Does Engagement in Energy and Utility Companies Drive a Sustainable Transition More Effectively Than Divestment?

Abstract

This study investigates the comparative effectiveness of shareholder engagement and divestment in driving real-world environmental change within the global energy and utilities sectors, with a primary focus on carbon emission reductions. As a supplementary analysis, it also explores effects on environmental incident counts and regional differences between US and non-US companies. Firm-level inclusion in the Climate Action 100+ Initiative is used as a proxy for engagement, while divestment is proxied using substantial reductions in holdings data from Norges Bank’s Government Pension Fund Global (GBFG). The empirical analysis employs fixed effects panel regression models, using firm-level panel data from 2017 to 2023. The findings show that engagement is significantly associated with a reduction in direct (Scope 1) emissions, while divestment has a statistically significant effect in reducing Scope 2 emissions. The sub-analyses find no significant effects on environmental incidents count nor regional differences in engagement effects, specifically between US and non-US companies. Overall, the study’s findings support the case for engagement over divestment, as it appears more effective in driving internal change within energy and utility companies. This is reflected through reductions in direct emissions, which are crucial for achieving meaningful and long-term progress in the fight against climate change. However, by showing that each strategy influences different types of emissions, the study also highlights the potential complementarity of the two strategies when used together.