I felt conflicted when I saw that a group of authors were calling for Baillie Gifford, the fund manager, to be ditched as a sponsor of the Edinburgh International Book Festival on the grounds that it invested in fossil fuels. I am a newly fledged children’s author myself and watched as my peers liked the letter on social media.
But I am also a financial journalist, and wrote a book on climate change that argued that divestment wasn’t a great idea if you actually want to change things. In the current ESG-sceptical, energy crisis climate we’re in, that’s still the case.
When people start thinking about carbon emissions and their investment portfolio, divestment seems the obvious option. You don’t want to have anything to do with those evil oil and gas companies, so you sell them, or invest in funds that promise not to hold them. There are two justifications for this: one is fair enough and the other isn’t. The first is a purist approach: the desire not to get your hands dirty as an investor. Selling won’t change things but not all investors are trying to effect change and that’s their choice.
The other is the belief that divestment raises the cost of capital for companies: that your divestment will cause financial harm. Unfortunately there is no evidence this is true. A paper by the Stanford Graduate School of Business found the impact of ESG divestment on the cost of capital was too small to affect real investment decisions meaningfully in the US: to affect the cost of capital by at least 1 per cent, it found, at least 86 per cent of investors need to choose to hold only clean stocks.
Selling shares that already exist also means passing them to another investor who may be less scrupulous. Mark van Baal, founder of Follow This, a shareholder pressure group pushing Shell to cut emissions faster, believes that voting on climate change resolutions has flatlined in part because engaged investors have sold their shares to those who just don’t care.
Basically, divestment means giving up a seat at the table. Some investors have long argued that engagement, rather than divestment, is the way forward. However, greenwashing and virtue signalling have muddied the waters in recent years. Institutional investors talk a lot about their engagement policy. They often don’t need to vote against boards, they argue, because they have so many great one-to-one conversations with them instead. They’ll get there, it’s a nudge approach, it takes time. The buzzword at the moment is stewardship, which can include a broad range of things.
The problem for retail investors and asset owners is that this is hard to measure. Are institutional investors really achieving anything through these conversations or is it a quick question about how they should probably disclose their CO₂ footprint in their annual report before getting down to the meatier issue of where the next drilling site should be?
Some investors give up. The Church of England made the front pages in June when it said it was selling out of fossil fuel companies altogether, having previously pushed them to change. This was partly in frustration that boards were not moving fast enough, and partly out of annoyance that their name, as an ethical investor, was being used by the companies to burnish their green credentials. But while headline-grabbing divestments can send a certain message, ultimately such a step is a purist rather than a practical approach.
Others distinguish between debt and equity when it comes to divestment. The Lothian pension fund, for example, takes a “deny debt, engage equity” approach: the theory being that it will have more impact if you refuse to refinance a company’s debt than if you sell the shares.
For equity investors, one concrete way to measure what steps asset managers are taking to confront fossil fuel companies is through their voting record. Are they voting against board members who aren’t setting tough enough targets on reducing emissions? Are they voting against their remuneration packages? That can focus minds sharply.
At the moment, institutional investors aren’t required to disclose how they vote. The Financial Conduct Authority’s vote reporting group says that while there are “pockets of excellence”, “the nature of vote reporting disclosure is sporadic”. More needs to be done to make it systematic.
The FCA is inviting comments by September 21 on a consultation paper in which it argues it needs to be easier for asset owners to find out what their asset managers are doing in terms of stewardship. It proposes a voluntary, standardised voting template but some want this to be mandatory. This would increase the regulatory burden on the fund management industry, but it would help investors decide who to give their money to.
Once disclosure is required, the next step for asset owners, including retail investors, would be pressurising asset managers to vote more. This is even more important as it comes at a time when US asset managers such as BlackRock and Vanguard, caught up in the politicised anti-ESG backlash, are voting less often.
This brings us back to Baillie Gifford. Rather than requiring it to sell its fossil fuel holdings altogether — the fund manager has protested that it only has 2 per cent of client money in such companies, compared with a market average of 11 per cent — it would make more sense to get it to vote more often on climate resolutions.
The fund manager does give an account of its voting record — it pointed me towards page 89 of its 90-page document on its engagement practices for evidence that it had voted against BHP’s climate transition plan, for example — but it’s not exactly easy to peruse.
The FCA’s moves towards greater voting transparency are to be welcomed. But investors need to do more to hold companies accountable. And asset owners and managers need to resist the temptation to bow to pressure by washing their hands of the attempt to push through change.
Insiders I spoke to for this column referred rather wearily to the pressure to divest coming from financially “naive” members of their organisations. They have my sympathy: the reality is that a targeted approach, insisting that asset managers use their vote, is one of the best ways we have so far to achieve impact.
Alice Ross is an FT contributor. Her book, “Investing to Save the Planet”, is published by Penguin Business. X: @aliceemross
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