Beyond divest vs. engage: a review of the role of institutional investors in an inclusive fossil fuel phase-out

ABSTRACT Institutional investors, who control as much as $154 trillion globally, may play an important role in shaping the energy transition as major stakeholders in fossil fuel producing, distributing and consuming companies. Research on investors and fossil fuels has focused largely on the divestment movement or on shareholder engagement. However, given their limited success to date, additional strategies to influence the fossil fuel sector are merited. This review paper expands the scope of attention to investors, asking: what strategies for influencing the fossil fuel industry are available to institutional investors and what are the implications of these for achieving an inclusive fossil fuel phase-out? Through a systematic review of 153 papers, we identify seven strategies for influencing the fossil fuel phase-out: divestment, shareholder engagement, hiring practices, engaging the financial sector, engaging indirect financial actors, litigation, and green investment. These strategies represent ways for investors to increase the impact of their engagements, as well as areas deserving greater attention from academics, policymakers, and activists. Across these strategies, we note trade-offs in favour of financial returns at the expense of social, ecological, and equity outcomes. We argue that future research should focus on: (a) the role of under-studied actors in aligning finance with climate goals; (b) the implications of investor action for an inclusive energy transition; and (c) policy solutions capable of overcoming investors’ short-term profit motives to instead incentivise long-term investor engagement with climate issues. Key policy highlights Legal mandates and uncertainties in how to apply fiduciary responsibility with respect to climate change result in investors and asset managers prioritizing short-term profits at the expense of climate goals. Voluntary investor efforts focus predominantly on transparency and disclosure and are insufficient to meet climate goals. Legally binding decarbonization strategies are needed to align finance with the Paris Agreement. Influence over investment strategies is increasingly concentrated in a small number of powerful actors. Policymakers should consider not only asset owners, but also asset managers, index providers, and proxy advisory firms. Investors can increase their climate action by incorporating policies on climate into their mandates for asset managers and engaging with fossil fuel financiers.