Pull the plug or pick up the phone?
The engagement versus divestment debate
While responsible investing’s roots may lie in negative screening— excluding potential investments based on the company’s product involvement or other factors— the evolution of stewardship standards has placed more responsibility on investors to be active stewards of capital.
As RBC GAM’s research shows, global investors find engagement to be more effective than divestment by a significant margin when it comes to the context of fossil-fuel-free investing.
Almost half (45%) of investors believed engagement was more effective in the 2021 survey, compared to 10% who preferred divestment. Over the last three years, there has been no growth in support for divestment, indicating a clear preference for engaging with companies to effect change.
Which do you consider to be more effective in the context of fossil fuel free?
Understanding the debate
Engagement is an active stewardship strategy that involves meeting with key investment stakeholders, such as the boards and management of corporate issuers or policymakers and regulators. The purpose of engagement may include learning about how issuers are approaching strategic opportunities and material risks in their business. However, it also provides investors with an opportunity to address any concerns they may have with the governance or operations of the business and encourage issuers to adopt industry-leading practices related to material ESG factors.
When it comes to climate change, engagement is viewed as a key tool for investors to work with boards and management teams to ensure that businesses are adequately managing their climate-related risks and opportunities, including those associated with a transition to a low carbon or net-zero future. These engagements are undertaken by investors both individually and collectively.
Divestment, on the other hand, refers to selling or avoiding investments in companies, sectors, or countries based on particular activities. When it comes to responsible investment, divestment is most often used in reference to avoiding investments based on moral, social, or political motivations. In the context of climate change, some investors choose to simply divest from or avoid fossil fuels in their investments.15
While many investment managers do offer their clients divestment solutions, based on the past five years of survey responses, an overwhelming majority of investors believe that the best approach to support the transition to a low-carbon economy is through active stewardship and engagement.16