I felt conflicted when I came across a letter from a group of authors calling for Baillie Gifford, the fund manager, to be dropped as a sponsor of the Edinburgh International Book Festival due to its investments in fossil fuels. As a newly published children’s author, I noticed that many of my peers agreed with this sentiment on social media. However, as a financial journalist and author of a book on climate change, I argue that divestment is not the most effective way to bring about change.
In the current climate crisis, it’s understandable that people would consider divesting from companies associated with carbon emissions in their investment portfolio. The idea is to cut ties with oil and gas companies by selling their stocks or investing in funds that avoid them. There are two justifications for this approach: one is the desire to maintain a morally pure investment portfolio, and the other is the belief that divestment will financially harm these companies.
Unfortunately, there is no evidence to support the claim that divestment significantly impacts the cost of capital for companies. A study conducted by the Stanford Graduate School of Business found that ESG divestment had minimal effects on the cost of capital and did not influence real investment decisions in the US. It concluded that at least 86 percent of investors would need to exclusively hold clean stocks to impact the cost of capital by 1 percent.
Moreover, divestment often means passing shares to other investors who may not share the same ethical concerns. This can undermine the overall goal of reducing carbon emissions. Mark van Baal, founder of Follow This, a shareholder pressure group advocating for Shell to cut emissions, believes that divestment has led to a decline in climate change resolutions, as engaged investors sell their shares to those who are less concerned about environmental issues.
Engagement, instead of divestment, has long been argued as the preferred approach by some investors. However, the rise of greenwashing and virtue signaling has complicated matters in recent years. Institutional investors often tout their engagement policies and claim to have productive conversations with companies, avoiding the need for voting against boards. But it’s challenging to measure the effectiveness of these conversations, as they often focus on tangential issues rather than the core problem of reducing emissions.
For equity investors, one concrete way to gauge asset managers’ commitment to confronting fossil fuel companies is through their voting record. Are they voting against board members who are not setting ambitious emission reduction targets? Are they voting against excessive remuneration packages? Such actions can have a meaningful impact. However, the current lack of voting disclosure requirements makes it difficult for investors to assess asset managers’ voting practices consistently.
To address this issue, the Financial Conduct Authority (FCA) is proposing measures to improve transparency in voting practices. The FCA is considering implementing a standardized voting template to make it easier for asset owners to assess their asset managers’ stewardship activities. While some argue that this should be mandatory, others see it as an additional regulatory burden on the industry.
Once voting disclosure becomes mandatory, asset owners, including retail investors, can pressure asset managers to vote more frequently. This is particularly crucial at a time when US asset managers, such as BlackRock and Vanguard, facing political backlash against ESG investing, are voting less frequently.
In the case of Baillie Gifford, instead of demanding complete divestment from fossil fuel holdings, it would be more effective to encourage the fund manager to vote on climate resolutions more often. While Baillie Gifford does provide information on its voting record, it can be challenging to access and comprehend.
The FCA’s efforts towards greater voting transparency are positive, but investors must go further in holding companies accountable. Asset owners and managers should resist the temptation to bow to pressure and divest. From my conversations with industry insiders, it is clear that there is frustration towards divestment demands from financially inexperienced members of organizations. A more targeted approach that emphasizes the use of voting power is one of the most effective ways to achieve meaningful change.
Alice Ross is a contributor to the Financial Times and the author of “Investing to Save the Planet,” published by Penguin Business. X: @aliceemross
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