Dividends have traditionally elicited a wide spectrum of opinions from the high priests of finance. At one extreme, the dark art of dividend payments has been described as "irrelevant". Within the alternative "relevant" church, dividends have been seen as a signal of corporate propriety or used as a steering wheel allowing Boards to optimise capital structure depending on tax regimes and investment opportunities.

With ESG considerations now impinging on corporate finance, a further dimension has been added to this already complex picture. Should investors focus on companies offering “green” dividends and avoid “grey” dividends? The colour coding can easily be extended to permit a more nuanced analysis - but for our purposes, the two-colour filter will suffice. “Green” on this occasion applies to renewables companies or environment-enhancing corporates. “Grey” dividends range from fossil fuels or biosphere-degrading firms.

The basic thrust of the Modigliani-Miller "dividend irrelevance" proposition is that a company’s value is determined by its investment policy and future prospects, not by its financing decisions.  Miller provided an anecdote many years ago of the resistance of "Mr Market" to his idea. At a lecture to a large brokerage house, he was interrupted by the news that the (then) AT&T’s first dividend increase in 30 years had just been accompanied by a 10% jump in its share price!

With that apparent triumph of experience over high theory, we can assume dividends do matter but for reasons we may not perfectly understand. How should ESG investors react to the dividends on offer from the large fossil fuel corporates and their increasingly "green" strategic statements in terms of future investment?

One solution is exclusion. By definition, that may increase portfolio risk by failing to exploit the benefits of diversification. More worrying from an ESG perspective, it reduces demand and share prices, increasing the yield attractiveness of the very same stocks to other investors. It is not difficult to see that this, in turn, might lead to a flow of capital from public to private markets, impairing public transparency in the process. Exclusion, ultimately, has its costs, which are often hidden.

Grey dividends and buybacks do matter to green investors. Indeed, for the climate, they probably matter even more than green dividends themselves.

An alternative solution is one of engagement. This avoids the potential pitfall of unnecessary portfolio risk and the dubious ethical position of passing the buck. However, it embeds its own problems when we come to think of dividends.

As an engaged investor in an environmentally challenged company, should I lobby for high grey dividends, to re-channel the proceeds myself into alternative green investment opportunities? Alternatively, should I encourage management to re-invest the profits themselves on my behalf, smoothing their environmental footprint at its own pace?

There are no easy answers. However, the experience of large parts of the European utility industry over the last 15 years yields some clues. Giants such as EON found it well-nigh impossible to co-manage declining assets and growth, ultimately settling for radical M&A and restructuring, after significant shareholder losses.

Growth and decline make an uncomfortable mix within the same corporate structure in many cases, and managing the different risks together is a Herculean challenge. Distilling green growth from grey decline makes sense in many cases. That suggests to me that engaged ESG investors in environmentally-challenged stocks should be lobbying hard for early spin-off strategies of growth acorns, allowing a more transparent alignment of risk and return in public markets, to ensure that the future is not held back by the past.

If impossible, investors should lobby hard for large dividends and buybacks, to re-invest the money themselves. However, in that conclusion lies a paradox – grey dividends and buybacks do matter to green investors. Indeed, for the climate, they probably matter even more than green dividends themselves. A green future may best be secured if investors take a leadership role in murky waters, the sooner the better given the over-arching need for rapid climate action.