Climate change is bad, and some companies produce more emissions than others. When people disapprove of a company, a common move is to boycott it. This is the purpose of fossil fuel divestment.
The divestment playbook has been to support ESG funds, which invest in low-emissions companies, and to advocate for big investment funds—such as governments, pensions, churches, and university endowments—to end their investments in fossil fuel companies. 350.org, an international environmental organization, is representative. “We want institutions to immediately freeze any new investment in fossil fuel companies and divest from direct ownership and any commingled funds that include fossil-fuel public equities and corporate bonds,” its website says.
The divestment movement has been successful at getting big funds to divest. Harvard, which has the biggest university endowment in the world, announced in 2021 that it would divest from fossil fuel companies. The University of Toronto, where I work, divested from fossil fuel companies in 2022.
Despite the appeal of boycotts, sometimes there are better options.
has a good article about how McDonald’s recently switched to cage-free eggs. Since the company served around two billion eggs in the United States last year, this is a big deal. As Singer describes, this change didn’t come about because of a boycott. Instead, many people and groups, including Singer and the activist Henry Spira, convinced McDonald’s that going cage-free was the right thing to do.Next year will be the fiftieth anniversary of Singer’s Animal Liberation, the book that launched the animal welfare movement. As Singer has been saying for a while now, the hoped-for revolution never came. Veganism and vegetarianism are much more culturally accepted, and a lot has changed even since I became vegetarian in high school, but the overall consumption of animal products hasn’t dropped.
There’s an important lesson here in the nature of progress beyond animal welfare. Pushing for revolution can end up being worse than incremental change. And even if the bigger goal is achieved, it sometimes doesn’t work the way proponents expect it to. As I’ve written before, local food often produces more emissions than other options. Similarly, pushing for rent control at the expense of building market-rate housing raises rental costs.
Like supporting local food and opposing market-rate housing, fossil fuel divestment makes intuitive sense. These companies need money to operate, and they get money from investors, so divestment means they’ll have less money and thus won’t be able to develop new projects. Seems good! The flip side is that, since these companies make money from polluting, profiting off them by owning shares means shareholders are complicit.
Divestment, however, turns out to be counterproductive. Part of the story is about how companies change. Publicly owned companies are governed by shareholders, who collectively own the company and get to vote on what it does. As Eleonora Broccardo, Oliver Hart, and Luigi Zingales show in “Exit vs. Voice”, boycotts through selling shares (exits) tend to be less effective at changing companies than shareholder advocacy (voice). Selling shares means former investors no longer have a voice. Worse still, when socially responsible investors sell their shares, that lowers the share price, thereby allowing investors who don’t care about the climate to buy them at a discount. This pattern will continue, making the company increasingly owned by investors only trying to maximize profit.
The other part of the story concerns financing. The main point of ESG investing is to take money out of polluting companies and invest it in green ones. But this creates a problem, as economists Samuel Hartzmark and Kelly Shue show in their paper “Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms”. The problem is that green companies can’t do much to become greener, while polluting companies can do a lot. For a polluting company, even a small difference in percentage of total emissions will be much more significant than a large percentage by a green company.
A polluting company faces a tradeoff. It probably has ways of decreasing its emissions, but making those changes is a longer term strategy that requires upfront investments. For example, if a cement company wants to produce greener cement, it will have to build a new factory and change other parts of the business. If the cost of those changes increases because there are fewer investors—the goal of divestment—the company won’t be able to fund the greener option. Instead, since shareholders will still want them to make a profit, divestment will push the company to create revenue by polluting more, since that’s the only option available to it. In other words, divestment will cause polluting companies to become more short-term focused, which will increase pollution.
The alternative to divestment is engagement. A well-known example of this is Engine No. 1, the investment firm that successfully campaigned to have three of ExxonMobil’s board members replaced with ones willing to make Exxon more sustainable.
Earlier this week, Singer published an article in his newsletter by Josh Balk, Matt Prescott, and Matt Penzer, who run The Accountability Board, which engages in what it calls “portfolio advocacy”. In the article, they describe how they use engagement to advocate for important causes to other shareholders. One success story is getting Jack in the Box, a fast-food company, to measure and reduce greenhouse gas emissions.
Because it’s more focused, this approach is much more effective than boycotts. It takes a lot of people boycotting a company for it to notice, whereas a small group can make change happen using the shareholder approach. It isn’t the only option.The Financial Times has a great article going over the nuances, but the upshot is that 350.org-style divestment doesn’t work. As Bill Gates put it, “Divestment, to date, probably has reduced about zero tonnes of emissions.”
There’s a pattern here. Climate change, animal welfare, and housing are all important issues. But the most popular approaches to addressing these issues frequently turn out to be counterproductive. Activists need to do the work of thinking through their strategies. We can’t afford to make mistakes.
Quick Hits
I have new videos on the ethics of placebos and an explainer on why death is bad (when it’s bad). Have a look!
I forgot to mention two excellent articles from Works in Progress when they first came out. The first is about paying people to donate organs, based on the paid-plasma model, which I discuss with
here.The second is about challenge trials, which involve deliberately infecting someone with a virus—in this case, Zika—to study it more effectively. Bioethicists have been generally opposed to challenge trials, which is a mistake.