Although the investment industry is normally not a target for public protests or activist campaigns, we witnessed some actions taken by these groups over the course of 2020 regarding the ESG strategies of some asset managers and their ownership of stocks from oil, gas, and coal companies. The ultimate aim of the activists is to put so much pressure on the respective asset managers that they sell their holdings in fossil energy companies. The announcement that ExxonMobil will be replaced by Salesforce (a software company), after being a member of the Dow Jones Industrial Index for 92 years, was widely seen as “a landmark moment” and “a sign of a shifting landscape” in the economy. The question remains if the fact that asset managers start to sell oil, gas, and coal companies from their portfolios, will that help to drive the transformation of the energy sector toward a cleaner future?
At first look, it might be clear that if asset managers are divesting from a business, it should lead to falling share prices and, therefore, lower valuations for the respective companies. Generally speaking, this assumption is true from my point of view, but one needs to bear in mind that there is a buyer for every stock that is sold. Otherwise, there would be no transactions at all since stocks don’t disappear just because somebody is selling them. This means that the stocks will be held by a person or institution that is generally fine with the business model of these companies and may help them to invest even more in exploration, as the world will depend for a long time on fossil energies and/or oil as a general commodity.
That said, it might be better from an environmental point of view if asset managers stay invested and lobby for a transformation toward more sustainable practices. This means fund managers and other representative from asset management companies must engage with the boards of the respective companies make them rethink their strategies. Fossil energy companies can transform themselves to sustainable energy companies by investing in the production of alternative energies and the respective technologies involved. They could also become technology leaders in this place, as the cash flow from the fossil energy business could be used to drive research and development in alternative energies. But this means the board of directors would need the commitment from their investors who normally strive for capital returns and dividends and would force the board to pay dividends if they are not committed to the transformation of the company.
Asset managers would need to be committed to their ESG strategy, as we have seen that nearly every asset manager talks about ESG strategies, but only a few put their words into hard action. Beside the lack of detailed knowledge of how to implement an ESG engagement strategy effectively, one of the main reasons for this lack of commitment are costs, since asset managers will need additional staff and other resources to run a long-term engagement strategy.
In addition to this, the upcoming demand from regulators on the EU action plan on financing sustainable growth is focusing on climate change as the first step and will not reward asset managers for taking actions on transforming companies to a more sustainable business model. Therefore, we rather may see more asset managers divesting from fossil energies and other companies that may not fulfil the needs of the EU taxonomy, instead of transforming those businesses. Therefore, it is questionable if we will see a drive toward more sustainable business models within the sectors where asset managers start to divest.
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