Divestment does not just leave fossil assets to less responsible investors
But it's a reasonable concern.
It’s an oft-asked question for us: '“Won’t divestment just lead to fossil assets being held by less responsible investors?”
This is a reasonable concern, but we believe it’s over-stated, for the following reasons:
Challenging the industry’s social license to operate: Divestment from fossil fuels is not only about shifting ownership and finance. Its first and most powerful effects are social: it’s a statement that expresses public concern about the environmental and social impact of these industries. Divestment campaigns force institutions to consider the issues at stake very thoroughly, and so a divestment decision usually signals genuine, hard-won and deep institutional change. By divesting, responsible investors send a strong signal to society at large that they don’t want to contribute to businesses that threaten human rights threats, and accelerate climate change and environmental degradation. This dynamic was most resonantly described by Robert Massie in a comparison to the anti-apartheid disinvestment campaign:
Normally, when you own a stock, you’re endorsing their business plan. And so instead of pushing this off to someone else, [divestment] transforms people and institutions exactly as a democracy should. (Full quote, worth reading, here.)
Fossil fuel companies are staffed by humans, and humans don’t want to be pariahs, they are sensitive to these pressures.
Accelerating the transition: Every penny that remains invested in fossil fuels is money lost to a still under-funded energy transition. Fossil fuel divestment can help accelerate the transition to renewable energy sources and low-carbon technologies – and in our own work, the University of Cape Town, from which we secured a divestment commitment in 2022, has already helped prove this, by moving money from offshore fossil holdings to new SA-based renewable infrastructure.
Reducing financial support: Divestment reduces the financial support for fossil fuel companies. Even if less responsible investors take over, they may find it harder to secure funding from mainstream institutions, given the growing awareness of the environmental risks and long-term financial viability of such assets, or find that their cost of capital has increased.
Reputation and social pressure: Fossil fuel companies owned by less responsible investors may face increased scrutiny and reputational risks. As the world becomes more environmentally conscious, businesses associated with polluting industries may face challenges in attracting talent, partnerships, and customers. Students who have supported divestment campaigns or climate action are far more keen to work for a renewable energy company than for Eskom, and this dynamic holds enormous, much-under-estimated human capital implications for the fossil fuel industry: they can no longer rely on attracting “the best and brightest”.
Promoting shareholder engagement: Responsible investors can still engage with fossil fuel companies, by opting for partial divestment. Having partially divested may in some ways reduce their voice, but will also show fossil fuel companies that they are deadly serious about wanting to see improved business practices.
South African asset managers repeatedly protest that they need to remain invested in fossil fuel companies to influence them. But we have seen few if any persuasive examples of shareholder action influencing them, and we have ourselves engaged in shareholder activism with Sasol, Thungela and Exxaro – mostly without the support of asset managers (Aeon Asset Management aside) who have not supported our recent efforts (efforts led by Just Share) to help get the latter two companies to disclose their backdoor lobbying tactics. (Some media coverage of our engagement efforts.)
Engagement is not useless, but on this issue it’s far from from adequate: there is vanishingly little evidence that fossil fuel companies respond to shareholder pressure. It’s also highly disingenuous for asset manager to protest that they need time to engage, when they have taken decades to get around to taking the climate issue seriously. Asset managers should have begun engagement over climate change in 1992, when the UN Framework Convention on Climate Change was first signed. Instead, they took decades to start taking the issue seriously. Because Africa is more vulnerable than other regions to climate damage, SA asset managers arguably should have been ahead of their international peers on this issues, instead of lagging so dismally behind.
Asset managers like Allan Gray love to say they’re creating change via engagement, but their engagement efforts are belated and shabby at best.
What’s more, meaningful shareholder engagement is a very human-resource intensive process that is outside the capacity of most retail and small institutional investors, as has been repeatedly acknowledged even by an institution on the scale of UCT. For most investors, divestment is an easier signal.
We know divestment is just one part of a larger strategy to combat climate change and transition to a sustainable future. It must be complemented by other actions, such as supporting renewable energy projects, advocating for policy changes (a carbon tax, end to fossil fuel subsidies), raising awareness about climate issues, re-tooling democracies to be less vulnerable to disinformation and corruption and more responsive and accountable to citizens.