Home > Seems financial institutions can divest after all

Seems financial institutions can divest after all

1 April 2022

1 April 2022

The flight of capital from the Russian economy since the invasion of Ukraine has torn many of the finance sector’s arguments against fossil fuel divestment to shreds.

In this devastating case of the invasion of Ukraine, investor action has come far too late. For years, and especially the weeks leading up to the invasion, the warning signs of Russia’s increasing hostility were ignored by investors and companies with a financial stake in the country’s economy, while their investments helped Putin build his military might. 

Only after the outbreak of war have investors accepted their culpability, and acted after so much damage has already been done.

We see a similar pattern with financial institutions’ response to climate change. For years, decades even, calls to divest from the coal, oil and gas industries driving us towards catastrophic global warming have been met with convenient excuses and claims that divestment is ineffective, impossible, or both. These claims have never been true, and the example of divestment from Russian companies is further proof of this.

Investors can divest ‘passive’ investments

A common investor response to fossil fuel divestment demands has been to claim they cannot exclude companies from their passive investments, which include exposure to all companies in a particular index (for example the ASX 200 or FTSE 100). But within days of Russia’s invasion of Ukraine, asset owners around the world—including Australia’s super funds—were demanding their asset managers dump Russian investments, including those held through passive funds. 

With this demand from their clients made clear, lo and behold the world’s largest asset managers, including multi-trillion dollar managers BlackRock and Vanguard were pressing index providers like MSCI and FTSE Russell to cut Russian equities and bonds from their indices. And guess what? They did!

Just like that, the ‘passives problem’ was solved. All it took was for asset owners and managers to care enough to wield their immense power.

Drug dealer’s defence abandoned

Banks, super funds and asset managers have been guilty of using the drug dealer’s defence when it comes to investment in fossil fuels: if we don’t provide the capital, someone else will and the company or project will go ahead anyway.

Despite the moral indefensibility of this position, it’s also been proven false. Coupled with the sanctions imposed by governments around the world, the decisions of companies, investors and financiers to pull services and capital out of Russian companies have decimated the Moscow Stock Exchange and cut off Russian companies’ access to most of the world’s largest banks. Take for example Russia’s two largest oil and gas companies, Gazprom and Lukoil, which have seen ~90% share price falls since mid-February. Major projects like the Sakhalin oil field development have been derailed by the divestment wave, and it’s hard to see Russian companies being able to foot the bill with increasingly limited options for project partners, capital raising and debt finance all drying up.

Engagement is best, until you really want to make an impact

‘We prefer to engage with companies we invest in to drive change. Remaining invested gives us a seat at the table’. These are lines repeated so often by super funds and banks that divestment advocates like us hear them in our sleep.

And yet, when institutions care enough about an issue to want to make a real, immediate impact, they turn to divestment. This is unsurprising, given their decades of engagement with the fossil fuel sector have failed to halt its rampant expansion, delivering little more than greenwash while the industry continues pursuing new coal, oil and gas projects that push us ever closer to catastrophic global warming. In terms of impact, we can again turn to Lukoil, which has strayed from the state line, publicly calling for “the immediate cessation of the armed conflict”.

The effectiveness of divestment has also been recognised in recent research, which shows divestment of companies on sustainability grounds causes a stock price decline and subsequent reduction of those companies’ emissions.

And it also turns out divestment doesn’t actually destroy an investor’s opportunity to engage. Earlier this year, Danish pension fund AkademikerPension said it often gets more attention and airtime from management after it had excluded the company.

Left to their own devices financial institutions will act too late

The most important lesson to learn from the finance sector’s response to Russia’s invasion of Ukraine is that, if left to their own devices, financial institutions won’t wield their immense power to avoid humanitarian or environmental catastrophe until it’s too late.

The questions pension fund members and bank customers around the world will be asking is ‘how did these institutions invest my money in companies providing the capital for Russia’s government and military forces in the first place’? And ‘why did it take the outbreak of war for them to act’?

We need to ensure these institutions are not able to make the same mistake when it comes to investment in companies driving the climate-wrecking expansion of the coal, oil and gas industry. Just like the invasion of Ukraine, the “smartest guys in the room” have all the information they need to know they are invested in a looming crisis and every opportunity to act and avert it.