Divestment: it is hard to do well while doing good, latest E4S report shows


According to a study published by the Enterprise for Society Center this Wednesday, divesting unethical businesses is unlikely to improve divested firms’ sustainability profile or investors’ financial performance.

Divestment is by far one of the favorite strategies used by responsible investors, with USD 19,771 bn of assets applying it in 2018. “This popularity justifies the need to understand the impact of divestment on the activities of targeted companies and on the investor’s portfolio” explain Jean-Pierre Danthine (E4S-EPFL) and Florence Hugard (E4S-UNIL), the two authors of Divestment: for what impact published this Wednesday by the Enterprise for Society (E4S) Center in partnership with Retraites Populaires and Pictet Asset Services.

Before even analyzing the impacts of divestment, the report underlines the two main objectives of divesting firms that have poor environmental, social, or governance (ESG) practices. That is: first, altering business practices by depriving the firm of funding and by reinforcing stigmatization, and second, reducing risk and improving performance of the investor’s portfolio.

Based on a thorough analysis of the academic literature, the two authors concluded that divestment seems to miss these two objectives. Investors are unlikely to be successful at changing reprehensible firms’ business practices through divestment, as firms tend to reply to stigmatization with greenwashing for instance. “Divestment on primary markets, where firms directly get funded, appears to be the most effective but only for certain firms that really rely on the investor’s capital” emphasized Florence Hugard.

Considering the impact on the investor, divestment reduces certain types of risk such as climate risk but does not necessarily improve financial performance. Reprehensible firms generally pay higher interest rates mostly because they are unpopular or bear additional risks – which implies higher financial returns for the investor. The overperformance of ESG exclusionary funds observed on financial markets in 2020 for instance could rather be explained by a momentum effect, which by definition cannot persist indefinitely. “There would be a cost of being a responsible investor in the long term” concludes Jean-Pierre Danthine “it is therefore not always possible to do well while doing good”.

These conclusions echoed the Building Bridges Week that took place last week and suggest that for finance to make its contribution to the transition to an economy respecting planetary limits, it is important that the pressures it exerts are well directed.