Does Divestment Work?

Should fund managers try to encourage companies to change for the better by refusing to invest?

Annalisa Esposito 24 April, 2020 | 12:32AM
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The ways that sustainable funds choose their investments vary greatly. Many funds use negative screening to rule out businesses that don't fit within their criteria. But some investors would argue this attitude does little to encourage companies to change. 

L&G is one of these. It tries to raise the standards of the companies and markets in which it invests in, pushing for positive change on a broad sweep of areas including sustainability, executive pay, diversity and political lobbying by corporates.

Sacha Sadan, director of corporate governance at Legal & General, takes an active and impactful approach to stewardship, and believes that real change is only achieved by being an engaged and active owner, whether that be through exercising voting rights as an investor or engaging directly in dialogue with companies.

“Direct engagement with companies or regulators provides the opportunity to have an open discussion on key strategic and ESG related topics, which can have a material impact on our clients’ long term financial returns, and as such is part of our fiduciary duty to clients,” he says.

Name and Shame

L&G committed to name and shame companies in its Climate Impact Pledge report in 2018 - picking out those businesses making the most progress on environmental, social and governance (ESG) factors - and those not doing enough.

Among the companies with a positive response: car producer Toyota, US bank Wells Fargo, Australia’s Commonwealth Bank and oil and gas giant Total. 

At the other end of the spectrum were the companies that L&G made the decision to divest from - selling its stake as a signal to companies that they must take ESG issues seriously. Among these were China Construction Bank, Dominion Energy and Rosneft Oil.

Did it work? Sadan says many of the companies L&G divested from got in touch to ask what they would need to do to be reinstated in the firm's funds. 

Alex Rowe, manager of the Nomura Sustainable fund, agrees that engaging is important. He points to the US technology sector as one with certain corporate governance weaknesses, which  has been seemingly unwilling to engage with shareholders. “Possibly the cause, but certainly an amplifying factor, is the prevalence of disagreeable dual share class structures, which concentrate voting power,” he says.

Among the tech giants Nomura has engaged with are Facebook, which has suffered repeated social conduct related scandals, with data usage and privacy being a repeat issue; and Alphabet, where staff around the world walked out in protest over sexual harassment.

“We have sought to engage with these companies over the past couple of years, with regrettably limited success, however more recently we detect some improvement,” says Rowe. In some cases, the firm has employed the services of Sustainalytics, whose engagement team works on the behalf of investors to push for better practices; it has engaged on more than 200 cases on Nomura's behalf.

Rowe explains: “Alongside peer investors we sought to address concerns over data privacy and to advance our view that the steps being taken and company disclosures are inadequate. We will continue to use our presence as global investors to push for better practices and outcomes for all stakeholders.”

Best of Breed Approach

Not all investment groups agree with divestment, however. Some would argue that it is more difficult to encourage change if you are not a stakeholder in a business, while others opt for a "best of breed" approach to investment, picking out those making the most progress relative to their peers.

Yet Neville White, head of responsible investment policy and research at EdenTree Investment Management, finds it that divestment on ESG grounds has become so contentious - it is no different, he argues, to fund managers choosing which stocks to buy and sell on financial grounds. 

“Choosing not to allocate capital to companies exhibiting poor overall environmental, human rights and business ethics credentials is a perfectly valid risk-adjusted approach to ESG analysis and oversight,” he says.

He has recently divested from Deutsche Bank, which was implicated in multiple financial scandals including Libor rigging, mis-selling and money laundering. He also withdrew investment in British multinational security services company G4S. “The company was facing multiple ethical challenges over care and protection, including assault, use of non-approved restraint and more serious torture allegations in South Africa,” he explains. “The decision to divest was ultimately prompted by allegations of abuse at the Medway young offender unit.”

And while White endorses engagement as a method of encouraging change, he adds: "There is the danger among industry observers that the responsible investment industry has turned engagement into an excuse not to take more decisive action when needed.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Annalisa Esposito  is a data journalist for

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