S5 Ep38: Divest or engage?

Episode Summary

Executive Summary: The episode explores whether finance can speed up climate action through stewardship and engagement rather than divestment. Dirk Schoenmaker argues large investors like pension funds should pressure fossil fuel firms to cut emissions and invest in transition capacity, while Jeffrey Wurgler’s survey suggests experts see climate risk as underpriced but think regulation and taxation, not investors, are the strongest near-term forces for change.

Main Topics: Stewardship vs. Divestment (Priority: 5/5): Dirk Schoenmaker explains why his ABP advisory team favored deep engagement with some fossil fuel firms over immediate divestment, arguing that incumbents may be crucial to building green infrastructure and accelerating the energy transition. Role of Institutional Investors (Priority: 5/5): The discussion examines whether large pension funds and asset managers can influence corporate environmental behavior through ownership pressure, monitoring, and voting, rather than simply reallocating capital. Expert Views on Climate Risk Pricing (Priority: 4/5): Jeffrey Wurgler summarizes a survey of finance academics, regulators, and policymakers showing that most believe climate risks are not properly reflected in markets across stocks, insurance, and real estate. Limits of Markets and Corporate Incentives (Priority: 4/5): The episode emphasizes that markets price profits and losses, not externalities, so climate damage may not change asset prices quickly unless regulation, taxation, or climate shocks affect earnings. ABP Protest and Policy Shift (Priority: 4/5): Student and civil servant protests in the Netherlands targeted ABP’s fossil fuel holdings, pushing the fund from engagement toward divestment after legal challenges and public pressure. Monitoring Engagement Outcomes (Priority: 3/5): Schoenmaker argues engagement can be assessed using observable indicators such as capital expenditure plans and emissions disclosures, making stewardship more measurable than critics claim.

Key Arguments: Large fossil fuel firms may be better partners in the energy transition than outright divestment because they already possess scale, infrastructure knowledge, and capital-building capacity. A 'smart engagement' strategy should set measurable emissions-reduction targets, monitor annual progress, and divest only from firms that do not respond. Carbon taxes and regulation remain important, but finance can complement policy by using investor pressure to push faster change. Climate risks are widely believed by experts to be underpriced in asset markets, but uncertainty about timing, location, and industry effects limits immediate repricing. Because asset prices reflect profits and losses rather than social harms, markets alone are unlikely to drive rapid decarbonization without policy intervention. Institutional investors can matter, but only if a small number of very large actors act in a coordinated and persistent way. Engagement success is monitorable through capital expenditures, emissions data, and investment plans, so stewardship need not be a vague or unaccountable strategy.

Data Points: ABP assets: 450 billion euros - Dirk Schoenmaker describes ABP as one of the world’s largest investment funds Survey invitations: about 11,000 - Jeffrey Wurgler and Johannes Strobel emailed finance professors, regulators, and policymakers Survey responses: about 900 - Total responses received to the climate finance survey Climate risk underappreciation ratio: 20 to 1 - Respondents believed climate risks are underappreciated by asset markets versus overappreciated Short-term risk horizon: 5 years - Wurgler describes the survey’s near-term risk question Long-term risk horizon: 30 years - Wurgler describes the survey’s long-term risk question Emissions reduction target: 7–8% per year - Schoenmaker cites IPCC-consistent reduction targets used for oil company engagement ABP Shell divestment: 600 million euros - ABP sold its stake in Shell in October 2021 ABP fossil fuel divestment total: more than $17 billion - ABP announced divestment from fossil fuel companies ahead of COP26 Oil company engagement filter: 5 to 8 of 10 big holdings - Schoenmaker hopes only frontrunners remain after smart engagement

Pivotal Quotes: "how can we? Speed up the energy transition because it is not about divestment, but it is about speeding up the energy transition." — Dirk Schoenmaker: Explaining the goal of the ABP advisory report "We call it smart engagement." — Dirk Schoenmaker: Describing the strategy of setting emissions targets, monitoring progress, and divesting if firms fail to move "Respondents overwhelmingly, by a factor of 20 to 1, believe that climate risks are underappreciated by asset markets" — Jeffrey Wurgler: Summarizing the climate finance survey findings

Implications: Finance can pressure firms, but not reliably on its own. For real decarbonization, investors, regulators, and governments must act together; otherwise, divestment or engagement alone may be too slow or inconsistent to shift emissions fast enough.