The argument against fossil fuel divestment
The Guardian’s Leave It In the Ground campaign names and shames the Wellcome Trust and the Gates Foundation for not divesting their holdings in fossil fuel companies. Editor Alan Rusbridger launched the project by declaring the case for the divestment of fossil fuel investment is overwhelming both on moral and financial grounds.
While this campaign and those against Harvard, Oxford, Sydney and other universities are great at generating publicity – the Wellcome Trust announced it had already sold off its £94 m ($147 m) investment in ExxonMobil – they may be doing more harm than good.
The tactics applied harken back to the anti-apartheid boycotts of the 1960s-1980s in the hope that the campaigns will ultimately filter through to the money making parts of the fossil fuel industry. Yet none of the arguments for fossil fuel divestment appear to understand the nature and importance of ownership in modern shareholder societies.
One of the hallmarks of investing in a company is that share ownership confers the legal right of proportional ownership. Legally, any individual holding a specific ownership share can bring issues to the company and has proportional rights to vote on all motions put to the ownership either by the board or shareholders.
While corporations have to engage in conversations and negotiations with a multitude of 'stakeholders', it is only those who possess ownership rights that they are, in practice, accountable to in a fiduciary sense. Shareholders determine the composition of the board, and the value of their investment will be influenced directly by what the board and senior management do.
Investors in the driving seat?
Those behind divestment campaigns have lost sight of the fact that investment can imply control. Significant ownership shares, or coalitions of ownership shares, can be turned into activist voting blocks and also ensure that specific ownership interests get seats on the board.
For example, investor Dan Loeb used his fund’s position in Yahoo! to force a change of CEO while also gaining a seat on its board. Groups such as Domini Social Investments are quite enthusiastic about their effective use of an activist investor approach to inducing corporate change. On average they put a dozen proposals to shareholders of major corporations such as Apple, Energen and Pepsico a year, addressing issues ranging from methane emissions to political contributions and the role pesticides in the decline in the number of honeybees.
Investment can influence corporate actions, which is why pension funds and institutional investors want to hold significant shares in key companies. The greater the investment, the more likely it is that the company’s management must take the viewpoint of the investor seriously, as in the Yahoo! case. Divestment does little more on this dimension other than to turn an inside voice that can demand that a company listen into an outside voice that a company can easily ignore.
Olaf Kraak / EPA
Divestment does not destroy value – it simply transfers it to another set of owners who are not so morally outraged and are willing to pick up the shares set aside, at a slight bargain. As the outraged owners are being replaced by less moral types, the likelihood that inside pressure can be brought to bear declines.
Hence, if the point of the divestment campaigners is to publicly shame the fossil fuel companies and put pressure on them to change their strategies, the campaign is doomed to fail. Rather than the board and management having to suffer owners who are concerned about the moral direction of the company, they are now happily accountable to owners who are less likely to care about such things.
Shares don’t equal cash flow
Divestment campaigners seem to believe their investment goes to the company – that somehow this divestment starves the company of the ability to invest, or raises the cost of capital and debt.
In fact, buying shares does nothing to alter the cash flows available to that company for future investment. The only time the company receives funds is when it issues new shares, and divestment will have no influence on this. Indeed, most major energy firms have not had new share offerings in decades. Hence the conclusion that such divestment would reduce the investment capital available to fossil fuel companies has no basis in either financial reality or fact.
One response to this last general point is that while divestment will not hurt large companies, it will restrict investment in smaller fossil fuel and mining companies. In reality this also makes no sense.
First, the groups that would divest are not so rich that they can move financial markets with their divestment alone or even in concert with others. For example, while Harvard has lots of money in its endowment ($36 bn) it still won’t change the price of oil or the value of oil companies. The university’s endowment pales in comparison to Bridgewater Associates (a hedge fund with $169 bn under management) and most major pension funds and sovereign wealth funds, the majority of whom are unlikely to jump on the divestment bandwagon. Harvard might divest, only to leave the investment to be picked up easily by investors from China, Qatar, or Indonesia.
Second, even if small companies did suffer through divestment there is nothing to stop the larger fossil fuel firms simply using their cash flow and borrowing capabilities to purchase their now cheaper and more vulnerable rivals. So rather than divestment hurting the large amoral multinational fossil fuel companies and its remaining investors, it provides an opportunity for them to control and consolidate the industry further, potentially reaping more dividends from the act of consolidation.
If the divested funds were used to purchase shares in 'alternative energy' companies all that would be happening is that the shares of those companies would be changing hands. Again, this share investment would not add to the cash flows or available investment capital of these companies unless the redirected investment went into new share offerings.
Divestment campaigns can no doubt make people feel good about themselves and the actions they are taking to make the world a better place. They can also put pressure on organisations who don’t have active ownership structures but instead view themselves as accountable to a range of people who act as if they have ownership rights – think of universities and their faculty, students and alumni. All of this is noble.
However, such campaigns may be inferior to a more activist alternative, which is to either increase the investment or to work to pool the investments of like-minded shareholder groups so as to form ownership blocks that can demand changes in the board, management and strategy. In the end, it may be that moral outrage is not as effective as capitalism because one of the points of capitalism is to separate ownership from management while allowing owners control over managers.
One can express moral outrage about short-term shareholder capitalism but shares do not care who owns them and it is the job of the shareholder as owner to ensure that the company is run according to their wishes. If the divestment advocates want companies to operate according to different precepts, perhaps more active ownership control would achieve their goals more quickly and effectively.
Timothy Devinney is University Leadership Chair & Professor, Pro Dean of Research & Innovation at University of Leeds.