I’ve long questioned the belief that divestment is an effective strategy for incentivizing company change. If one investor sells a company’s stock, someone on the other end buys it at market value. Granted, if the investor is big enough or if the number of shares sold is large enough, share value may take a quick hit. But the market has a very short term memory so more likely than not, the hit lasts only a few days. Advocates of divestment argue that it gets executive and board attention.
Even so, institutional investors use divestment strategies to make their holdings look more sustainable, responsible or ethical overall – although some do use it as a sincere attempt to influence companies to change. Net Zero Investor wrote about Norges Bank Investment Management’s (NBIM) unique approach to divestment:
“Financial prudence is a key piece of NBIM’s divestment puzzle. Defending the fund’s divestment decisions, [Carine Smith Ihenacho, NBIM chief governance and compliance officer] stressed: ‘on this [divestment], we make money’…
Yet, for NBIM, divestment is not the end of the road. Companies are still offered the opportunity to show improvement… ‘If companies improve, we can reverse that decision’, said Ihenacho. Reverse they did. 16 companies were moved back into the fund’s investment universe in 2024. Improved climate risk management over several years was part of the rationale.”
NBIM’s concept is invest-engage-divest*-engage-invest* – the asterisk meaning NBIM’s actions are conditioned on the company’s response. NBIM may be on to something:
“NBIM’s reversals speak to a wider debate over divestment. They seemingly suggest that divestment by large asset owners could incentivise companies to do better – provided the divestment is up for reassessment. [Emphasis added].
In so doing, NBIM’s report circles back to a question posed by Dr. Tom Gosling – now a professor at the London School of Economics – in a commissioned research report for the Border to Coast Pensions Partnership in 2024: does divestment work?
These reversals add nuance to the answer, which in any case is not straightforward. While they might not reflect causal links between divestment and altered corporate behaviour, the two did occur in tandem. Correlation is not causation, as the adage goes, but it does offer evidence worth considering.”
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Photo credit: Timon – stock.adobe.com
