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“Not wanting to own oil companies because they’re lying, polluting entities makes sense from a moral perspective, but I think we need a more rigorous conversation about whether it’s an effective strategy,

Credit: Columbia.edu

Not everyone believes divestment is an effective tool for curbing climate change.

“Not wanting to own oil companies because they’re lying, polluting entities makes sense from a moral perspective,” Lisa Sachs, director of Columbia University’s Center on Sustainable Investment, told EHN, “but I think we need a more rigorous conversation about whether it’s an effective strategy.”

Divestment doesn’t do much to impact the industry’s bottom line, Sachs said.

“When we’re talking about divesting, which just means selling shares, we’re talking about a secondary market,” Sachs explained. “The company that has issued those shares has already gotten that capital when those shares were initially sold.” In other words, selling fossil fuel shares doesn’t mean the company will lose that money — it just means ownership of those already-issued shares will change hands.

Sachs pointed to a 2021 analysis by researchers at Stanford University that found at least 86% of investors would have to divest in order to increase fossil fuel companies’ cost of capital (which essentially means their cost of doing business) by 1%.

“We’re not going to get 86% of shareholders to divest, and even if we did, that change in the cost of capital is too small to influence the behavior of a board of directors at a fossil fuel company,” Sachs said.

However, divestment can “delegitimize an industry, and that’s a very important signal,” Kathy Hipple, a finance professor at Bard College and former financial analyst at the Institute for Energy Economics and Financial Analysis, told EHN.

Another tactic involves holding onto shares and exerting influence over companies as a shareholder.

“If you’re divesting from shares for some moral reason, you are necessarily selling them to someone who cares less,” Sachs said. “If you keep the shares, then at least you have a voice as an owner.” She pointed to Engine No. 1, an activist investment firm that bought millions of shares in Exxon Mobil and installed board members who promised to drive more climate-friendly policies.

Hipple said that even if an institution keeps fossil fuel shares and takes an activist investor approach, they need the divestment option for leverage.

“You’ve got to have the threat of being able to say, ‘I’m not going to stay invested if you don’t do this,’” Hipple said. “If you take divestment off the table, that’s a key arrow taken out of your quiver.”

That’s what the Church of England did. The Church’s Board of Pensions, which had around $1.72 million invested in Shell, spent years working as activist shareholders, leading a climate-focussed investor group that fought to make the company align its business strategies with the Paris Agreement goal of limiting global warming to 1.5 degrees Celsius. But in June, the Church of England announced that Shell wasn’t taking sufficient action to limit global warming, so it would not only divest all of its pension funds from Shell, but would also divest around $13 billion from its Church Commissioners fund from all remaining oil and gas companies in its portfolio, including Shell, BP, Equinor and TotalEnergies.

“If your industry starts to get a black eye, that casts doubt on whether it will still be around in 20 or 40 years, which makes it difficult to attract top talent,” Hipple said. “We can tell from how aggressively the industry is lobbying against this that investors caring about climate change poses an existential threat to this industry, and divestment has played an important part in that.”