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An alternative strategy to divestment
Sometimes, you might feel reluctant to divest because you hold a significant portion of the stock. If you already have shareholder rights, then an alternative strategy can be to become an active shareholder. This is known as an engagement-focused strategy.
There are a number of ways to do so, such as writing a letter to the board or raising questions at an annual general meeting (AGM). But this essentially means that you can raise any issues you have with the way the company is run, and get involved at changing the company internally, rather than simply divesting.
However, if you have an issue with the entire business model – ie the fact that a tobacco company sells tobacco – you’re unlikely to be successful. If, on the other hand, you’d like to encourage a company more sustainable, or more ethical in how it treats its workforce, then this could be a good way to be proactive within the company.
Types of divestment
There have been a range of divestment movements over the years, some of which have targeting specific companies and products, while others have gone so far as to withdraw investment from entire countries. We’ve looked at three of the most common types of divestment to see what opportunities the markets might hold for traders to go both long and short.
Divesting in fossil fuels
Perhaps the most commonly mentioned example of divesting is the movement away from fossil fuels as a response to global warming.
Fossil fuel companies are considered to be a cornerstone of the global financial system, so for many investors it is inevitable that some part of their savings account or share portfolio is invested in the industry. However, with the rise of fossil-fuel-free companies, many investors and institutions are divesting their own money or seeking the option to do so from their financial advisor.
The movement is actually the largest growing divestment trend in history and is led by large activist groups, such as sentayho.com.vn, who run the Go Fossil Free divestment campaign. The campaign’s message is clear: investing in fossil fuels is morally wrong but also financially risky. As the awareness of climate change spreads, positions held in fossil fuel companies could become worthless.
According to Go Fossil Free, the number of global institutional investors who sought to cut fossil fuel stocks from their holdings increased from just 180 in 2014 to more than 1135 in 2019 – these institutions have committed to divesting approximately $11.48 trillion in total.2
Divesting in fossil fuels has had such an impact, that individual fossil fuel companies have noticed the change to their balance sheets. According to sentayho.com.vn, Peabody Energy – previously a large private-sector coal company – cited in 2014 that the divestment campaign was one of the reasons for its declining profits. By 2016, the firm had gone bankrupt.
The movement has also fundamentally changed the makeup of many global stock indices. For example, if we look at the S&P 500, in 1980, fossil fuel stocks comprised of more than 28% of the total index – in 2019, this number is approximately 5%.
As oil prices fall and renewable energy attracts an increasing amount of attention, investors and traders are increasingly turning to alternative energy stocks, such as solar and wind.
After divesting it is common for investors to look at how they can reinvest the capital elsewhere to profit from companies that compete with the fossil fuel industry. This could be through investing in the company shares or speculating on the future of the underlying asset with spread bets or CFDs. You can invest in shares through our share dealing service or speculate on the future of fossil fuel stocks by opening a live trading account.
Divesting in gun manufacturers
Some investors might look to other sociopolitical causes as a basis for divestiture, such as reducing the amount of capital invested in gun manufacturing firms.
Following a series of mass shootings in the US, pressure mounted for investment firms to reconsider their portfolios and remove gun stocks. A lot of individual investors wanted to ensure that their money was not contributing to causing any harm, both domestically and abroad. Divesting from gun manufacturers wasn’t necessarily an easy process – especially for American investors who held a 401(k) retirement savings plan or were invested in the Vanguard Small-Cap Index Fund, as these often hold significant amounts of weapons and ammo shares. With the increasing awareness about divesting from gun manufacturers, a variety of online tools sprung up to ensure that investors would always know exactly how their funds were being used.
In the US, a movement called ‘Campaign to Unload’ was launched in the following of the Sandy Hook shooting, which raised awareness for why individuals should divest from gun companies. And the campaigns have definitely had an impact. Between 2012 and 2016, there was a huge increase in the amount of military and weapons manufacturing companies that were impacted by divestment – with the amount of impacted assets rising from $74 billion to $835 billion.
This divestment has had a big impact on the value of gun manufacturers’ shares. For example, shares in American Outdoor Brands Corp (AOBC) – parent company of Smith and Wesson – fell from an all-time high of $31.15 per share in 2016 to a low of $5.41 in 2019.
Remember, the trend for divestment does not always equate to immediate share price movements – however, the volatility caused by such campaigns can provide an interesting trading environment. It is always important to perform technical and fundamental analysis before taking a position on any stock.
To practise trading the shares of gun manufactures, use an IG demo account.
Divesting in tobacco companies
Tobacco companies are often considered a defensive stock – a category of companies that retain their value, even as the wider market declines. This is due to the historic demand for cigarettes. However, as the awareness of the health implications of smoking has spread, the popularity of the product has declined. This has led to companies and individuals considering whether they want to continue investing in the industry.
For example, in 2016, French insurance firm AXA divested $2 billion worth of tobacco assets – the management team stated that as a health insurance firm, they could not consciously invest in one of the largest threats to public health. Similarly, the UK’s National Insurance Savings Trust (NEST) announced in 2019 that it would divest from all £40 million of its current tobacco investments. This was due to increasing global regulations against tobacco and declining smoking rates, both of which could impact tobacco stock revenues.
These two cases are prime examples of the different reasons for divesting. The first is due to a conflict of interests in terms of ethics, while the second is based on long-term growth and profit expectations.
There are examples of divestment causing companies to miss out on key profit targets. For example, in December 2016, US retirement system CalPERS announced it had lost out on an estimated $3.5 billion as a result of their ban on tobacco stocks.
However, new research has suggested that divesting from tobacco will not negatively impact returns. Genus Capital Management’s report showed that an index portfolio without tobacco didn’t underperform an index with tobacco over a 20-year period.3 They largely attributed this to the severe headwinds the tobacco industry will face from lower consumption, global taxes and regulations.
Both companies and individual traders should always consider the long-term implications of divesting and what the next step in their strategy will be. To take a position on the future of the tobacco industry and key tobacco stocks, create a live trading account. Alternatively, you can practise trading in a risk-free environment using an IG demo account.