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Investors: Stay and Fight for Green Change or Divest?

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The Importance of Engagement for Socially Conscious Investors


Socially conscious investors, employees, and consumers are increasingly advocating for divestment from certain companies in order to address social issues.

In recent years, several brands have adopted social and political stances, a trend commonly termed as "going woke". While this move has garnered praise for raising awareness on pertinent issues, it has also faced significant consumer pushback. Critics argue that corporations are capitalizing on social justice movements and making performative gestures without committing to real change. There's also a sentiment that brands should stick to their primary business rather than wade into sociopolitical waters, as it can come off as inauthentic or forced. For some consumers, the intersection of commerce and activism seems inherently contradictory, leading to skepticism about the genuine intentions of these brands. Additionally, taking a stance can alienate a segment of the customer base who may not agree with that particular viewpoint. As a result, brands find themselves in a challenging position: striving to be socially responsible and resonating with a younger, more socially-conscious demographic, while risking backlash from consumers who feel they are being pandered to or those who disagree with the stance being taken. The outcome underscores the complexities of navigating the evolving consumer landscape and the challenges of authentically integrating social responsibility into a brand's image.

In the broader narrative of brands "going woke", a few notable incidents stand out. Bud Light, for instance, faced both praise and criticism when it launched an ad campaign celebrating LGBTQ+ Pride Month. While many lauded the effort for inclusivity, others perceived it as a marketing gimmick or expressed discomfort with mixing politics and products.

Target, another prominent brand, faced backlash when it announced an inclusive bathroom policy, allowing transgender individuals to use the restroom that aligns with their gender identity. The policy ignited debate about safety and inclusivity, and led to boycott campaigns from certain groups. While the brand was celebrated by many for its stance, others threatened to (or did) stop shopping at its stores due to disagreement or concerns.

Similar incidents have occurred across industries, from sports brands endorsing political movements to tech companies changing platform policies in the name of social justice. The recurring theme is that while taking a stance on social issues can resonate with a segment of the population, it invariably sparks dissent from another.

Such brand endeavors highlight the fine line between genuine corporate social responsibility and what some consumers see as opportunistic "brand activism". In the rapidly evolving sociopolitical landscape, brands must carefully weigh the advantages of taking a stand against the potential pitfalls and polarizing effects on their consumer base.

The Problem with Divestment

Divestment can only have an impact if it depresses the stock price of the targeted company. Unfortunately, this decline attracts investors who are not socially conscious and are happy to acquire the stock at a discount. This opportunistic buying tends to eliminate the price decline and undermines the incentive for the company to act in a socially responsible manner. For example, divestment from oil stocks makes them an attractive investment for investors who are less concerned with removing fossil fuels.

The Attenuation Effect

This effect is particularly strong when investors are motivated by social goals rather than moral outrage. For example, Mormons do not divest from tobacco to end smoking, but rather because of a religious mandate. Socially conscious investors who want to curb CO2 emissions to reduce climate risk are often willing to sacrifice some return for significant environmental impact. However, if the impact is limited, they may give up on divestment.

The Role of Large Investors

In the absence of large, very socially conscious investors who divest regardless of the impact, our research shows that small socially conscious investors are unlikely to divest. This means that even in a world where all investors are socially conscious, divestment may not occur.

The Power of Engagement

Engaging with management as an investor stands a much better chance of achieving socially desirable outcomes. Rather than divesting, socially conscious investors can use their voting power to influence companies to adopt more sustainable practices.

The Benefits of Voting

When faced with a proposal to spend more on reducing pollution, socially conscious investors weigh the personal cost against the social benefit. Through their votes, these investors can encourage large companies to adopt green technologies, making a significant impact on climate change.

The Role of Shareholders

If the majority of shareholders are even slightly socially conscious, they are more likely to vote in favor of costly environmental changes. Delegating environmental decisions to shareholders can lead to more socially efficient outcomes, as long as most investors are not solely focused on their own financial interests.

Barriers to Engagement

There are several reasons why engagement is not more prevalent among socially conscious investors. First, it requires a critical mass of socially conscious investors who vote accordingly. While this is becoming more common, it is not yet the majority for most publicly traded companies. Second, until recently, the US Securities and Exchange Commission limited shareholder ballot proposals. However, there has been a rise in shareholder pressure since then.

Changing Attitudes

There has also been some confusion about the fiduciary duty of institutional investors, who often hold stocks through mutual funds. Many believed that their duty was solely to act in the financial interest of investors. However, this attitude is changing, with more institutional investors passing voting decisions to their underlying investors.

The Role of Boycotts and Divestments

While engagement is generally more effective, boycotts and divestments still have a role to play. The rise of social media has made it easier to mobilize campaigns, but their effectiveness can vary. In some cases, boycotts may succeed due to strong social pressure, while in others, engagement may be a safer bet for those looking to drive meaningful change.

In conclusion, socially conscious investors can have a greater impact by engaging with companies rather than divesting. By using their voting power and influencing corporate behavior, they can drive sustainable and socially responsible outcomes.

Conclusion: The Impact on New Companies and Business Founders

For new companies and business founders, the importance of engagement for socially conscious investors should not be underestimated. As the demand for socially responsible business practices continues to grow, these investors play a pivotal role in shaping the future of companies.

One of the main advantages of engagement over divestment is the opportunity for dialogue and collaboration. By engaging with socially conscious investors, new companies and business founders can gain valuable insights and perspectives on how to align their practices with societal values. This can help them avoid potential pitfalls and make more informed decisions that resonate with their target audience.

Engagement also offers the chance for business founders to showcase their commitment to social responsibility. By actively involving socially conscious investors in the decision-making process, new companies can demonstrate their willingness to listen and adapt. This can enhance their reputation and attract like-minded investors who are more inclined to support their endeavors.

Furthermore, engagement provides a platform for learning and growth. By actively seeking feedback and engaging in discussions with socially conscious investors, business founders can expand their knowledge and refine their strategies to address social issues effectively. This continuous improvement process can help new companies stay ahead of the curve and remain relevant in an increasingly socially conscious market.

It is worth noting that while engagement is vital, boycotts and divestments can still have an impact. As new companies and business founders navigate the complexities of balancing financial success with social responsibility, they should be aware of the potential consequences of actions that go against the values of socially conscious investors. By proactively engaging and aligning themselves with these investors, new companies can position themselves for long-term success and positive societal impact.

In conclusion, new companies and business founders should recognize that engagement with socially conscious investors is not only important but also beneficial for their growth and success. By embracing this approach, they can build stronger relationships, gain valuable insights, and demonstrate their commitment to social responsibility, ultimately contributing to a more sustainable and socially conscious business landscape.

Article First Published at: Article First Published at: https://www.ft.com/content/54750a26-1f3e-4714-9d28-b9a5e677d454
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