Divest, Engage, or Both?

Following stories of JP Morgan’s recent decision to stop banking prisons, several friends and colleagues have asked me about the innovative techniques philanthropic investors are now using to advance their causes (including efforts aimed at overincarceration, which the Arabella Advisors team has studied closely). 

 At Arabella, we work every day with a wide range of clients who use sophisticated techniques and strategies to deploy their investment capital in pursuit of social good. Those techniques and strategies go well beyond just screening out problematic investments from investment portfolios and include tactics designed to put direct pressure on companies to reform their ways or even change their businesses entirely. Such tactics include divestment, at one end of the spectrum, and engagement through shareholder activism at the other.   

There’s been some debate in our community about which of these tactics is most effective, but we’re seeing both used effectively in different contexts, and it’s easy to envision circumstances in which they can be used most effectively in combination. At a high level, our reflection on this body of work suggests that: 

1.  Divestment can be a great starting point for foundations to align their corpus with their values, but it is often isn’t sufficient to exert maximum financial pressure.  We now know that divestment can be done without jeopardizing risk/return profiles or compromising on diversification considerations.  As we recently reported, nearly 1,000 institutional investors with $6.24 trillion in assets have committed to divest from fossil fuels, and major banks and insurers have committed to stop financing and underwriting fossil fuel projects, thereby increasing the cost of capital and slowing industry expansion. Our research also shows, however, that divestment alone is often insufficient to exert substantial financial pressure on its targets. The convergence of engagement strategies with divestment strategies, where divestment is basically used as leverage for shareholder demands, is an important new development in the field. (Of course, moral and ethical arguments for divestment, whether from the prison-industrial complex or the gun industry, are also powerful forces.)   
2.  Engagement can be a powerful strategy, but it may also benefit from the threat of divestment. Rather than divesting, some institutions have chosen to engage with the very corporations they want to see change—expressing their views and advancing their causes as investors, and pushing for change using a variety of shareholder actions (proxy votes among others). The Gund Foundation’s engagement strategy to get Devon Energy to sign on to reporting on climate-related metrics is one example.  Donors can also deploy capital to grassroots activists in lieu of direct engagement. If engagement fails to make sufficient progress, foundations can later divest from those companies.  
3. Either way, philanthropy can and should be doing much more. According to a recent Chronicle of Philanthropy article, less than 0.3 percent of the assets of the US’s 15 largest endowed foundations (~$150B combined) are invested in ways to align with mission. This exemplifies the disconnect between programmatic activity and corpus investment. It also underscores both practical and philosophical realities. The practical reality is that, for established foundations, these changes are significant—investment policy statements may need to be rewritten, investment managers need to be committed, and trustees may need to make their choices more transparent in this moment. The philosophical reality is that there is still plenty of debate about whether investment management’s only role should be to maximize the returns that, in turn, get reinvested for greater good. Without debating the merits of foundation choice, which many others have done cogently, it is fair to note that foundations can and should at least use the power of their endowments to push investment managers to adopt inclusive investing practices to promote greater equity in access to—and management of—investment capital.    
4. Coalitions and collaboration are effective learning and doing strategies.  Going it alone can be risky and at times ineffective. Increasingly, donors are choosing to participate via a coalition of investors to support an initiative or work with existing organizations (e.g. ICCR, Majority Forward). Coalitions provide strength in numbers and often enable the group to rely on an organization that is solely focused on a particular outcome to help ensure more targeted results.  

For those who may be interested in getting started—whether with divestment, shareholder engagement, collaborative impact investing, or other techniques for advancing social good at the nexus of philanthropy and finance—the Arabella team can help. To learn more, contact my colleague Kristina Lazarevic.