Engagement and divestment: Shareholders transcend a false binary
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Key Findings
For many investors, the debate around fossil fuel investments once centered around engagement vs. divestment. But the experience of fiduciaries today is leading to another realization: It’s and, not or.
Engagement strategies need divestment on the table if they want to be credible — and divestment decisions can facilitate fulfillment of broader stewardship goals.
The need for action is heightened by fossil fuel companies’ long history of rejecting good-faith investor engagement on issues of climate risk.
When faced with risky corporate behavior, investors must act swiftly to reduce threats to their portfolio. This means being willing to use the right tool for the job.
Introduction
Across the market, institutional investors are waking up to the reality of climate-related financial risk. Yet as they seek to harden their portfolios against the challenges of a warming world, they face a problem. The traditional energy sector stands disproportionately proximate to many of the causes and effects of climate instability — yet, by many evaluations, is refusing to meaningfully adjust course.
In response to this climate risk, commentators have traditionally theorized two options: exit, or voice. Should institutional investors cut exposure to the most misaligned assets? Or should they retain a seat at the table and try to steer corporate policy from within?
A growing body of evidence suggests that the choice is not so binary in practice. This briefing note summarizes ongoing developments in investor practice and standard-setting that illustrate how investors do not need to choose between meaningful portfolio-wide engagement and intentional deployment of divestment.
Investors should engage across their portfolio to reduce risk exposure and transition misalignment and should see divestment as an important tool to achieve the same ends. In practice, the approaches strengthen and facilitate each other. Engagement needs divestment to have teeth, and a specific divestment decision can strengthen fund-wide stewardship efforts. They are two sides of the same coin.
