The Centre for Endowment Asset Management (CEAM) at University of Cambridge organised and hosted the "Divest or Engage? Strategies for Responsible Investing" conference with the collaboration of ECGI, on 28 October 2019. The discussions highlighted the challenges for excluding undesirable assets from investment portfolios, how engagement can be a value-enhancing complementary tool, and also how the significant variances between data providers can have a fundamental impact on the ESG credentials of institutional portfolios.
While the direct effect of divestment on share price was questioned, it was suggested that divestment can have an alternative purpose, such as branding, or as a tool to influence government policy and public opinion. Further, it was argued that engaging with oil and gas companies on the acceleration of their capital expenditure toward low-carbon technologies may provide a better outcome for climate change, without leaving the field open for potentially higher polluters that may be predominantly state-owned.
The conference began with a case study of climate-change activism at the University of Cambridge, addressing how a dilemma stemming from an increasing awareness on ESG issues had impacted the future investment strategies of the University, followed by an academic research paper analysing the effect that ESG ratings disagreements have on stock returns, particularly in conjunction with the legal origins of the rating providers' headquarters.
While it was noted that funds labeled as sustainable or low carbon can experience fund inflows, there was general acknowledgement at the event that ESG ratings discrepancies are in marked contrast to the strong observed correlations between Moody's and S&P ratings for example. This could be attributed to different weightings or emphasis within the E-S-G assessment, and different interpretations which all require a clear understanding of the providers' unique methodologies. One suggestion was to examine the most critical or correct ratings as a matter of research.
Engagement by active institutional owners was underlined as a powerful tool that can produce positive outcomes, whether at a portfolio level, by making an announcement for example, or at a company level, via meetings wih the company, resulting in voting and trading actions. Evidence was presented using two case studies during the conference. The second session included a quasi-natural experiment conducted regarding how a sudden change in governance preferences of Norway’s sovereign wealth fund (NBIM) could induce firms' governance practices changes aligning with NBIM's expectations. This session later zoomed in on the latest survey of industry professionals' views on sector exclusions.
The third session included an academic research paper highlighting the case evidence of a strong correlation between asset managers' engagement and trading decisions, which lends support for voice influencing exit. The next paper provided the first detailed evidence of the nature and impact of co-ordinated, collaborative, and international efforts by a prominent international network of activist shareholders to influence investee companies on ESG issues.
The final session involved a panel discussion with four industry representatives exchanging their views on the future prospects of the responses of the finance industry, especially investment management, to the widespread ESG concerns.
The summary article "Strategies for Responsible Investing: Emerging Academic Evidence" by Vaska Atta-Darkua, David Chambers, Elroy Dimson, Zhenkai Ran and Ting Yu, is available below.
Session 2: Thought leadership in responsible investing
Firms Reaction to Changes in the Governance Preferences of Active Institutional Owners
Survey on Sector Exclusions
Session 4: Panel discussion
The Centre for Endowment Asset Management (CEAM) is a research and education centre based within Cambridge Judge Business School. CEAM has an active role globally in furthering high-quality research into long-horizon investing.