Selling anything usually means there is a buyer on the other side (unless you are me trying to sell something on eBay). When it comes to corporate divestments, chances are that buyers plan on continuing to operate the asset(s) your company wants to sell. If your company has crunched the numbers (or has been directed to sell assets as part of anti-trust positioning), you don’t really care what the buyer does.
Except these days, maybe you should – at least a little – because there is an emerging tension between an individual company or fund decarbonizing itself through divestitures versus global carbon reductions. While divestment helps the seller, it may be considered a form of greenwashing. For buyers, it doesn’t seem like a stretch to think that new owners of high emissions businesses may face operating constraints in the form of carbon emissions limits.
Regardless of the reason a business has for asset divestment, it has the opportunity to deduct CO2 emissions associated with those divested assets from its overall corporate carbon footprint. The same is true for financial institutions getting rid of high-emissions holdings – except they get a massive bang for their divested buck because a CDP study from earlier this year indicated that CO2 emissions from the finance sector’s holdings are 700 times greater than their direct emissions. The study covered 45% of the global financial sector with a total of $109 trillion AUM.
So at the company or firm level, divestitures appear to be a successful Net-Zero strategy.
But things fall apart a bit when the perspective expands to actual global emissions. At the macro level, there is likely no (or very little) real emissions reduction.
- Buyers of real assets most likely incorporate continued operating scenarios in their acquisition plans. Certainly at times there are business benefits to shutting down operations, or even repurposing the plant, property and equipment to a higher & better use. Typically, however, the new buyer will continue to operate the facilities and emissions will continue – and possibly even increase, as the new owner looks to maximize the value of the investment.
- Financial holding divestment doesn’t really impact issuer(s) the way many people assume it does. One of the ironies in ESG mythology is that stock price always translates to company impact. In other words, the company benefits from stock sales at high prices and suffers from stock sales at lower prices. The reality is different. Most day-to-day stock trading occurs between private parties that hold existing shares. Think about it – when you sell shares in your personal investments, who gets the proceeds of the sale – you or the company whose shares you sold? Unless the company is either (a) issuing new shares directly to the market or (b) using existing shares as currency or collateral in major financial moves, the company itself doesn’t really benefit. It is stockholders that benefit, not usually stock issuers. Of course, one could say that executives and managers who have equity as part of their compensation influence operational decisions based on share price, but that is somewhat different. Getting back to the main point – divestment of financial holdings, even at the institutional level, isn’t likely to impact emissions of the company whose shares were sold, except in limited situations.
- Financial holding divestment isn’t realistic for index funds and other “universal holders,” who need to own a specific bucket of stocks. And as Liz has blogged on TheCorporateCounsel.net, it’s actually more impactful for investors to engage with companies than to divest. The focus on engagement is why ESG in board composition is becoming such a big issue.
What’s the bottom line? Focusing on – or even pushing for – divestment won’t result in much global progress on CO2 reductions. Using the energy sector as an example, according to the International Energy Agency (IEA) study Net Zero by 2050 – A Roadmap for the Global Energy Sector:
If today’s energy infrastructure was to be operated until the end of the typical lifetime in a manner similar to the past, we estimate that this would lead to cumulative energy‐related and industrial process CO2 emissions between 2020 and 2050 of … around 30% more than the remaining total CO2 budget consistent with limiting global warming to 1.5 °C with a 50% probability.
… existing net zero pledges fall well short of what is necessary to reach net‐zero emissions globally by 2050. This highlights the importance of concrete policies and plans to deliver in full long‐term net zero pledges.
What You Can Do
How your company address this challenge depends a great deal on your industry and the company’s climate policies and priorities. In practice, it’s almost a given that there will not be a clear-cut solution to the dynamic (or perhaps “tension”) between pecuniary needs and other goals, especially matters relating to how a third party chooses to operate assets your company sells. But it is worth considering:
- Making a formal determination about the company’s position on emissions from divested assets.
- Establishing contractual limitations in sales agreements relating to carbon emissions of divested assets. There is no certainty a buyer would accept operational limits like this, but setting out initial expectations in that regard may lead to some type of emissions reduction that benefits both parties.
- Seeking out asset buyers with a “climate friendly” operating philosophy that would be interested in seeking a joint solution.
- When buying high-emissions operations, assess the future for regulatory actions that impose significant emissions reductions, and determine how to begin working towards meaningful actions.
- For financial holdings, consider how divestment impacts achieve climate goals at the micro (company) and macro (global) levels. Determine if other approaches may offer opportunities for mutual benefit.