Ciaran Hughes QFA
Beyond Divestment: The Power of Active Ownership and Engagement
Updated: Apr 6
Divestment, the practice of selling off stocks or other investments in companies with controversial business activities, has garnered attention in recent years as a way to promote environmental, social, and governance (ESG) standards. While divestment can send a clear message to corporations, it may not always be the most effective tool for change. In this blog post, we will explore the limitations of divestment and discuss the collaborative power of active ownership and engagement. We will provide real-world examples and delve into the intricacies of share ownership, while also examining the likelihood of boards of directors and management responding to active engagement.
Limitations of Divestment
Divestment can be an effective means to distance investors from companies with objectionable practices, but it has several limitations:
Reduction of influence: Divesting can eliminate an investor's ability to engage with company management or influence corporate policies, effectively forfeiting any potential leverage for change.
Market impact: When an investor divests, other investors may step in and purchase the shares, potentially negating the intended impact.
Short-term focus: Divestment often prioritizes short-term financial returns over long-term value creation, which may not be in the best interests of investors or society at large.
The Collaborative Power of Active Ownership and Engagement
Active ownership involves taking a more proactive approach to investments, engaging with companies to influence their ESG practices. This can manifest in several ways, including voting on shareholder resolutions, attending annual general meetings (AGMs), and directly engaging with company management or boards of directors.
Real-world examples of successful active ownership include:
Climate Action 100+: A global investor initiative that engages with companies to improve governance on climate change, curb emissions, and increase transparency. Notable successes include persuading Royal Dutch Shell to set short-term climate targets and linking executive pay to emissions reduction targets.
The Shareholder Rights Directive II (SRD II): A European Union directive that strengthens the position of shareholders and encourages long-term shareholder engagement. This has led to increased transparency and dialogue between companies and investors.
Understanding Share Ownership
Owning a share of a company means that the investor holds a portion of the company's equity, effectively becoming a part-owner. Shareholders have the right to vote on various corporate matters, including the appointment of directors and approval of major corporate actions. Through this mechanism, active shareholders can exert influence on company decision-making and ESG practices.
The Willingness of Boards and Management to Engage
The likelihood of boards of directors and management working with and adhering to active engagement varies based on several factors:
Corporate culture: Companies with a more open and collaborative culture are more likely to engage with shareholders and respond to their concerns.
Regulatory environment: In jurisdictions with strong shareholder rights, boards and management may be more inclined to engage with shareholders.
Investor reputation: Shareholders with a track record of successful engagement and a clear, well-reasoned approach are more likely to be taken seriously.
In conclusion, while divestment can be an effective tool for expressing dissatisfaction with a company's ESG practices, it may not always be the most effective way to drive change. Active ownership and engagement can provide a more collaborative and influential approach, enabling investors to shape corporate practices and create long-term value. By understanding share ownership and the factors that influence a company's willingness to engage, investors can harness the power of active ownership to advocate for meaningful change in ESG practices.