Divesting shares: does it work?

Calls for divestment are once again reverberating across the globe. Does it work?

Selling holdings in companies to effect change — be it political, environmental or social — bumps up the targeted companies’ cost of capital. It adds what Harvard Law School calls “voice”, driving change that reverberates through mass media and high-profile institutions, and ultimately defenestrating the powerful lobbying might of perceived miscreants.

So runs the theory. Cases backing it up include the kneecapping of Big Tobacco in the western world and the (official) end of apartheid in South Africa. The latter came after 155 North American colleges and schools divested $719bn — over $2tn in today’s money — of relevant holdings.

In practice, things are less clear cut. For one, divestment seldom occurs in isolation and only works as part of a bigger arsenal, comprising sanctions, political will and withdrawal of other financing, such as bank debt. Big Tobacco’s whammy included multibillion dollar lawsuits, government clampdowns on advertising and more health conscious populations.

Divestment, which as cynics point out is simply switching ownership to disinterested parties, is itself a long game. Guardians of assets, be they endowments, pensions or mutual funds, would be doing their investors a big disservice by dumping targeted stock wholesale: instead they plot lengthy and staggered exits, details of which are kept carefully under wraps.

Take fossil fuel divestiture, which boasts some hallmarks of success. There are now 1,600-plus institutions, sitting on an aggregate $40tn-plus of assets, according to Stand.earth which runs a database of fossil fuel divestment commitments. Conservatively, some $1tn has moved out of — or is pledged to exit — the sector in the past 13 years, estimates Stand.earth’s Richard Brooks.

There have been high-profile sellers, like the Church of England whose money managers plan to jettison oil and gas majors not already excluded from its £10.3bn portfolio. “It is our duty to protect God’s creation,” said the Most Revd Justin Welby, Archbishop of Canterbury and chair of the Church Commissioners for England.

But even big voices go only so far when other factors are at play: oil, whose fortunes are in any case cyclical, saw prices rise on the back of Russia’s invasion of Ukraine. Far from denting the cost of capital, share prices of traditional energy stalwarts have comfortably outperformed renewables over the past three years.

Hence the carrot and stick trade to redeploy funds into sustainable energy. The New York State Common Retirement Fund has committed $20bn to its sustainable investments programme and plans to double that by 2035. 

(There is of course a less altruistic angle to this: no smart investor wants to be stuck with assets falling out of favour.)

Fossil fuels and tobacco have the advantage of being clear targets. The current calls for divestment in Israel are a more mixed bag. Some student groups are calling for an exit from weapons manufacturers; others are targeting tech like cloud providers. Some targets are held within ETFs.

This matters because exacting change requires serious heft. To effect an increase in excess of 1 per cent in the cost of capital, impact investors would need to make up more than 80 per cent of all investable wealth, according to a study by Jonathan Berk at Stanford University and Jules van Binsbergen of the University of Pennsylvania. 

True, other studies attribute a bigger impact to those divesting from fossil fuels and other targeted sectors. But the same applies: divestment needs both mass sign-up by investors and accompanying strategies if it is to bring about change.

Roaring Kitty’s meme stock investors cannot save AMC

We are so back. That was the message meme stock investor “Roaring Kitty”, aka Keith Gill, said on X on Sunday. After a lengthy hiatus, the subsequent series of videos and images added up to coded, if not indecipherable, communication.

No prizes for guessing what followed. Shares of GameStop, the otherwise ordinary retailer that became meme stock fodder in 2021, more than tripled over Monday and Tuesday.

More interestingly, AMC Entertainment shares jumped from just $3 each to about $10. The cinema chain has struggled mightily post-pandemic. But it has also leaned into the meme stock phenomenon, creating the “Ape” avatar as its community symbol.

Most AMC observers are well aware that the company is headed for a major debt restructuring that will probably wipe out most of its existing equity value. Its share price peaked in 2021 at about $230. The face value of debt and lease obligations total more than $8bn. Last week its market cap was under $1bn. Trade publications have reported that creditors are beginning to organise as the company approaches a mountainous $3bn of maturities in 2026.

But why worry? AMC has been able to sell $3bn of stock since the start of 2021. That includes $250mn on Tuesday for $3.45 per share amid the irrational rally. At some point soon the music will stop, leaving AMC stranded. By then the story should not relate to any bankruptcy filing but why retail investors willingly ploughed in their own cash to forestall it for so long.

Meme stocks have begun to be understood as fundamentally a community. Any kinship formed apparently outweighs the near certainty of losing money. AMC, like some casino manager offering complimentary hotel rooms and buffet dinners for high rollers, created events to hook stock buyers.

The company’s actual securities filings are, unsurprisingly, far more sober. AMC wrote recently in its annual report that its “cash burn rates are not sustainable long-term” and that its only hope was for box office receipts to return to 2019 levels. This is unlikely. In 2023, total industry revenues were down more than 20 per cent from five years ago.

AMC lenders and bondholders will benefit from the cash raised from retail investors activated by social media output. But at some point they are going to want to be treated like the future owners of the business. These investors are far less solicitous than Roaring Kitty’s minions.