Engagement needs to be supported with a “Credible Threat”of divestment

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Managers must use a ‘credible threat’ of divestment to engage boards. In a world of climate crisis, proper engagement and divestment do not have to be at odds with each other.

Many fund managers engage with companies to end harmful practices. Yet engagement is opaque, and fund selectors struggle to assess managers’ commitment and the progress companies make.

Concerns that screening could lead to under-performance may motivate advisers to pursue a less blanket approach. This could involve the lobbying of fund managers, the underweighting of firms with harmful activities, or the overweighting of those that support solutions to the world’s problems.

Many ethical investors state they use engagement to influence companies. But it is tough to appraise the quality and commitment of a firm to engagement work. A stronger focus on engagement is essential, especially for it to be a key tool for addressing issues like climate change.  Difficulties with appraising engagement quality can also lead to concerns about ‘greenwashing’.

Q G Rayer (2020), Managers must use ‘credible threat’ of divestment to engage boards, Citywire New Model Adviser®. Online: https://citywire.co.uk/new-model-adviser/news/managers-must-use-credible-threat-of-divestment-to-engage-boards/a1357540?section=new-model-adviser, 15 May 2020.


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