What is Divesting?
Divestment / Divesture - the action of selling subsidiary assets, investments, or divisions of a firm to maximize the value of the parent company. This can be either a partial or full sale of a business unit.
Should ESG be a matter of divesting or engaging in creating positive change? Perhaps it should be a combination of the two.
Types of divestments:
· Spin-offs: Creating and selling new shares to shareholders. The subsidiary becomes an independent company whereby shares can be traded separately on the stock exchange. The expectation is that the divestment will be worth more post-separation from the parent company
· Equity Carve Out: Divestment is simply partial, and the business unit is not sold completely. The shares are sold through an IPO – again by creating a new subsidiary company. Control in this case is handed over to the buyer, but a partial equity stake is retained
· Direct Sale of Assets: Selling assets for immediate cash to another company
How can social goals be achieved through divesting?
Achieving social goals, through divesting strategies, is a technique dating back to the late 1970s. Specifically, divestment was encouraged during Apartheid to protest against the system. This tactic pressured firms into removing business holdings in South Africa by reducing or removing operations. Today, this strategy has again become popular, because of rising global warming concerns.
Pension funds pioneered the socially responsible divestment and engagement approach. The first being Waltham Forest’s local government, who removed all crude oil investments from their pension portfolio. Divestment appeals from human rights activists have pleaded for asset managers such as Vanguard, BlackRock and Fidelity to divest from private prison firms, which in 2017 the New York City pension fund divested from (divestment does not harm the prisoners). Unsavoury investments are evidently becoming unpalatable.
Aside from pension funds, 78 of the 154 U.K. universities have pledged to divest from fossil fuels. The Church of England has also claimed investment and endowment funds worth over €12bn will abandon shares in fossil fuel companies who are not tackling climate change. The Church of England has already divested from tar and coal companies.
BNP Paribas have eliminated any companies that generate a tenth of revenues from coal production. Whilst BlackRock have divested any firms in their investment portfolios that create 25% of revenue from thermal coal production. However, BlackRock is still in the top “dirty thirty” investing companies that are responsible for controlling assets of $512bn associated with fossil fuels. Also amongst the list are JP Morgan, Capital Group and Fidelity. But is black-listing and forcing divestment on such companies the ultimate panacea?
Ben Caldecott, director of the Oxford Sustainable Finance Programme, said to the Financial Times, “divesting doesn’t make a difference to the share price of divested firms,” adding that “you can only really have an impact in deep and highly liquid public equity markets via effective engagement and stewardship.” Similarly, Bill Gates claims divestment has “zero climate impact.”
Potential downfalls of divesting:
Divesting is not a solution, perhaps just progress. Despite raising social concerns, it is less effective than actively engaging and promoting socially responsible change in unethical firms. Providing assistance to companies on how to improve social responsibility and engaging in sustainable strategies is of better use. Or, rather than simply divesting, individuals could invest in socially progressive companies such as Beyond Meat, Ben & Jerrys, and Microsoft.
One argument for holding unethical stocks, instead of divesting, is shareholders could come together and advocate for company change. Maintaining unethical stocks could be offset by creating positive change using shareholder power – although a significant stake is required to do so.
A shocking truth as to why unethical firms are appealing is, although they might have questionable business practices, their profitability and reliability are factors that makes such stocks essential. Tobacco and alcohol flourish due to their addictive nature, prospering from unfixable, never-ending human weaknesses. Therefore, for companies that profit from immorality, divestment can be a large cost. Sizeable and lucrative returns from legal and profitable firms are limited if environmental, social and governance (ESG) themes are prioritised. And sometimes, this risk of divesting from such profitable firms is too extensive to ignore.
For individuals, divesting assets from their portfolio strategy is often based upon personal beliefs. Investors will often consider the moral integrity of the company – Does the company and its management team hold up to your standards of morality? The social impact of the team – Does the company align to your wider beliefs? Finally, financial security – Does the company still have a secure financial future? There are multiple reasons as to why an individual might move away from so called ‘sin stocks,’ but by doing so investors might face the risk of losing out on significant short-term profit increases.
Whether it is for individuals or investment firms the term unethical stocks and shares is a subjective term. An opinion of a ‘good stock’ for one person might be extremely contradictory to another person’s perception. Thus, the likelihood of putting a stop to unethical investments and divesting from all fossil fuels or unethical firms is not ripe.