What is Divestment?

Also known as divestiture, divestment is the process of successfully completing the sale of an asset. This makes divestment the opposite of investment, a process that involves the successful acquisition of some type of asset. Individuals may engage in divestment for a number of different reasons, including the need to generate cash for settlement of outstanding debts or to finance a new project. Companies may choose to divest certain assets for the same reasons, as well as in response to the social or environmental policies adopted by the business operation. Governments may also choose to divest certain assets from time to time, often in response to social or environmental factors.

While divestment is simply the act of selling an asset, the term is typically used in reference to the divestiture of company assets or government holdings rather than assets owned by an individual. At times, the sale of assets is prompted by a change of direction within the company. For example, if a business plans on slowly moving to a business model that is based more on Internet sales and less on the maintenance of traditional brick and mortar retail outlets, the company may begin to divest itself of specific real estate holdings.

Divestment may also take place when the officers of a company choose to restructure a financial portfolio in response to shifts in its social or environmental stances. This may involve selling off stocks and other investments in companies that do not support those same stances. Instead, the proceeds from the divestment activities are used to purchase interests in different companies that are in line with the social and environmental ethics of the corporation.

Corporate and governmental divestment sometimes occurs when it is discovered that a given investment is tied to a business that promotes social ills such as racism, gender inequality, or operates in a manner that has a pronounced negative impact on the environment. Doing so sends a clear message that the business does not support those types of activities and has no desire to be connected with their propagation in any form. Often, the funds generated by the sale of those assets is used to invest in other companies that are promoting ideals that are in harmony with the social and environmental mindset of the investor, allowing the company to still enjoy some type of return on those funds.

In some cases, divestment occurs on an as-needed basis, such as in generating capital to handle a short-term cash flow issue. At other times, the divestiture is a structured plan of action designed to help the individual or company move in a specific direction. For example, a company that is in the process of migrating from the production of one type of product to another may systematically sell assets associated with the older business model as it phases out production of the now obsolete goods. At the same time, the funds generated from those sales can be used to set up new production facilities and equipment for use in the manufacturing of the company’s new product line.