Dumping actions to punish corporate bad behavior has minimal impact

Investors who ditch companies with poor ESG standards in the hope of forcing them to do better should look away now: New research shows you’re wasting your time.

Even though billions of dollars are diverted to companies scoring higher in environmental, social and governance measures, the funding costs of bad actors have hardly budged, according to a study.

This suggests that behavioral change in business is unlikely to be achieved through portfolio allocation – which has long been the dominant approach on Wall Street and beyond.

“A substantial increase in the amount of socially responsible capital is needed for strategy to affect company policy,” authors Jonathan Berk and Jules Van Binsbergen wrote in the article. “Given current levels of socially conscious capital, a more effective strategy for using that capital is to follow an engagement policy. “

The study, published at the end of August, addresses one of the main dilemmas at the heart of ESG investing: is it better to punish companies that fail by selling them, or to stay invested and try to make improvements? through active ownership?

Perhaps because it’s easier, many ESG strategies have evolved around the old approach. So Berk and Van Binsbergen – of the Stanford Graduate School of Business and the Wharton School, respectively – began with the hypothesis that effective divestment should lead to higher investment costs for the company that been sold.

By tracking the amount of ‘socially conscious capital’, the companies targeted, and the correlation of those companies with the rest of the market, the pair found that the impact on the cost of capital was’ too small to significantly affect decisions. real investment ”.

It’s a conclusion with plenty of anecdotal evidence to back it up.

This year, some of the world’s largest emitters of carbon dioxide have seen significant price gains, including ExxonMobil, Chevron and ConocoPhillips. Glencore, blacklisted by the Norwegian Sovereign Wealth Fund since May 2020 due to its exposure to coal, is up more than 50%.

Meanwhile, the most striking business changes have been made by active investors. The No.1 engine won three seats on Exxon’s board earlier this year after a lengthy proxy fight. Its first exchange-traded fund is committed to using its shareholder rights to influence change, rather than divestment. His ticker? VOTE.

In the article titled “The Impact of Impact Investing,” Berk and Van Binsbergen conclude that divestment is unlikely to have a significant impact in the future, because socially responsible capital represents such a small part of the total.

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