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Franziska Jahn-Madell: Disinvestment versus engagement

04 May 2021 Expert insight

More charities are pondering disinvesting companies from their portfolios. What are the pros and cons?

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What is disinvestment and what’s in its favour?

Disinvestment is the act of selling the shares of a company in response to concerns over environmental, social, corporate governance (ESG) or ethical issues.

If we look at the fossil fuel sector for example, the predominant argument in favour of disinvestment is that fossil fuel companies have known about climate change for many decades and if shareholder pressure has failed to change their approach over this time, it is not likely to be successful now. Any charity with environmental concerns might no longer want to be associated with these companies.

The second argument is based on the beliefs or values of investors. This can be driven by environmental or societal concerns, or religious values. Both the Church of England and the Catholic Church have stated the importance of addressing the moral issues, primarily concerning intergenerational justice, raised by climate change.

The third argument is based on the economic risks of continuing to invest in fossil fuel companies. To achieve the goals of the Paris Agreement, society needs to reduce emissions of greenhouse gases and the consumption of fossil fuels. Consequently, there is a risk that fossil fuel assets will not be able to earn an economic return for their entire usable life and can become what is known as “stranded assets”.

What makes disinvestment less compelling?

While the arguments for disinvestment are all important and play a significant part in the debate about whether to continue to invest, for example, in fossil fuel companies, there are other factors that also need to be considered.

First, disinvestment is only possible once. While it can be used to make a statement, which is likely to gain the attention of fossil fuel companies, once the shares have been sold, it is often no longer possible to be involved in discussions with these companies.

Second, there is an argument that by selling the shares and depressing the share price, other investors without these concerns will be able to purchase shares at a lower price, allowing them to increase their profit while the business models of the companies remain unchanged.

These are the main arguments in favour of engagement.

What is engagement and can it make a difference?

Engagement is the process of continued dialogue with companies and other relevant parties, with the aim of influencing companies’ behaviour in relation to ESG considerations.

Investment managers and asset owners, along with many environmental groups, have been engaging with companies about climate change for a number of years. Decarbonising the economy as a whole, including hard-to-abate sectors such as fossil fuel, building materials, aviation and shipping, will be key to transition to a low-carbon economy in line with governments’ net-zero commitments.

There are valid concerns about the success of engagement so far. However, in the last few years there have been considerable shifts, and engagement could now be a very powerful tool to effect real change. As concerns about climate change have intensified, the desire to engage with companies on these issues has grown. This has led to the launch of a number of shareholder initiatives, including Climate Action 100+, which has three high-level goals on climate-related matters – to improve governance, reduce emissions and increase disclosure. Ruffer is a founding signatory of this five-year global initiative, and through it, investors commit to engaging with 161 companies that have significant greenhouse gas emissions in industries from metals and mining to consumer products.

Does Ruffer recommend disinvestment or engagement to its clients?

There is no reason why engagement and disinvestment can’t be combined. Investment managers often commit to engage with a company for a set number of years, but if companies haven’t achieved certain targets by the end of this period, they then consider disinvesting. This approach can be particularly powerful if the timeline is publicly shared with the companies.

At Ruffer, disinvestment is one of the escalation mechanisms we use as part of our engagement process. Others we deploy before disinvestment are, for example, filing a shareholder resolution, voting against executive or non-executive directors, or making a statement at an AGM.

A growing number of companies are now making significant commitments to reduce their greenhouse gas emissions, and to align their business models with the goals of the Paris Agreement. This partly reflects public pressure – and related reputational risks for businesses – but also, importantly, reflects the influence of shareholders through collaborative initiatives such as Climate Action 100+.

What we do

At Ruffer, our focus is consistent capital preservation and growth. Most investment managers invest to a benchmark, meaning that their performance is closely anchored to the fortunes of the market. We create an ‘all-weather’ portfolio designed both to grow capital in the good times and, crucially, to preserve it in the bad, such as last year during the pandemic.  

Franziska Jahn-Madell is director, responsible investment at Ruffer


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