Financial Markets: Taking advantage of Investments (and Divestment)
9 minute read
Updated on: 29 May 2021
We’ve learnt quite a lot about markets in the last couple of chapters, so now we can take a look at financial markets! These are markets that deal with the trading of securities - things like stocks, bonds and currencies (dollars, yuans, and other types of money). So how can we use this market in the fight against climate change?
Let’s talk investments
People can choose to invest in (put money into) an idea or business, in return for some of the profits later.
When investing, you expect to receive more money back than what you originally put in. However, investments involve taking risks and sometimes the company may not end up making any profit.
Imagine that your neighbour, Melissa, has started her own lemonade stand in her front yard. She’s got a pretty basic setup of just a table and cups, but several people still come to buy her lemonade (it must taste really good!). This gives you an idea: you could offer Melissa some money to get a better stand in exchange for part of the profits. If the new stand brings in more customers, you could both end up with more money: a win-win situation!
Using your investment, Melissa makes a brand new lemonade stand which attracts a lot more customers and makes a lot more profit. Because of your previous arrangement, she gives you a certain percentage of the profits, which would hopefully add up to more than the money you put in to start with. Well done on your investment!
Can investments do good?
Many people invest just in order to make more money from the money they already have. However, some types of investment make money while creating a positive impact at the same time.
Impact investing aims to have a positive effect on society or the environment whilst also making money, by choosing companies and their products/services carefully.
Individuals or groups can use impact investing to invest in companies that are helping reduce CO₂ emissions, which could mean we avoid the worst impacts of climate change.
Impact investing can make real, positive changes to our world, but there is another way that we can use financial markets to drive change. In fact, it’s the opposite of investing!
Divestment: The opposite of investment
Divestment is exactly the opposite of investment. It involves an individual or group taking their investments away from a company or even a whole industry .
Does this ring a bell? That might be because divestment has recently become a popular form of climate action.
Recently, some investors have been withdrawing their money from fossil fuel companies. This creates a stigma (negativity) around investing in fossil fuel companies, which can encourage others to also divest, limiting the industry’s size. A smaller fossil fuel industry means fewer carbon emissions overall… .
Can divestment drive change?
Divestment and other similar actions, such as boycotting, have helped in the past with things like getting rid of slavery, and apartheid (racist separation of people) in South Africa.
As well as the direct impacts we have looked at so far, divestment campaigns can also have indirect impacts.
The indirect impacts of divestment seem to have been significant. It has raised questions about finance and climate change for many people, and has played a part in changing how we think about the fossil fuel industry - especially its reputation .
Lastly, divestment has empowered individuals to feel like they can themselves make a difference.
Divestment can also encourage voters and put pressure on politicians to think about climate change when making policies.
This is important because there is evidence that fossil fuel companies have used lobbying power to get policies that suit them in the USA and the EU.
Divestment could be important to reduce any power the industry currently has over policies.
Does divestment directly affect the fossil fuel industry’s money?
Unfortunately, the direct financial impacts of divestment have been quite insignificant so far. As soon as you remove your investments from the fossil fuel industry, chances are someone else will just invest their money instead of yours .
So then all that happens is you lose out on an investment that could have made you more money. You can still have a better conscience and know you’re helping indirectly, but it undoes the monetary effect because the company still receives money, just not from you!
This is especially a problem if the price of these investments drops due to people divesting, as this makes it cheaper for someone else to invest.
Divest or Engage?
There remains a debate over whether divesting is the best way to make fossil fuel companies change. Investors often have a say in how companies act, but lose this opportunity if they remove their investment . Some institutions think it is more effective to work within fossil fuel companies and encourage them to become more sustainable .
If green investors leave and are replaced by investors who don’t care about the environment, this could mean fossil fuel companies get worse rather than better…
Also, it’s not only the fossil fuel industry that has to fix our increasing emissions problem! Society relies on fossil fuels for most things we do - from cooking and heating to lighting and transport (among other things).
As long as there is still a demand for fossil fuels, the emissions will continue, regardless of who is responsible.
So while people can remove investments from fossil fuels, this is less effective overall if they continue to fly and drive lots, eat red meats and don’t reduce their energy use!
Ideally, people would both divest and reduce their demand for fossil fuels (although sometimes there are no other options)!
Divesting can be an effective way to drive change when the companies you have investments in are not acting like you want them to (for example, reducing their emissions)! Divestment raises awareness, which in itself can drive change .
However, divestment alone is not enough to have a significant financial effect on the fossil fuel industry.
It is important to understand the impact of both investments and divestments, but remember to do your research and think carefully about the other issues they each have!
Rather than individuals or groups choosing to divest, in the next chapter, we will learn about a system that governments can put in place to directly charge polluters for their emissions.
So, now that you hopefully understand investment and divestment better, what are you going to do with your money?Next Chapter