Responsible Investing Strategies: Emerging Academic Evidence

Divest or Engage?

Vaska Atta-Darkua, David Chambers, Elroy Dimson, Zhenkai Ran, and Ting Yu compare in a 2020 article two of the most popular responsible investing strategies: negative screening and engagement.

Their study Strategies for Responsible Investing: Emerging Academic Evidence considers the challenges faced by the University of Cambridge, which mirror those experienced by institutional investors worldwide.

Their main takeaways are:

• Evidence suggests that engagement can affect company behaviour and improve investments' environmental and social outcomes.
• Evidence on the direct impact of divestment on companies is more mixed, as divestment can have unintended consequences. It includes potential financial costs from exclusions and increased benefits to the targeted companies' management.
• Many investors see negative screening as a tool with far-reaching political and societal impact, which they place above immediate financial influence.
• ESG metrics vary significantly across providers, and the choice of data provider can fundamentally impact the ESG credentials of institutional portfolios.
• A survey conducted for the Divest or Engage conference revealed that 47% of respondents said they believed in both divestment and engagement in the case of fossil fuel companies.

The study however finds heterogeneity in investment professionals' engagement and exclusion preferences, in both their strategies and their reasons to support it.

The choice between negative screening and engagement and the specific approach to each should be informed by careful consideration of the specific circumstances and objectives of the investor.

One potential criticism of the study could be its reliance on the specific context of the University of Cambridge and a survey with potential response biases, which may not be representative of most institutional investors.