Billionaire philanthropist Bill Gates has argued that investors are having "zero" impact on climate change by simply divesting from fossil fuel stocks. In an interview with the Financial Times, Gates said the approach had probably "reduced about zero tons of emissions." Instead he argued that investors who wanted to promote progress should consider instead investing in disruptive firms aiming to reduce emissions, such as alternative protein companies.
We believe that the exclusionary approach has a role to play in aligning an investor's portfolio with their values. But we broadly agree with Mr Gates that the positive impact on the environment or society of divesting is likely to limited – by definition for every seller in secondary markets there is a buyer, and the divestment does not withdraw capital from the corporate. Instead we favor an engagement approach, which involves investing in select firms that may have certain environmental, social or governance challenges and encouraging them to improve. Here’s how it works:
- Promote: The fund manager works with the companies it invests in to promote change initiatives that are expected to have a demonstrable positive sustainable impact and the potential for a related earnings benefit and/or a higher valuation multiple.
- Monitor: Of the 779 climate-related shareholder proposals filed from 2013 to 2018, 41% were withdrawn after investors and the companies in question agreed that the latter had made or had pledged to make sufficient progress in this area, according to data compiled and analyzed by Ceres.
- Support: To encourage engagement and impact claims and provide investors with transparency, the strategy must be underpinned by robust systems that develop, implement, monitor and report on engagement topics, company targets, engagement goals and milestones, outcomes and attribution.
So as sustainable investing moves beyond simple exclusion, we believe a multi-stage engagement strategy can offer greater potential for investor, environment and society alike. For more details on ESG engagement read our Education primer on this subject.
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