Two seemingly contradictory responsible investing approaches — divestment and engagement — actually complement one another when it comes to enhancing companies’ environmental, social and governance (ESG) performance, according to a new paper.

The paper, published by the EDHEC Risk Institute’s Scientific Beta initiative, argued that divestment and engagement, which are sometimes seen as opposing ESG investing strategies, are actually mutually reinforcing. According to the paper, divestment is frequently characterized as a form of investor surrender, rather than as constructive action to motivate change at a company.

“It is often argued that an investor who is dissatisfied with a company’s ESG behaviour, and who wishes to remedy the situation, should stay on as a shareholder and engage with it,” the paper said. “The reasoning is that when an investor divests, their influence over the company ceases.”

But the paper argued that “both divestment and engagement are actions that promote change.”

While engaging with a company to alter its ESG behaviour can be directly effective, the paper said that divestment can drive also behavioural change “when it directly and indirectly contributes to raising the cost of capital for divested companies: this limits [the companies’] ability to invest in projects the investor deems harmful and gives their management an incentive to improve their ESG performance.”

“The rise of collaborative engagement campaigns, in which current and potential shareholders combine their forces, is testimony to the fact that divestment does not put an end to an investor’s possibility to engage with a company,” the paper said.

Additionally, the paper noted that a shareholder who isn’t willing to sell when engagement fails “will enter the negotiation in a weak position: the possibility of divestment is in that sense a prerequisite for effective engagement.”

The paper also argued that engagement can make divestment campaigns more effective: “noisy exits can be more impactful than silent ones.”