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church of england


Should you put your faith in engagement or divestment? 

IbyIMD+ Published 27 November 2023 in Sustainability • 9 min read • Audio availableAudio available

The Church of England has moved away from engagement and sold its fossil fuel shares, but to whose benefit? The shares have most likely been bought by investors who care little about climate change. One pension fund’s pioneering approach may provide a better alternative.

The Church of England has long been an advocate of engaging with companies, urging them to set and meet climate goals in line with the 2015 Paris Agreement, which aims to limit global temperature increases to less than two degrees Celsius, and preferably 1.5 degrees, compared with pre-industrial levels. The Church, which manages a 10-billion-pound endowment and a 3.2-billion-pound pension fund, is a co-founder of Climate Action 100+, a group of 700 global investors who engage with 166 companies across 32 markets. 

Yet the Church of England’s patience is not boundless. In June, it announced it was selling its holdings in a group of energy majors, including Shell, BP, Exxon Mobil, and TotalEnergies. The Church concluded that these corporations had failed to keep their climate change promises. Justin Welby, the Archbishop of Canterbury, head of the Church of England, and himself a former oil executive, said: “Some progress has been made, but not nearly enough.” 

After a northern hemisphere summer scarred by record heat waves, raging fires in Europe and North Africa, and floods from New York State to China, the need to take a stand has never seemed more urgent. For many investors, engagement is no longer enough. In 2020, under pressure from student protests and hunger strikes, the University of Cambridge pledged to sell its fossil fuel holdings over the next decade. The following year, Harvard University announced that it would make no direct investments in fossil fuel companies and would run down its holdings in funds that did so. 

Yet there are prominent voices who say that, if you really want to wean the world off fossil fuels, divesting your shares in energy companies is the wrong way to do it – because for every seller of equities there is a buyer whose intentions may be less benign than yours. The new shareholders may not push fossil fuel companies as hard to set and achieve climate goals. They may be happy for the companies to expand their fossil fuel exploration and production and to bother less about investment in renewables. In which case, what have the divestors achieved? Nothing, Bill Gates told the Financial Times in 2019. “Divestment, to date, probably has reduced about zero tonnes of emissions,” he said.  

Chris James, the founder of Engine No.1, took a similar line during a discussion at the COP 26 climate conference in Glasgow in 2021. Engine No.1, an activist hedge fund that was pushing Exxon to take climate change more seriously, managed to elect three representatives to the company’s board that year. Engagement was better than divestment, James told a COP 26 panel, adding: “No problem has ever been resolved by running away.” 

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The case for withdrawal 

So why does divestment still attract support? There are at least four reasons. The first is that people do not want to be associated with an industry that is doing so much damage to the planet. “Not in our name,” they say. Luigi Zingales, a professor at the University of Chicago Booth School of Business, calls this the “deontological stand” – deontology being the theory of moral obligation. People do not want their money, or their institution’s money, to support a nefarious activity.  

This stance drives much of the growth in ethical and ESG funds. People feel deeply uncomfortable about earning profits from tobacco, gambling, and pornography – or coal, oil, and gas. But some critics of the deontological stand argue that fossil fuels are different. Most of us accept that we have to cut their use, and sharply, but we will still need them while the transition happens. Our economies would shut down if we simply stopped using fossil fuels. And if we catch planes or turn on lights that are still powered, albeit to a happily reducing extent, by fossil fuels, isn’t it hypocritical to say we won’t invest in them? 

And what if divesting from them results in lower returns? That could be a problem for those funds with a fiduciary duty to their members or investors. Will pension fund members really accept smaller pensions just because they are more ethically managed? Don’t their fund trustees have an obligation to avoid those lower returns? 

This is where supporters of divestment deploy their second argument – that any higher returns from fossil fuel activities are illusory – and that action to counter climate change will inevitably lead to a fall in oil and gas use. Fossil fuels will become “stranded assets” as the companies extracting them lose their “social right to operate”. Their value will decline to worthlessness. This argument suffered a blow when Russia’s war on Ukraine, beginning in February 2022, led to a disruption in energy supplies, a spike in prices – and bumper profits for the oil companies. But second-quarter results this year showed the profits of oil majors such as Exxon, Chevron, Shell, and BP falling after the worst of the Ukraine war price shock passed, leading to a boost for the “stranded assets” claim. 

The divestment campaign’s third argument is that engagement doesn’t work. The New York Times in May quoted Mark Kramer, a senior lecturer at Harvard Business School, as saying that, despite Engine No. 1 getting its supporters on to the company’s board, “Exxon has continued to invest aggressively in expanding its oil and gas production”. Danielle Fugere, president and chief counsel of investor advocacy group As You Sow, said that Engine No. 1 “has not made a discernible difference in the way Exxon is addressing climate change”. The argument here is that by engaging with Exxon, Engine No. 1 is simply providing the company with cover: yes, its environmentally responsible directors sit on the board, but Exxon carries on doing exactly what it wants.  

Engine No. 1 attempted to counter this criticism, pointing The New York Times to Exxon’s investments in carbon capture, hydrogen, and lithium mining, and saying that none of these were happening before the election of the Engine No. 1-backed directors.  

‘Some progress has been made, but not nearly enough’: Justin Welby, the Archbishop of Canterbury, on energy companies failing to keep their climate change promises. Image: Getty

The Church of England has effectively endorsed this third divestment argument – by selling its fossil fuel shares, it has appeared to accept that its engagement with the energy giants has not worked. This brings us back to Bill Gates’s point: by divesting, how have you made things better? You have merely sold your shares to investors who care less about climate change than you do. 

The fourth argument in favor of divestment – and one frequently used – is that it worked in the case of South Africa. Just as sanctions helped to bring down apartheid, this argument goes, so divestment will force the fossil fuel companies into a change of course. This begs the question: did sanctions really help to bring down apartheid? It is understandable that many people think that they did – the two most illustrious opponents of apartheid, Nelson Mandela and Desmond Tutu, said so. Also, sanctions were imposed and apartheid ended. Isn’t it obvious that the one caused the other? 

But correlation is not causation. A solid body of academic research suggests that sanctions were a marginal reason for apartheid’s downfall. This contrarian research is usefully summarized in a 1999 article in The American Economic Review by Philip Levy, then at Yale University. Drawing on writers such as Patti Waldmeir, the FT’s South African correspondent during the fall of apartheid, Levy says there is little evidence that sanctions substantially damaged South Africa’s economic performance. Far from wilting in the heat of trade sanctions, South Africa’s export volumes rose. The white South African business community often benefited from divestment. When foreign corporations withdrew from the country, local businesspeople could buy their South African subsidiaries at knock-down prices – and then conclude licensing deals with the departed parent companies.  

If sanctions didn’t end apartheid, what did? Levy and Waldmeir have pointed to three factors. First, local opposition, strikes, and demonstrations were making South Africa increasingly ungovernable, adding to pressure for change. Second, apartheid’s restrictions on black workers doing skilled jobs were acting as a brake on the country’s development and attracting increasing opposition from local business leaders. Third, the Soviet Union collapsed. This deprived the African National Congress, the main opposition movement, of its key backer and made it more amenable to a negotiated settlement with the apartheid regime. In turn, the apartheid government, deprived of one of its most persistent arguments against change – that it was a Communist plot – realized, under pressure from business leaders, that the ANC was open to compromises that left whites with significant economic power.  

Engage with equity, not debt 

So, what can environmentally concerned investors do if they find the four arguments in favor of divestment unconvincing? Is there an alternative to simply walking away, as the Church of England has done? 

The Lothian Pension Fund, which manages the local government pension scheme for Edinburgh and the surrounding area of south-east Scotland, has a different approach. Lothian describes its strategy, broadly, as “engage our equity and deny our debt”. Rather than selling shares in companies that don’t live up to climate pledges, Lothian does not lend to them. That is, it does not subscribe to new corporate bond issues. And, in a slight deviation from “engage our equity”, it doesn’t participate in rights issues or new issues of shares. 

Lothian explains its position by saying that “buying or selling existing listed equities (shares) does not affect the capital position of the company (it receives no cash), whereas subscribing to new bond or equity issuance does – it usually receives cash to invest”. 

Rather than selling shares in companies that don’t live up to climate pledges, Lothian does not lend to them

This does not mean that Lothian is soft on companies that depart from Paris Agreement goals – to which it is strongly committed. If companies do not adhere to climate targets, Lothian denies them financing, whether through bonds or new equity, potentially also increasing the long-term cost of taking on any new debt and reducing income from any new share issuance. Crucially, it does not divest its existing shareholdings – using its presence as a shareholder to push for setting and meeting net zero goals. “We expect our approach to be a more effective means of achieving necessary change – a real reduction in greenhouse gas emissions – than divestment,” Lothian says. 

Lothian’s strategy offers one possible way through the engagement-versus-divestment dispute. It answers the criticism that divesting merely brings in shareholders with a less environmentally committed outlook. It also deals with the reality that share sales in the secondary market don’t much bother quoted companies; they don’t raise any new money for the company. Some argue that selling shares at a reduced price raises the companies’ cost of capital but, as Stuart Kirk, who had to leave his role as head of responsible investing at HSBC’s asset management division when he criticized the ESG movement, has said: no one has satisfactorily explained how this increase in the cost of capital works. Lothian instead punishes environmentally delinquent companies when they try to raise new money, which has a real and measurable impact. And, in the meantime, as engaged shareholders, Lothian can put pressure on those companies to do better. 

That the Lothian approach hasn’t been more widely adopted is perhaps because it is not widely known. Or possibly that, in our polarized world, it is insufficiently strident to satisfy either side. Which is a pity – because the climate crisis, becoming more evident by the day, requires some joined-up – and grown-up – investor thinking. 


Michael Shapinker

Michael Skapinker

Contributing editor of the Financial Times

Michael Skapinker is a contributing editor of the Financial Times and the author of Inside the Leaders’ Club: How Top Companies Deal with Pressing Business Issues. He is also a member of the I by IMD editorial board.


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