Divesting a blue chip

By Doug Watt | November 13, 2012 | Last updated on November 13, 2012
3 min read

Vancity’s decision to remove Enbridge from a pair of Inhance socially responsible (SRI) mutual funds came as a surprise, since divestment is relatively rare. But experts don’t expect an exodus from Enbridge.

In August, Vancity announced Enbridge no longer met environmental, social and governance criteria for its responsible investments. The decision was based on a U.S. National Transportation Safety Board report on Enbridge’s 2010 pipeline spill in Michigan. The investigation found major errors by Enbridge that led to a spill of more than 20,000 barrels of oil into the Kalamazoo River.

In its wake, Vancity Investment Management, a sub-advisor on three SRI funds for IA Clarington, divested its Enbridge holdings.

“Clearly IA Clarington felt after signi cant engagement [with company management] there were insuf cient signals to indicate the company was taking the social and environmental risks seriously,” says Ashley Hamilton, a Canadian shareholder engagement executive expert working in London, England.

She adds it’s unlikely other major investors will follow suit. “We might see one or two more divestments from boutique fi rms or specialized managers with narrower mandates, but no more than that,” she says.

“Enbridge is one of Canada’s blue chips, and for most pension funds and mutual funds that have broad investment mandates for Canadian equities, conventional wisdom would suggest they remain invested across the market, which means staying in oil and gas and Enbridge.”

Sucheta Rajagopal, an SRI advisor with Hampton Securities in Toronto, says her clients were generally pleased with the divestment. “There is some skepticism on the part of investors as to how bad a company has to be before we divest.

“My clients defi nitely feel that you have to draw the line somewhere, and it makes them feel good that we stand up and say: ‘This is behaviour we won’t tolerate.’”

Ian Quigley of Qube Investment Management, whose fi rm invests with a social mandate and holds Enbridge, says the company is currently deciding between engaging with Enbridge management and divestment.

“We collaborate with the UNPRI on engagements and also encourage the market regulator to consider changes related to enforcing better levels of governance,” Quigley says.He adds the Edmonton-based Qube has received a couple of calls from clients concerned about Enbridge, but most support the oil and gas company.

“For this reason, we are probably moving a little slower on a divestment decision relative to our peers as we hope the rough summer Enbridge has had with investor relations could turn around.”

In general, investors opt for divestment only after making serious efforts to initiate positive change, Hamilton explains. “By divesting, investors signal that the company’s current course does not meet acceptable standards. In other cases, if investors view the reputational, legal or regulation risk as high, they may divest to mitigate these risks.”

Although divestment isn’t common, there are several notable examples besides Enbridge. In 2009,Norway’s state pension fund, the largest in Europe, divested from Barrick Gold, citing evidence of environmental damage at a company mine in Papua New Guinea.

Earlier this year, the Norway fund excluded Israel real estate firm Shikun & Binui over its construction of Israeli colonies in East Jerusalem. Also this year, the Netherlands’ biggest pension fund, Algemeen Burgerlijk Pensioenfonds, withmore than $300 billion in assets, divested from Walmart over the retailing giant’s labour practices and anti-union position.The Norway fund divested from Walmart in 2006.

However, it’s unclear if such divestments have major impact, which is why many SRI managers opt for shareholder engagement.

“With engagement you have the opportunity to be a force for change, applying constant pressure, and inviting the company to improve its practices and manage risk,” says Hamilton. “With most clients I’ve worked with, divestment is the very last option.”

Doug Watt is an Ottawa-based writer, specializing in sustainable investing.

Doug Watt