What Exactly is Divestment?

Divestment is the opposite of investing - the act of selling your investments. The context in which I'm talking about divesting today is when people divest for moral or ethical reasons - they divest from companies they believe are unethical.

Does Divestment Actually Hurt a Company's Bottom Line?

Not directly. The actual act of selling your shares does not have any negative financial impact on the company [1] [2] [3]. Why?

  • For every socially responsible investor, there are many more socially apathetic investors that will buy the shares. From the New Yorker

An example: suppose that the market price for a share in ExxonMobil is ten dollars, and that, as a result of a divestment campaign, a university decides to divest from ExxonMobil, and it sells the shares for nine dollars each. What happens then?
Well, what happens is that someone who doesn’t have ethical concerns will snap up the bargain. They’ll buy the shares for nine dollars apiece, and then sell them for ten dollars to one of the other thousands of investors who don’t share the university’s moral scruples. The market price stays the same; the company loses no money and notices no difference.

  • After a company goes public, the purchase and sale of shares on the stock market don't actually send the company any money. These shares are sold on an exchange between third parties.

If enough people decided to divest from certain companies, it could drop their stock price. However, this is simply not the case.

But Divestment Campaigns Might Still Be Effective

The key word being campaigns. Divestment can be an effective symbolic tool to signal disapproval of a company.

So if for example you work for a non-profit organization that opposes the actions of certain companies or industries, calling for divestment may shame the companies enough that people take other actions that actually do hurt them, such as boycotts of their products.

Investing May Actually Be More Effective than Divesting

By investing in shares of a company you get shareholder voting rights. Now there may not be enough shareholders that agree with your views on how a company should operate. But there are real world examples of shareholders forcing an oil company to do something it did not want to do.
In 2017 ExxonMobil was forced by its shareholders in a 62% majority vote to "more clearly report how climate change affects Exxon’s business." Of course, this did not force ExxonMobil to reduce their carbon emissions or take other steps to reduce its impact on climate change, but it's still an example of shareholders succeeding in opposing company management.

But I Still Want to Divest!

If you want to divest from certain companies because you personally don't want to profit from their actions, by all means divest. But don't divest believing you're hurting the company financially.

Furthermore, if you buy index funds, it's generally more costly to buy socially responsible index funds because they typically charge higher expense ratios. I recommend instead of buying these socially responsible index funds to calculate the percentage of a regular stock market index fund that is composed of companies you oppose, and donate that percentage of the profits from such companies to charity. This way you can pick exactly the companies you oppose, as opposed to a socially responsible index fund choosing them for you, and you're not paying extra.

  1. The New Yorker ↩︎

  2. Vox ↩︎

  3. The Effect of Socially Activist Investment Policies on the Financial Markets: Evidence from the South African Boycott, Journal of Business, 1999, vol. 72, no. 1 ↩︎