Divest, Engage, or Both?

Divest, Engage, or Both? In the wake of stories about JP Morgan’s decision not to open bank prisons, several acquaintances and friends have been asking us about the latest strategies that investors from the philanthropic sector are using to promote their causes (including initiatives aimed at reducing the number of prisoners that is something that the Arabella Advisors team has studied very closely).

At Arabella, we work daily with diverse clients, using sophisticated strategies and methods to use their capital investment to pursue social benefit. The procedures and processes are more than just screening out investments that are not suitable for investment portfolios. They also include strategies designed to force businesses to change their practices or business models. This includes divestment on one side of the spectrum and involvement via shareholder activism on the other.

There’s been some debate within our community on which strategies are the most effective. However, we’re seeing both employed effectively in various settings. It’s also easy to imagine scenarios where they could be most effective together. On a larger scale, the analysis we’ve made of this research body suggests that:

Divest, Engage, or Both?

  1. Diverting funds can be a good start in helping foundations align their assets with their ideals. However, it’s often not enough to put maximum pressure on the financials. Divestment is feasible without risking the risk/return profile or delaying diversification concerns. As reported recently, more than 1,000 institutional investors holding $6.24 trillion of assets have pledged to withdraw from fossil fuels. Additionally, significant insurers and banks have announced that they will end financing and subscribing to fossil fuel projects, thus raising the costs of capital and slowing the industry’s expansion. Our research shows that divestment cannot create substantial financial pressure on the targets. The integration of engagement strategies with strategies for divestment, in which divestment is primarily used as a means of leveraging to satisfy shareholders’ demands, is a significant innovation in the area. (Of course, moral and ethical arguments for divestment, regardless of whether they come from the prison-industrial complex or the firearm industry, are significant factors.)
  2. Engagement is a potent strategy, but it could also profit from the risk of divestment. Instead of divesting, some institutions have opted to work with companies they wish to see change, expressing their opinions, advocating for their interests as investors, and urging change with various shareholders’ actions (proxy votes, among others). The Gund Foundation’s approach to engagement to convince Devon Energy to sign on to report on climate-related metrics is a prime instance. Donors may also allocate capital to local activists instead of direct involvement. If direct engagement cannot bring sufficient progress, foundations could then decide to divest from these businesses.
  3. Whatever the case, philanthropy has the potential to or should do more. According to an article in the Chronicle of Philanthropy article, less than 0.3 percent of the assets of America’s 15 most significant endowed foundations (~$150B in total) are put into ways that are aligned with the mission. This illustrates the gap between corpus and programmatic investment. It also reveals the philosophical and practical implications. The practical reality is that, for established foundations, these changes are significant–investment policy statements may need to be rewritten, and investment managers need to be committed. Trustees may need to make their choices more transparent at this moment. The reality of the philosophy is that there’s plenty of debate on the purpose of investment management and whether it should be to maximize profits that are then invested for the greater good. While we don’t have to debate the merits of foundation selection, which several others have done convincingly, however, it’s fair to point out that foundations could and should, at a minimum, utilize the potential of their endowments to pressure the investment industry to embrace inclusive investment methods to increase equity in access to and the management of investment capital.
  4. Collaboration and collaboration can be effective methods of learning and implementing strategies for learning and doing. If you go it alone, it is risky and often unproductive. In a growing number of cases, donors choose to join a coalition of investors in support of initiatives or collaborate with established organizations (e.g., ICCR, Majority Forward). Coalitions are a powerful force by numbers and allow the group to count on an organization only focused on one specific goal to achieve better results.

If you’re looking to get started, whether through divestment, shareholder engagement collaboration in impacts investing, or any other strategies for improving social outcomes at the intersection of finance and philanthropy–the Arabella team is here to help.

By Mia

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