Should investors stay and fight for green change — or divest?
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Socially conscious investors, employees and consumers are increasingly pushing funds to divest certain shareholdings, to address the big social problems of our time. But we have conducted research that suggests, in most cases, they would do better to retain their stakes and engage with management to bring about reform.
To have an effect, divestment must depress the stock price of the company targeted for change. Unfortunately, that decline attracts investors who are not socially conscious and are glad to acquire the stock at a discount. This opportunistic buying tends to attenuate if not eliminate the price decline, negating any incentive for a company to act socially. For example, divestment from oil stocks makes oil companies an attractive buy for investors less engaged with removing fossil fuels. The only certain effect of divestment is that such investors will grow richer at the expense of socially conscious ones.
This effect is true in general, but stronger when investors are motivated by a social goal rather than moral outrage or beliefs. For example, Mormons do not divest from tobacco to end smoking but instead follow a religious mandate.
By contrast, most socially conscious investors do not consider C0₂ emissions immoral; they want to curb them to reduce climate risk. The attenuation effect (opportunistic buying by investors who are not socially conscious) undermines the objective of socially conscious investors, who are happy to sacrifice some return only for significant environmental impact.
If this impact is limited, they give up. In the absence of large, very socially conscious investors who divest no matter what, our research shows that small, socially conscious investors do not divest. Ironically, we can end up with no divestment at all, even in a world where all investors are socially conscious.
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We also show that, sometimes, you can have socially conscious investors divest and push some firms to become clean, even when this is suboptimal from a social perspective. The reason is that a socially conscious investor is more likely to divest when others do. While this complementarity generally leads to too few divestments, it can also lead to too many.
By contrast, engaging with management as an investor stands a much better chance of delivering socially desirable outcomes. Imagine shareholders face the following proposal: the company will spend a little more but will pollute less. In deciding their vote, socially conscious investors will compare the personal cost when a company chooses a green technology with the social benefit such technology brings to humankind.
Since socially conscious investors are only partially altruistic, they will weigh the social benefits by a parameter reflecting how much they care for others. A well-diversified investor will own a very small fraction of each company. On one hand, the cost they will bear when a specific firm adopts a green technology is very small. On the other hand, the social benefit they will help produce is very large. Through his or her vote, an investor can alter the behaviour of very large companies such as Exxon, really changing the pace of climate change.
If the majority of shareholders are even a little socially conscious, the second effect will dominate the first, and they will vote in favour of costly environmental changes. We show that, as long as most investors are not totally selfish, delegating environmental decisions to shareholders will lead to socially efficient decisions.
If engagement is so effective, why do we see so little of it? First, because it works when most investors are socially conscious and vote accordingly. This is only recently the case for most publicly traded companies. For example, 27 per cent of Pfizer and 29 per cent of Moderna shareholders voted to share the Covid vaccine for free with African countries in 2022. It is not yet the majority, but it is coming closer.
Second, until autumn 2021, the US Securities and Exchange Commission heavily filtered shareholder ballot proposals. Since then, there has been a rise in such pressure.
Last, there is some confusion in the US about the fiduciary duty of institutional investors. Most investors only hold stock through mutual funds. That still allows them to give voting guidelines but these were not common in practice (before late 2021) due to the SEC filtering most out.
In this vacuum, most institutional investors believed their duty was to act in investors’ financial interest, rejecting proposals that did not maximise shareholder return. This attitude is now changing. An increasing number of institutional investors, such as BlackRock, are passing the voting decision to their underlying investors.
Does this mean that boycotts or divestments have no role? Absolutely not. Our analysis is limited to unco-ordinated boycotts. Today, social media makes it much easier to mobilise campaigns, although their causes and effects can be uneven.
A fur boycott can occur because a small and aggressive minority pressurises consumers to comply, while the boycott of a heavy polluter might fail because social pressure does not work as well with businesses. For those who want to improve the world, engagement seems a safer bet.
Eleonora Broccardo, associate professor, University of Trento; Oliver Hart, professor, Harvard University; and Luigi Zingales, professor, University of Chicago Booth School of Business, are authors of Exit versus Voice (2022, Journal of Political Economy)