Explained: Divestment

A 5 minute quick read

Divestment is the process of selling assets or subsidiaries (companies owned a parent company) in order for the parent company to realign itself with certain goals. Effectively, divestment is the opposite of an investment and is usually done when that subsidiary asset or division is not performing financially.¹ A company may also be forced to divest due to legal or regulatory action.

Divestments typically happen in three ways:²

1. Spin-offs, when shares of a subsidiary are distributed to shareholders, becoming a standalone company;
2. Equity carve-outs, when a certain portion of the equity in a subsidiary is sold to the public through a stock market offering in return for cash; and
3. Direct sale of assets, when assets are sold directly to another party for cash.

Companies or institutions may also choose to divest in order to meet shareholder demands on ethical or social guidelines, or to become more appealing to new investors by following public trends³. This is a way for institutions to participate in socially responsible investing, choosing only to invest in socially valuable companies or to refuse to invest in companies that are viewed as ‘unethical’.

For instance, between the 1960s to 1980s, as part of the anti-apartheid movement, students across the U.S. began lobbying their universities to divest from companies with business ties to South Africa. More recently, the international ‘fossil-free’ movement - started in 2012 by climate activist organisation 350.org - has seen growing success over the past 9 years, leveraging on communities worldwide to lobby local institutions to divest from fossil fuel companies.⁴

In the grander scheme of things, divestment is simply a precursor towards a more sustainable portfolio. Upon divestment, funds that are freed up should be reinvested into sustainable avenues, such as companies providing sustainable solutions.⁵ Such support for sustainable companies counters the funding gaps created by divestment for errant companies that may be filled by more indifferent investors. More importantly however, such support strengthens the market competitiveness of sustainable companies and goes towards increasing their market share and penetration.

footnotes

¹ Kate Mackenzie (2020), The Finance Industry Passed a Climate Turning Point This Year, https://www.bloomberg.com/news/articles/2020-12-11/the-finance-industry-passed-a-climate-turning-point-this-year

² Patrick Bolton, Morgan Després, Luiz Awazu Pereira da Silva, Frédéric Samama and Romain Svartzman (2020) The green swan: Central banking and financial stability in the age of climate change, https://www.bis.org/publ/othp31.htm

³ Adam Tooze (2020), The world to come: The imminent shocks, https://www.newstatesman.com/politics/economy/2020/08/world-come-imminent-shocks

⁴ Inger Anderson and Johan Rockström (2020), COVID-19 Is a Symptom of a Bigger Problem: Our Planetʼs Ailing Health, https://time.com/5848681/covid-19-world-environment-day/

⁵ Luiz A Pereira da Silva (2020), Green Swan 2 - Climate change and Covid-19: reflections on efficiency versus resilience, https://www.bis.org/speeches/sp200514.htm