Protest disinvestment – an effective tool for change?

A growing movement centred around academic institutions in the US is pushing for pension disinvestment from fossil fuel companies. The argument holds that quazi-public investment in an industry that may imperil the environment and our collective future runs counter to the public good orientation that such institutes of higher learning provide, i.e., “we” shouldn’t be investing in and profiting from organizations that harm “us”.

In their own words (see more at )

“it just doesn’t make sense for universities to invest in a system that will leave their students no livable planet to use their degrees on, or for pension funds to invest in corporations that will ruin the world we plan to retire in.”

I have no qualms whatsoever with the moral basis of such decisions. I’ve taken similar investment decisions with holdings whose operations I disagreed with. The question I’d like to explore is whether disinvestment is effective in changing what some may define as unwanted behaviour, and if this can’t be proven as effective, what alternatives might exist.

Is it effective?

The most referenced comparison to such campaigns is the 1980s disinvestment campaign against Apartheid South Africa, and its effect on the then-ruling P.W. Botha government. Unfortunately, and despite oft-repeated claims, the campaigns role in ending the apartheid era is far from clear. We do know that by the end of the 1980s, 90 cities, 22 counties and 26 states had taken some action to divest from South African based companies. Moreover, 55 universities and colleges either partially or fully divested. According to the Los Angeles Times (Jan 19, 1987), by the end of 1986, 245 institutions had adopted policies that would “affect” over $260 billion of capital. What is meant by the term “affect” is unclear, and a look at state pension disinvestment shows only $14 billion in actual announced removals. Moreover, given FDI levels in South Africa at the time, the actual figure is much more likely to be at the bottom of the $14-260 billion spectrum. This is supported by the research of author Richard Knight who finds that over $25 billion RAND was withdrawn from the country between 1984 and 1988, which at then-prevailing exchange rates amounts to roughly $15 million USD.

So what were the impacts of these actions? It turns out I’ve written about this before (with reference to economic sanctions against Iran): “An international disinvestment campaign accompanied by economic sanctions are often painted as the cause behind the fall of P.W. Botha’s Apartheid government. Yet a closer look shows the regime’s demise predated the imposition of sanctions, and was a result of the accumulation of labour market pressure and discord caused by the increasing demand for black workers juxtaposed with the increasing repression of those workers. That system was increasingly untenable, and from 1976 forward, it was simply a question of time before labour unrest was felt more broadly in the economy.

That happened in the early 1980’s as international investors began divesting themselves of their South African assets and lending, not because of sanctions, but rather because of the fundamentals of the economy. Thus, the sanctions that came in 1985 didn’t cause the downfall of the government – they placed what some, such as Philip Levy former Yale University professor and now resident scholar at the American Enterprise Institute, an additional challenge to the regime’s ability to forestall talks with the ANC. Levy notes, however, that equally if not more important was the departure of Cuban troops from Angola and the Soviet Union’s decision to withdraw from proxy wars – a decision that freed the Apartheid government to hold more open talks with the Communist-funded ANC. Thus while sanctions did indeed serve to help push Botha and the Apartheid system out of South Africa, they did so by building on top of an endogenous desire for change.”

Another study (which I hadn’t seen when I wrote the above) by Teoh, Welch and Wazzan looks at the impact of disinvestment during the same time period and finds that “Despite the prominence and publicity of the boycott and the multitude of divesting companies, the financial markets’ valuations of targeted companies or even the South African financial markets themselves were not easily visibly affected. The sanctions may have been effective in raising the public moral standards or public awareness of South African repression, but it appears that financial markets managed to avoid the brunt of the sanctions.” The authors argue that companies targeted by the campaign experienced no discernible financial pressure, as shares were simply reallocated from ‘‘socially responsible’’ to more indifferent investors. Lytle and Joy (1996) find a somewhat perverse conclusion in their 1996 paper on the effects of the disinvestment campaign, noting that stock prices of firms announcing plans to stay in South Africa fared better than stock prices of firms announcing plans to leave.

Evidently, the effectiveness of disinvestment on financial performance, and thus broader economic performance, is quite questionable. What is certainly true is that it can shape public perception about an industry or market. However, thereafter, actual change seems more predicated on internal / domestic issues as noted by Levy rather than the effect of external financial pressure.

Moreover, there’s a significant difference between investment in South Africa and investment in a particular industry such as fossil fuels. South Africa represented a relatively minor issue for most non-South Africans. For beyond the moral issues related to Apartheid, it held relatively little economic influence or importance. Regardless of the effectiveness of disinvestment on forcing change in South Africa, it required little of those advocating for it. As Geoffrey Wheatcroft wrote in 1998, “there was an element of shadowboxing or playacting in the Western anti-apartheid campaign. South Africa could have been brought to its knees by a total embargo on its mineral production — gold, diamonds, bauxite, vanadium and uranium. But that would have meant a real material sacrifice by the West, which disinvestment did not.”

Fast forward to the current campaign against targeting the fossil fuel industry and the same issues rise to the fore. Like it or not, fossil fuel consumption is still at the heart of industry and economic activity. If one really wanted to affect reduce climate change, then addressing the demand side of the fossil fuel demand curve would be the prime solution. Yet with respect to personal consumption, this seems quite unlikely, atleast in the short term. For example, current electric vehicle sales are 120,000 versus total global auto sales of 81 million. Future growth projections see EV vehicle sales growing to 3.8 million by 2020. Unfortunately that leaves 77 million new conventional automobiles moving off sales lots (that number willfully neglects to include future growth…) We as consumers seem unwilling to make the financial sacrifices necessary to make a forceful impact on demand levels. Subsequently such alternatives seem unlikely to make much of a dent in emissions, especially given vehicle sales growth in developing markets.

Other disinvestment campaigns include a push throughout the 1990s by pensions and academic institutions to disinvest from tobacco companies and defense companies. According to the Centre for Responsible Public Investment, seven US states, 11 cities, and 4 counties have either partially or fully divested from tobacco companies. More recently, Alberta’s provincial government sold $US17.5 million worth of tobacco shares “because it was suing tobacco firms for healthcare costs caused by smoking.” Similar actions have been made by Norway’s sovereign wealth fund which sold its tobacco-related investments in 2010. On the institutional front, 6 of the 12 leading medical schools in the US divested themselves of tobacco-related holdings over the period 1986-2001, while 19 other universities have done the same. For interest’s sake, Canada’s largest pension fund, the Canada Pension Fund invests significantly in several tobacco companies, as well as several defense and weapons companies.

Have such disinvestment made an impact on the industry? Stock prices haven’t suffered, and have in fact provided an extremely safe investment. And while consumption in the US has dipped from 25% to 20% of American adults over the period 1990 to 2010, a significant change to be sure, it follows an even larger drop over the pre-disinvestment phase (38% to 25% over 1970 to 1990 period). Pointing to disinvestment as a primary source of this change is therefore quite shaky.

Moreover, as Wander and Malone (2006) write, “should divestment efforts result in a company deciding to go into private ownership rather than risk continued stock erosion, control advocates would lose access to valuable information about industry economics and activities, disclosure of which the U.S. requires from publicly traded companies.”

None of this means disinvestment strategies aren’t worthwhile. Their role in raising public awareness are certainly valuable but in terms of affecting outcomes, the evidence just isn’t there. So if we’re looking to make real change in an industry are there more effective ways of directing this effort?

The alternatives

My argument against the evident effectiveness of disinvestment doesn’t negate the fact that I too would like to see fossil fuel use reduced. I’d just like to ensure we use our social capital most effectively to do so.

The most evident alternative is to reduce the demand for fossil fuels. Yet as the aforementioned figures on alternative fuel vehicles shows, it doesn’t seem we’re ready to bear the financial costs to do so.

What else can we do?

In 1989 Exxon shareholders, notably pension funds, protested the company’s handling of the Valdez oil spill by pushing the company to name an environmentalist to its board. As a 1989 New York Times article notes, “After the Alaska oil spill in March, pension funds that hold about $1 billion in Exxon stock had asked that an environmentalist be named to the board, and in May the company’s president, Lee R. Raymond, agreed.”

Unfortunately 25 years of evidence since highlights that the move seems to have done little to alter the company’s practices, perhaps owing to the fact that his appointment left 14 other non-environmentally focused directors…

A more recent example of shareholder activism is perhaps more instructive. On the surface, Bill Ackman’s coup to takeover CP Rail might seem irrelevant to discussions related to environmentally or socially-destructive industries. However Ackman’s year long fight against one of Canada’s oldest companies and its high-profile board highlights that change in publicly-traded companies isn’t impossible. Ackman’s coup forced wholesale changes in the board and management of the $13 billion railroad company and was done with a 14% stake in the company and (eventually) significant support from other shareholders.

As one industry follower noted in the wake of the coup, “companies of all stripes best prepare for closer scrutiny of their boards and challenges to their authority (by activist shareholders).” And while some, if not most, of these challenges will be lead by shareholders looking for bigger profits, there’s no reason they can’t be lead by activist shareholders looking to enact strategic change.

Thereafter the disinvestment by academic institutions of their fossil fuel investments, while certainly meeting a moral standard, may in fact be far less effective than a collaborative approach to shareholder activism within these holdings. As given their disinvestment is unlikely to affect either consumption or economic performance, would they not be better off remaining engaged and attempting to instil an ethos of adaptation, remediation and investment into new technologies and renewable energy?

And while doing so as individual investors would yield little influence, a consortium of public or academic funds would wield significant influence, able to re-orient, in part, strategies focused on short-term profit taking by allocating more to long-term investment in alternatives. Investors would have to be willing to absorb paper losses if markets reject this re-orientation, however this represents the real sacrifice that has too often been missing from activist strategies.

So disinvest if you must for moral reasons but if you really want to make a difference in actual supply and demand factors than the focus should be on facilitating change within these industries, not simply walking away and leaving consumption and production unchanged but in the hands of investors less concerned with the short- and long-term impacts of resource extraction.

*Years ago I began to learn about Canada’s resource industries thanks to an old friend who spent much of his life trying to improve the environmental performance of one of Canada’s largest oil companies. His insights on the positive and negatives of the industry, and its role in the Canadian economy, remain instrumental in my thinking, and I am forever indebted. Strangely enough, the date of this post coincides with the anniversary of his death. Here’s to you, KM. Thank you.


2 Comments on “Protest disinvestment – an effective tool for change?”

  1. Jthistle says:

    Interesting thoughts Dan. Happy you decided to tackle this topic. It’s the first time the investor-led climate change movement has moved outside of elite NGO circles.

    Do university endowments actually have people on the ground at shareholder meetings/AGMs?

    I’m curious about this because it seems to me that they operate through a fund manager or intermediary who is charged with maintaining returns using passive or index investing. So if endowments are never really engaged with their investments in the first place, it seems like they are not in a position to motivate a more activist investor approach.

    I could be wrong on this one, so please let me know.

    But this is certainly true for most people who rely on passive investment strategies. All they know is that the fund provides a return every year regardless of its make-up.

    Divestment seems like a break from this passive approach that implies support for other activist investors, and sends a signal that universities are taking more time to scrutinize their investment strategy.

    Divestment sends a message to fund managers vying for opportunities to manage endowment funds that they need to be more creative in allocating assets if they want the business. I, like you, hope this involves promoting some investment options in renewables etc. that carry more risk.

    Perhaps shareholders in large pension funds may take notice and further support a more active approach to investment that factors in climate change risks.

    Also, divestment is slightly more focussed and strategic than the “Apartheid” strategy. Rather than targeting a change in government, divestment targets coal companies, which are by-far the largest emitters of GHGs.

    This seems like the only reasonable approach given that an activist investor is not going to have much success convincing a coal company to close down.

    If this is re-orientation to a more active investing approach is only outcome of divestment, then it can be considered to have some success.

  2. Dan Herman says:

    Jason, thanks for your comment. In Canada, most uni pensions are indeed managed by a group of funds. However in the US, the larger endowments are managed by in-house management companies. For example, see Harvard Management Company ( So yes, in Canada, you are correct, it would require a change in operations to see individual pensions be more activist. However US examples of county/city/state activism (see CALPERS) highlights that the presence of an intermediary doesn’t necessarily limit the engagement of the fund owner.

    Moreover, while you’re correct that insider activists will not close down a company, they may be able to create pressure for increased investment in clean technologies, scrubbing and capture in coal production for example, which thus mitigates the production which is going to continue unabated so long as a market for it remains. This was the hope of the Exxon example I mention – which failed – but I’m a little optimistic that there might be hope if the ratio of activist/passive directors changed.

    Ultimately, I for one am not satisfied to simply pass ownership to someone else and leave the problem unchanged – it’s a hollow response. If the goal is societal change – as opposed to the mitigation of risk in a portfolio – then I don’t believe there is another option but insider-activism. Divestment allows risk mitigation and a moral win but as I write there is no real evidence it will do anything to adjust consumption or production… I can’t get past that. As an individual investor I have no choice but to divest. I’ve done so over the past years with companies that do fracking (as the evidence on risk is still unproven but nonetheless concerning) and others whose operations in the developing world are questionable. But for 10% + shareholders, they have the ability as insiders to pressure.

    Back to the engagement issue – in Ontario, there’s talk of a fund of funds that would aggregate the 20 odd individual university pension funds into one mega-fund. This would provide the scale necessary for influence and would provide a means for pension contributors in those funds to enact change. That scale is already present in state pension programs such as CPP, QPP etc yet they don’t seem to have made any distinction on social/environmental grounds in their investment strategies. Should these organizations not have some set of non-return related metrics for their use of public dollars?

    Fascinating topic.

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