Beginning in the early nineteen-eighties, students on college campuses across the U.S. demanded that their universities stop investing in companies that conducted business in South Africa, in protest of the apartheid system. As an example of social activism, the campaign was a phenomenal success: by the end of the decade, about a hundred and fifty educational institutions had divested. But did the campaign succeed in pressuring the South African government to dismantle apartheid? The answer is less obvious than you might think. The economists Siew Hong Teoh, Ivo Welch, and C. Paul Wazzan studied how U.S. divestment movements affected the South African financial market and the share prices of U.S. companies with South African operations. Divestments were expected, on average, to decrease share prices, but the study found that, in fact, political pressure turned out to have no discernible effect on the shares’ public market valuations. According to the authors, a possible explanation of this finding is that “the boycott primarily reallocated shares and operations from ‘socially responsible’ to more indifferent investors and countries.”
Although contemporary divestment campaigns have the potential to do a lot of good, we need to be clear about what their path to impact might be. Divestment is an example of socially responsible investing—the practice of either investing only in socially valuable companies or, more commonly, refusing to invest in companies that are deemed “unethical.” Socially responsible investing is big: according to a 2014 report by the Forum for Sustainable and Responsible Investment, roughly one in six dollars, or about eighteen per cent, of the $36.8 trillion in professionally managed assets in the U.S. is involved in socially responsible investing. And the movement has exploded in the past two decades. Students are lobbying their universities to divest from morally dubious industries, such as tobacco or firearms. More recently, a coalition of two thousand individuals—including celebrities like Leonardo DiCaprio—and four hundred institutions worth $2.6 trillion has pledged to divest from fossil-fuel companies.
However, if the aim of divestment campaigns is to reduce companies’ profitability by directly reducing their share prices, then these campaigns are misguided. An example: suppose that the market price for a share in ExxonMobil is ten dollars, and that, as a result of a divestment campaign, a university decides to divest from ExxonMobil, and it sells the shares for nine dollars each. What happens then?
Well, what happens is that someone who doesn’t have ethical concerns will snap up the bargain. They’ll buy the shares for nine dollars apiece, and then sell them for ten dollars to one of the other thousands of investors who don’t share the university’s moral scruples. The market price stays the same; the company loses no money and notices no difference. As long as there are economic incentives to invest in a certain stock, there will be individuals and groups—most of whom are not under any pressure to act in a socially responsible way—willing to jump on the opportunity. These people will undo the good that socially conscious investors are trying to do.
There is an important difference, therefore, between divestment and product boycotts. If a group of people believes that the Coca-Cola Company is harming the world, whereas PepsiCo isn’t, and accordingly switch their consumption from Coke to Pepsi, the Coca-Cola Company is harmed. Their sales decrease, and they make less profit. By contrast, if the same group of people stop investing in Coca-Cola, and invest instead in Pepsi, things will quickly balance out, and neither company will notice much difference. As soon as an ethical investor sells a share, a neutral or unethical investor will buy it.
This means that divestment risks being harmful. Several studies have shown that, because of the pressure against investing in morally dubious companies, “unethical” investments (sometimes called “sin stocks”) produce higher financial returns for the investor than their “ethical” alternatives. The economists Harrison Hong and Marcin Kacperczyk found that sin stocks outperform other stocks by 2.5 per cent per year. This has even resulted in a niche industry: for instance, the Barrier Fund, formerly known as the Vice Fund, is a “sin-vestor” mutual fund that exclusively invests in companies that are significantly involved in alcohol, tobacco, gambling, or defense. It has beaten the S. & P. 500 by an average of nearly two percentage points per year since 2002. By divesting from unethical companies, “ethical” investors may effectively transfer money to opportunists like the Barrier Fund, who will likely spend it less responsibly than their “ethical” counterparts.
Studies of divestment campaigns in other industries, such as weapons, gambling, pornography, and tobacco, suggest that they have little or no direct impact on share prices. For example, the author of a study on divestment from oil companies in Sudan wrote, “Thanks to China and a trio of Asian national oil companies, oil still flows in Sudan.” The divestment campaign served to benefit certain unethical shareholders while failing to alter the price of the stock.
There is some variation in divestment’s effects across different sectors. In a 2013 report by the Smith School of Enterprise and the Environment at the University of Oxford, the authors found that coal stocks are less liquid than those of oil and natural gas, and that divestment therefore has a greater chance of impacting share price because it is more difficult for alternative investors to be found. Indeed, Peabody Energy Corporation, a coal company, recently stated in its financial report that “divestment efforts … could significantly affect demand for our products or our securities.” However, even in this sector, the effect will probably be very small. In that same Oxford report, the authors cautioned campaigners that the direct impact of divestment is “likely to be minimal.”
There is one way in which divestment campaigns can have a positive impact. Campaigns can use divestment as a media hook to generate stigma around certain industries, such as fossil fuel. In the long run, such stigma might lead to fewer people wanting to work at fossil-fuel companies, driving up the cost of labor for those corporations, and perhaps to greater popular support for better climate policies.
This is a much better argument in favor of divestment than the assertion that you’re directly reducing companies’ share price. If divestment campaigns are run, it should be with the aim of stigmatization in mind. However, campaigners need to be careful. First, there is a risk of confusing people—suggesting that divestment will directly hit companies in the pocketbook when the evidence mostly suggests that it won’t. For example, the Campaign to Unload, which encourages divestment from gun manufacturers, describes its aim as “to hit back at irresponsible gunmakers where it hurts: their sources of funding,” even though gun manufacturers get funding from selling guns, not selling stocks. Moreover, in response to the question “How does a divestment campaign work?,” the group claims:
This sounds like an argument that divestment directly negatively impacts companies’ share prices, but that simply isn’t the case. Moreover, divestment campaigns may stigmatize organizations that are doing valuable work. For example, in 2014 the Gates Foundation came under scrutiny from protesters because of its investments in the G.E.O. Group, which runs private prisons. But the anger directed toward the Gates Foundation will cause more harm for the foundation, which is doing great work, than it will for private prison companies.
Above all, divestment campaigns risk distracting from more directly effective activities. If the environmentalist community focusses its time on divestment campaigns, they are left with less time for their other programs. This means less time spent lobbying for carbon taxes, or encouraging people to adopt life styles with lower carbon footprints, or calling on universities to boycott energy providers that rely on fossil fuels.
Where, then, does this leave us? Divestment campaigns have the potential to do good, but only with caveats. To avoid the risk of misleading people, those running campaigns should be clear that the aim of divestment is to signal disapproval of certain industries, not to directly affect share price. They should be clear that they aim to stigmatize the organizations (like fossil-fuel companies) that are being invested in, not those that do the investing (like universities, pension funds, or foundations). They should aim to maximize their media exposure. And, where possible, they should bundle the campaigns with actions that have larger direct effects, such as fossil-fuel energy boycotts, or with calls for specific policy changes.
