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September 2, 2020

New study: divestment is media-grabbing, but ineffective

A study conducted by researchers from Harvard and the University of Chicago and published in the National Bureau of Economic Research (NBER) concluded, unsurprisingly, that divestment was a less effective approach than engagement to push companies to address climate change. Divestment does little to advance ESG goals and is, in fact, a lot messier.

While climate activists and “Keep It In The Ground” groups prefer divestment due to its media-grabbing and retweeting effect, the NBER study shows all the dramatics and performative efforts have little tangible impact when it comes to pushing firms to act in a socially responsible manner.

The NBER study questions divestment’s effectiveness to generate genuine change, particularly when contrasted with engagement. The study demonstrates that in this scenario, engagement is not only the most socially responsible – and evidence-backed – approach, it is more effective to induce change than what the paper calls “exit strategy” due to its consensus and process-oriented logic.

First, divestment advocates view investment decisions through a single-issue lens. Hence, their macro perspective, including asset management, tends to be clouded. In contrast, engagement (or voice as described by the study) allows shareholders and financial experts to conduct investment decisions based on the greater good while respecting their fiduciary responsibility. On this, the NBER study concludes that “our simple model suggests that for a sufficiently large number of (moderately) socially responsible agents, the voice strategy dominates the exit one.”

Second, divestment strategies are usually driven by activist groups with a single mission in mind and do not represent the vast majority of opinions and neglect other approaches to tackle climate change. Hence, divestment groups rely on disruptive tactics to draw attention to their political motives in the hopes of dominating the conversation.

However, as the NBER study argues “there is no guarantee that its [divestment] ability to succeed is linked to the social desirability of its goal”, making engagement “more aligned to social incentives than exit [divestment].” Simply put, divestment’s lack of consensus undermines its original incentive for change, making engagement a more desirable approach.

In addition, divestment is messy and unpredictable. According to the study “divesting or boycotting can lead to too little or too much exit from the perspective of a benevolent planner”. Its disruptive, limitative nature is goal oriented; hence the outcomes cannot be measured, nor verified. It is a goal in itself instead of a process.

For instance, a couple of universities have pledged to divest their endowments from the fossil fuel industry, yet, when reading the small print, complete divestment is unfeasible because some assets are invested in commingled funds. Likewise, NYC Mayor Bill de Blasio’s vocal position in favor of divestment shows the approach’s performative nature. De Blasio has made a great fanfare about NYC’s pension funds divesting their assets from the industry; however, they have recently commissioned a financial assessment to evaluate if divestment is even possible. Likewise, internal divisions within the five pension funds have resulted in an unlikely unanimous response on divestment.

Fortunately, and despite divestment efforts across the country, several prestigious educational institutions, including Stanford, Princeton, Harvard and MIT, continue choosing engagement over divestment. By pursuing engagement -an informed, socially responsible approach- over divestment, Universities guarantee that the oil and gas industry chooses responsibility and contributes to find real, applicable solutions to climate change.