these approaches by managing investments aligned with ESG values over time.

The Research Evidence

Studies show that divestment has minimal impact on market dynamics.

Research from Stanford and Wharton reveals key limitations.

• An 80% participation threshold is needed for a slight change in capital costs.
• Stocks are substitutable, with less conscious investors often buying divested shares.
• No detectable market effect has been observed despite growing impact investing trends.

Empirical evidence on carbon emissions strongly favors engagement.

A Harvard study found that engagement reduces emissions, while divestment does not.

• Divestment strategies can be counterproductive, increasing emissions.
• Collaborative engagement proves more effective than confrontational methods.
• Ownership by active funds correlates with better emission reductions.

Why Engagement Works Better

Engagement requires a lower threshold for change, making it more practical.

With as little as 1% additional support, investors can sway shareholder votes.

This allows for agenda-setting power to prioritize issues like climate change.

Long-term dialogue transforms boardrooms into arenas for decarbonization debates.

The advantages are clear and impactful.

• It enables investors to use influence for positive change.
• Financial objectives can be maintained while promoting ESG principles.
• It fosters continuous improvement rather than abandonment.

Notable Examples and Case Studies

Historical divestment campaigns have had mixed success.

• The Sudan/Darfur campaign pressured governments through institutional divestment.
• South Africa apartheid saw widespread divestment starting in the 1980s.
• California funds have divested from various targets like tobacco and coal.

Successful engagement programs highlight modern effectiveness.

• BlackRock voted against 53 companies in 2020 for poor ESG progress.
• CalPERS uses shareholder power for board diversity and climate risk.
• Legal & General pushes for greater board diversity through active engagement.
• The IIGCC engages with major emitters to reduce greenhouse gases.

The Hybrid Approach and Strategic Balance

Divestment and engagement are not mutually exclusive.

A hybrid approach combines strategies for maximum impact.

Knowing when to use each is key to effective investing.

• Divest when business model changes are unachievable through engagement.
• Engage when collaborative efforts can drive sustainable outcomes.

The UN PRI framework suggests divestment as a last resort after engagement fails.

Additional Strategic Approaches

Collaborative engagement amplifies impact by uniting institutional investors.

ESG integration involves factoring ESG into decision-making for aligned investments.

Active ownership uses legal action and voting to hold companies accountable.

These methods enhance stewardship and engagement efforts.

• They require resources but offer tailored solutions.
• They are typical in private equity for direct influence.

Challenges and Considerations

Both strategies demand significant resources and expertise.

Engagement offers no guarantee of desired outcomes, requiring patience.

Divestment may lead to unintended consequences like job losses.

Industry evidence is mixed, though carbon studies strongly support engagement.

Investors must weigh these factors carefully.

By understanding the nuances, they can make informed choices.

This approach fosters a more sustainable and equitable financial system.

It empowers individuals and institutions to be agents of positive change.

Embrace engagement as a pathway to a better future.