The Divestor’s Dilemma: Does Shareholder Activism Aid a Sustainable Economy?

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From universities and investment firms to faith organizations and national governments, institutions around the world are divesting, a practice whereby investors avoid ownership of companies that don’t align with their ethical standards. To date, this movement has mobilized over $40 trillion and comprises 1,615 major proponents,1 including universities like Harvard and Oxford, the state government of Maine, and even Sweden’s government pension program.

But amidst the exploding popularity of environmental, social, and governance (ESG) standards, financial decision makers around the world are still struggling to determine what a truly sustainable investing approach looks like. As a result, despite noble intentions, these efforts can have counterproductive side effects.

Does Divesting Work?

The idea behind divesting is that it incentivizes ethical business activities through changing stock prices. For example, divesting from the fossil fuel industry could entail investors selling stock in oil companies due to their large contribution to carbon emissions. This may lead to a falling stock price, which reduces the financial resources company owners have access to, both through the declining value of their stock and the reduced ability to get inexpensive loans. Investors may then use a set of sustainability standards, called ESG metrics, to redirect their money into a company with lower carbon emissions, which improves the company’s access to financing through the same mechanism.

A growing number of recent studies have shown that the ESG investing movement is indeed reducing the cost of loans for companies with good ratings, often called “green” firms, and increasing the cost for ESG underperformers, also known as “brown” firms.2 Regardless, in the 2022 study titled “Counterproductive Sustainable Investing,” the authors found that divestment, as it is generally practiced, may actually be doing more harm than good from a sustainability standpoint. How can this be?

The first reason has to do with the way brown firms react to financial distress, namely, by increasing emissions. This is because falling stock prices may increase pressure for firms to shore up profits in the short term, with the consequence of dirtier production and higher emissions. The authors also found that the emissions reductions of green firms were largely independent of financial performance. Taken all together, this means that the effects of successful divestment would make brown firms browner, without making green firms greener.

And why doesn’t this investing approach positively incentivize green firms? In part because green firms are often only considered “green” by virtue of existing in sectors characterized by low emissions, not because of underlying sustainability commitments. A low-emissions business (like an insurance company) is unlikely to make consequential emissions reductions or innovation in green technology—but an oil company might. A notable exception to this is “impact investing,” in which asset managers seek out areas of sustainable innovation. Though the field is currently less than 3 percent of the size of the divestment movement,3 it is gaining traction. One of these impact firms, Centered Wealth, operates locally in Fairfield, Iowa.

Investing in Problematic Companies

Perhaps the best way forward is not to ostracize problematic companies, but to actively engage with them. Here, shareholder activism emerges as a compelling alternative. Activist shareholders invest directly in these companies and may use their voting rights or other means to advocate for sustainable practices. Engine No. 1 is a shareholder activist group that galvanized decarbonization efforts within ExxonMobil by making the case that sustainability improvements support shareholder value.4

Another example is As You Sow, a non-profit that uses proxy voting rights from participating investors to enact corporate sustainability. Within their “circular economy” initiative, As You Sow brought forward successful resolutions in companies such as McDonald’s, Starbucks, Dunkin’ Brands, Kraft Heinz, and Procter & Gamble for sustainability improvements in packaging. 5

To most, divesting makes more intuitive sense—we obviously want to incentivize sustainable behavior and discourage unsustainable activities where possible. But if effective divestment entails worse environmental outcomes, we need to take an honest look at other options. As investors and organizations navigate this evolving landscape, the path forward may lie in strategically pairing divestment strategies with shareholder engagement to encourage corporate responsibility. By leveraging the strengths of both approaches, it is possible that our investment decisions will bring meaningful change towards a more sustainable and equitable world.

  1. Global fossil fuel divestment database,
  2. Hartzmark, Samuel M. and Shue, Kelly, 2022, Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms
  3. Sizing the Impact Investing Market, 2022, Global impact investing network
  4. ExxonMobil: One Year Later, 2022, Engine No. 1
  5. As You Sow,

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