Welcome to Friends Talk Financial Planning, where today, hosts John and Bridget discuss the effectiveness and implications of divesting as a protest strategy. From university students protesting investments in Israel to the broader mechanics of divesting in various industries, this episode covers the complexities and outcomes tied to financial activism. Join us as we explore the nuances of creating impact through financial choices and the role of stigma and legislation in achieving real change.
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TRANSCRIPT:
Bridget: Hey, John, students are protesting. They're asking their universities to divest from Israel. Does divesting even work? Is this a good strategy? What are they after? How does this happen? That's what we're going to talk about today on Friends Talk Financial Planning. Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Before we dig into this divestment issue, I want to remind everybody to hit that subscribe button. Subscribing helps other people find our show on YouTube, and we're trying to get 1,000 subscribers. So with that, I'm interested in digging into this a little bit. This is an area in which I honestly don't have a ton of insight. What actually happens when you're talking about this? Is it useful? And you mentioned that in the introduction, Bridget. The students are asking for this, and I always sort of wonder, okay, you're asking for this, but do you even know what you're really asking for? Does that really work? And I know you've done a ton of homework on this, so I'm really interested to dig in here.
Bridget: Yeah. I've been an ESG nerd for quite a while, so I can tell you all about this. Let's talk about four phases of protesting. The first phase is establishing moral leadership. So this is somebody overall saying, “This is bad.” With smoking, we had the American Cancer Society saying, “Hey, this is bad. We want to cut down on smoking.” And it's an established organization saying that smoking is bad. The first step is moral leadership. The second step is generally protesting. And oftentimes this is students protesting at their own university. And what they're looking for now is divesting.
So let's talk about divesting, and if divesting itself actually makes a big impact. There're two parts to divesting. There's me, Bridget Sullivan Mermel, divesting. And then there're endowments and universities. Obviously, the universities are going to have more impact than me. But then let's talk about the mechanics of divesting. When there was a shooting in or around Chicago, one of my clients said, “I want out of guns. I want to be totally done with guns.” And so, I proceeded to try to figure out how to get guns out of this person's portfolio. And turns out there really weren't guns in the person's portfolio, because there were really only three gun manufacturers listed on an exchange, and they were all small caps.
So divesting from guns really only meant getting out of three small sacks, so that's not a big impact. And I don't know if that would really hit the spot for this client. And then the next level of getting out of it is, well, what about these other people that sell guns? Well, it seems like there're a lot of small gun shops. They're not listed on the exchanges. But then you have something like Walmart. Hmm. That's kind of problematic. You might want to get out of Walmart for different reasons, not just guns, so that's kind of interesting, too. And then you have places like Gander Mountain, and I'm not even sure that they still sell guns.
But again, you have to ask yourself, “If I divest from Walmart, is this going to hit the spot? And what percentage of Walmart is actually guns?” It seems like a minor percentage of Walmart is gun sales. I don't know for sure, but I've been to Walmart, and I don't even think I've found any guns. So that's the next thing. Is that going to really help you feel any better if you get out of there? So then we get to the current situation where we've got a small country with not that big of an economy, and they're definitely not in the US. I looked this up and they have, of the world economy or the world capitalization, they have about two tenths of 1% of the entire world's stock market.
If you look at just international, it was about one half of 1% of the entire international. And people that look at this say that if you get out of it, there's very little impact. When people looked at what happened with South Africa divestment, they said that it didn't really impact their stock market much because other neutral parties will go in and buy their stocks. And when a company has issued a stock, I don't think they care that much who buys it. After it's issued, it's on the market, and who owns it doesn't make that much of a difference to them. And so, when you look at the research on South Africa, that didn't really impact things. Okay, any questions?
John: I think that's a really interesting point that I hadn’t thought a whole lot about. But okay we've got stocks. And there's an Israeli company that we're investing in. And if I heard it right, half of a percent of the overall international stock market is from Israel. And if I'm one of the protesters, I say, “Geez, we should not invest in Israeli stock companies. Take our money out of the company.” That XYZ company in Israel doesn't care who owns the stock because that doesn't make a difference, other than what maybe their corporate officers get stock options. They're happy with that. But the company's productivity comes from when they sell their widgets, or whatever it is that they do. That's where the company's pocketbook is if you will. The stock is just the investors. Is that right?
Bridget: Right. But they're still trying hard. And so, there're two things going on here. First, if protesters can create stigma, that has an impact. And with South Africa, that's really what happened. And the same with smoking. Creating stigma around the topic is more important than the actual result of taking money out of Israel, because somebody else will invest in Israel. But creating this stigma matters. So it's like bad PR is worse for the company than divesting. Thus, bad PR is what companies in Israel are trying to avoid, because that next level, level three is pension funds giving out and institutional investors saying, “Okay, we want out.” All right, so now we're talking about some real money.
John: But again, if the institutional investors leave, that's the investment part going away, but doesn't that return to the previous point?
Bridget: It’s more stigma, more established people saying, “I want out,” or more established institutions creating more stigma. And then the fourth thing is what actually impacts things, and that's legislation and losses. For instance, in the 1980s, during the South Africa conflict, they created enough stigma so that the US passed a law that really mattered. That law had enough support in both houses of Congress to override a threatened veto by Reagan. That seems inconceivable now, but that's what they did. They could withstand a veto if it came to that. That's how much stigma was created and how much support they had, and that is what really matters. And same with cancer. It’s about lawsuits. Where you really create misery for these companies and these countries is when it gets up to that fourth level.
John: Interesting. What type of law was passed in the South Africa case? Were individuals then not buying South African goods because of the stigma?
Bridget: It was more restricting trade.
John: Okay. So it was a higher level than individuals buying things. It's the corporate side of things.
Bridget: Yeah. If you move it up the ladder, that's where it really matters. And so, it's interesting, there's a lot of work on fossil fuels and making portfolios that are carbon neutral, etc. And that's a really interesting case because I think it's kind of both. There's certainly a lot of stigma and political work, but it's such a complicated issue. It's so big that it seems like it's hard to say that these protests are having a direct line to have action.
John: It’s really interesting that it's not necessarily the divestiture that's the end goal. I wonder if the protesters think about that.
Bridget: Well, it might be for the students that are out there. That might be what they're thinking. But somebody’s thinking about the bigger picture.
John: Right. And there’s an interesting dichotomy of the things. Maybe the protesters say, “I think it’s important that we don't invest in those things.” But that's not really the most important thing, because that's not going to change the economies of those companies.
Bridget: It's a small thing.
John: But the consequences intended or unintended do have an impact.
Bridget: Yeah. And oil is an example of something that's large. I mean, geez, that's huge, but it's just a lot more complicated. It seems to me that a protest is one sliver of changing things. And of course, they do get action, but it’s so complicated and it's so widely used. It's such a big part of our economy. It's hard to divest, just like the gun manufacturers to the Gander Mountain example, or Walmart. So many people are in power globally.
John: Super interesting. All the layers that go into that. This is a great place to wrap things up. I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. We're both proud members of ACP, the Alliance of Comprehensive Planners, which is a group of likeminded advisors and a not-for-profit group. And you can find, if you're looking for an advisor in your area, you can check out acplanners.org.
John: And don't forget to hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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