Insights
Ethical Hotline: Divesting

Hi Emily,

To answer this honestly, we need to talk about scale.

Does one person (one Emily in this instance) quietly divesting her stocks in a company change that company's share price? No.

Does it make Emily feel better? Likely yes, and that's important.

But if a big shareholder, or a collective of smaller shareholders, threatens to divest (or actually divests) because of an issue, this can definitely affect a company and encourage them to address the issue.

The biggest impact on the company essentially centres on reputation. This matters because ‘reputation’ can be a significant (and intangible) asset forming part of the overall company value. The strength of reputation impacts future sales, cashflow and the ability to attract talented staff.

Nike in the 90's is a good example of this – there was a major public scandal when it was discovered their supplier was using child labour. Investors sold and their share price dropped dramatically, they took action to rectify their reputation and changed their policy. More recently Microsoft, under scrutiny from The Guardian, discontinued Israeli military access to Azure after it was proven it was being used to store expansive surveillance of civilian Palestinian communications.

This happened after pressure was applied by journalists, shareholders (threatening to divest) and Microsoft employees who demanded the company address their involvement in what they saw as an egregious violation of human rights.

Did the Israeli military find another way to store data? Probably.
But this mass demonstration of what consumers in a democracy were willing to tolerate and what they weren't, sent a clear signal to Microsoft about needing to police their terms of service with respect to human rights. Flexing the right to vote with your investments is an example of you utilising your democratic right to disagree. It helps establish expectations of corporate behaviour which is critical to ensure companies take accountability for the impact of their decisions.

But focusing on the negative will only get you so far.

As one person investing, redirecting your capital into positive alternatives can make real change.

For example, investing in companies and technologies enhancing electrification can help build a more resilient global economy and reduce risks around energy access that we've seen recently. Investing in this sector adds the vote of your dollar to a more sustainable future.

An alternative to divestment, if you're looking to affect change, can be engagement. In some instances, staying invested and having a voice within the company can be more effective. Smaller shareholders do get a vote on shareholder resolutions and can engage directly with the company; which makes it possible for them to champion improved outcomes. There's a caveat here though – usually only very large shareholders have enough sway to really impact outcomes.

And yeah, someone else might buy those shares you divested, but it's important not to underestimate the value of you not owning them.
Aligning your investing with your values can give you peace of mind and that's worth a lot. Other people may genuinely be okay with things you're not – part of being in a democracy is accepting diverse opinions – but you should be comfortable with what your money is amplifying.

The views expressed here are of a general nature and are not specific to Pathfinder's product. For more information on how Pathfinder invests, you can read our Ethical Investment Policy here.