Divesting and voting - theoretical and experimental evidence of equilibrium implications

Ensuring a green transition to avoid global warming is arguably the most important and greatest challenge of our time. Businesses are responsible for large emissions, but at the same time, new green technology developed by businesses is very important for solving climate problems. This means that businesses will play a crucial role in the implementation of the green shift. Since it is the financial markets that provide capital to businesses, financial markets can play a crucial role in steering businesses in a green direction—but only if the owners of the capital desire this. As a capital owner, there are essentially two ways one can influence businesses to become greener. Either one can divest from companies that pollute and invest more in companies that do not, or one can use their ownership power to influence the businesses' decisions in a greener direction—for example, by voting at the general assembly. Most owners are small and thus have limited influence, and therefore it does not matter much whether they divest or vote to make the companies greener. However, Norwegians collectively own the world's largest sovereign wealth fund (the Oil Fund), and thus have a completely different opportunity than others to influence businesses. This project has investigated how Norwegians wish to use this ownership power. I conducted a survey with nearly 3000 Norwegians asking them how they want the Oil Fund to use this ownership power. A majority of the population does not want us to divest from polluting companies, but a majority does want us to use the ownership power to influence the companies. But even though Norwegians own a lot, we have a 1-2 percent stake in most large companies. In other words, it also matters how others vote. It is not obvious how the willingness to vote green in the general assembly depends on what others do. If few vote green, then one can vote green without it having real consequences—neither one way nor the other. But if many vote green, then it may be that the vote actually becomes decisive, and then one must weigh the benefit of the company becoming green against any gains one might miss out on. This project finds that more wish to vote green when many others also vote green. In other words, there is reason to believe that Norwegians' preferences for influencing the companies we own shares in to become greener through voting are due to an actual desire to influence the companies to become greener. The main conclusion from this project is thus that there is support among the Norwegian population to use the Oil Fund as an active owner that influences polluting companies to reduce their emissions. The project does not find that most Norwegians have a desire to invest less in polluting companies by selling the shares in these companies. Why? To understand this, the project has tried to delve deeper into people's perceptions of risk-adjusted return. If polluting projects are considered less risky, then people might not want to divest from these even though they do not offer higher expected returns. To understand what Norwegians think about the returns on different types of companies (green and polluting) in various future scenarios, this project has thus started an investigation of this question which will result in a separate research article.

This project has demonstrated that a majority of owners of the world's largest sovereign wealth fund have a preference for using the ownership power to influence firms to become greener. On the other hand, owners on average are reluctant to divest from polluting stocks. Since it is the owners that ultimately decide, an important take-away message from this paper is that focusing on green shareholder influence rather than divesting may be a more fruitful strategy for people that want to impact firms to become greener. The results are valuable for several reasons. Practically, they enhance our understanding of how Norwegians expect the Oil Fund to wield its influence. The findings have already been communicated to policy makers and the wider public. Academically, they offer insights into how owners' preferences for various impact strategies are formed and their equilibrium effects. This result, together with the other main findings of the project, will soon be made publicly available through a working paper.

I want to understand the equilibrium effects of divesting and shareholder voting. By equilibrium effects, I here refer to the effect of the strategies conditional on the consequences of the actions of other investors. The focus on equilibrium strategies and incentives is important for understanding the real-world consequences of the different strategies. I first construct a theoretical model to analyze the equilibrium effects of divesting and shareholder voting. I then test the predictions from the model using experimental survey evidence. More details are provided in the project description.