The Power of Divestment

Written by Arthur Townend

2 min read

Background

Recap Investing strives to provide a measurable real-world impact for its clients. Arguably, before the modern era of ESG investing, one of the significant positive impacts of Socially Responsible Investment was contributing to the end of racial segregation in South Africa. The ending of apartheid in 1994 can be attributed to both internal and external political pressure, and whilst the efforts of the African National Congress (ANC) in ending racial segregation are well documented, the role played by the international community, particularly the US, is sometimes overlooked. Protest divestment put direct pressure on the ruling National Party, and was pivotal in bringing about the end of apartheid.

Understanding Divestment

The first major development in the US divestment campaign against apartheid came with the Sullivan Principles in 1977, which mandated workplace racial equality. With Washington’s reluctance to economically sanction South Africa, a grass roots anti-apartheid movement began lobbying individual businesses and institutional investors to end their investments in the apartheid state. Crucially, the Sullivan Principles meant that not only did they advocate divestment from South-African companies, but from US based companies with South African interests who weren’t aligned with the Sullivan Principles. Non-compliance threatened to damage corporate reputation and also created a significant financial threat of the withdrawal of both institutional and retail investors.  

Arguably the key factor in US divestment was the position taken by US colleges. Many students had brought attention to their cause by building shanties on their campuses to represent the living conditions faced by many oppressed South Africans. This college based anti-apartheid movement sought to pressurize their universities endowment funds to divest stocks of companies doing business in the country as a practical way to enact change. By 1988, a total of 155 colleges had at least partially divested, with institutions like the University of California withdrawing three billion dollars (about $6.6bn in today’s money) worth of investment from South Africa. Again, while this didn’t necessarily impact the share price or market capitalization, they were able to raise attention to important corporate interests.

Effects of Divestment

The divestment movement emanated from US colleges, but other large entities soon followed suit. This knock-on effect culminated in the US congress passing economic sanctions against the South African government in 1986. Following this, South Africa was ravaged by capital flight as business and investors left the country. Due to the capital outflows, the South African Rand depreciated significantly and inflation reached double digits. This dire economic situation helped to pressure the ruling National Party and meant they could no longer withstand resistance efforts. As a result, protest divestment in South Africa provides a compelling example of how socially responsible investment can bring about real-world social change. Which causes are your dollars supporting?

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