BY DR. JONATHAN DUCHAC, J.J. MESSNER, AND JOHANNA BEDUHN
Divestiture is a highly visible tool for social activism. The origins of modern divestiture trace back to the South African anti-apartheid movement of the late 20th century, where activists on college campuses harnessed the power of capital markets to end South African apartheid. The goal of the South African campaign was straight forward – place financial pressure on companies doing business with South Africa in order to motivate the government and citizenry of South Africa to end apartheid. In recent years, divestiture has transformed from a purely financial tactic into a social awareness tool used to raise public awareness of socially objectionable behaviors. This report summarizes the changing role of divestiture to gain insight into how this tactic is used to achieve Environmental, Social, and Governance (ESG) goals. Our analysis weaves together the academic and professional literature on divestiture with interviews of key players in the worlds of social activism and finance to develop an integrated understanding of divestiture, and how it is evolving.
The ultimate goal of any divestiture campaign is to change behavior by placing social and financial pressure on a target company, industry, or country whose behaviors have been deemed socially unacceptable. These campaigns are typically initiated by an activist group that targets a specific social issue. Divestiture uses two forms of pressure, direct and indirect, to influence a target to change its behavior:
- Direct pressure focuses on persuading investors to forgo investing in the target company, exposing the target to a direct financial loss from a reduction in demand for the target’s debt and equity.
- Indirect pressure focuses on using the divestiture campaign to raise public awareness of the target’s socially unacceptable behavior, exposing the target to increased social pressure.
While early frameworks of divestiture presumed that the primary purpose of this tactic was to exert direct pressure on the target; recent frameworks acknowledge a more complex model that considers the inter-relationship between a campaign’s direct and indirect effects. In this conceptualization, activist groups focus on using indirect pressure to socially stigmatize the target, motivating the target to change its behavior. Thus, rather than being a short-term attack on a target’s stock price, divestiture campaigns have evolved into a messaging and labelling tool that is part of a long-term effort to change a social norm or behavior.
Over the last half century, divestiture has been used in a variety of settings ranging from human rights violations in South Africa to the impact of fossil fuel production on climate change. To achieve an in depth understanding of divestiture as a tool and tactic, we examine six divestiture campaigns in detail: South African Apartheid, Tobacco, Fossil Fuel Production, Talisman in the Sudan (human rights), Boycott, Divest, Sanction (BDS) in Israel, and Private Prisons. Each case examines the history, motivation, execution, and resolution of the individual divestiture campaign. Our analysis illustrates the uniqueness of divestiture campaigns, with each campaign being defined by the unique circumstances of the motivating social issue and the associated stakeholders.
Our analysis concludes by considering the changing landscape of socially responsible investing, and how divestiture and socially responsible investing could evolve in the decades to come. Our final section discusses perspectives on (i) how the coming of age of millennials could change the relationship between social purpose and conventional investment objectives, (ii) the changing landscape of socially responsible investing, and (iii) the tradeoffs between investor activism and divestiture.