The Problem with Divestment: Helping Wealthy Investors Instead of Victims

A lot of social movements call for divestment of the shares of firms which are opposed to their goals.┬áIn particular, many colleges and universities have faced student protests demanding that college endowment funds divest from fossil fuel companies. However, they should be concerned about divestment’s actual effects.

If a group decides to sell off its shares of some Company XYZ, the price of the shares will fall. However, nothing has changed about Company XYZ’s expected future cash flows. Therefore, nothing has changed about investors’ valuations of Company XYZ. So when the share price falls, other investors simply get an opportunity to buy the shares for cheap. Net result: no damage to Company XYZ.

Furthermore, by creating this buying opportunity for other investors, what divesting groups are actually doing is transferring wealth to said investors. This usually means transferring wealth to wealthy individuals in the First World.

Of course, one argument could be that divestments act as public statements and make action by others more likely. A Harvard Political Review article argues that this was the case with divestments from South Africa in protest of apartheid: they had little financial effect, but helped raise awareness.

But divestments are public statements that cost money. What if universities instead aimed for high investment returns and donated the difference to efficient charities? (Possibly charities aimed at helping victims of whatever is being protested.) The result would be transferring money to effective causes instead of wealthy investors. And universities could still publicize their donations to charity as a way of raising awareness.

Let me reiterate: the main impact of divestment is that a few wealthy investors benefit, while the offenders are unharmed. Is that really ideal?