Fossil Fuel Divestment Strategies: Financial and Carbon-Related Consequences

Abstract

Fossil fuel divestment is discussed controversially with regard to its financial consequences and its effect on decarbonizing the economy. Theory and empirical studies suggest arguments for both, financial underperformance and outperformance of divestment. Therefore, our first research objective is to understand the financial effect of divestment. The second objective is to analyze the influence of divestment strategies on the carbon intensity of portfolios.Empirically, our analysis is based on the Canadian stock index TSX 260 for the time between 2011 and 2015. The results of the study suggest higher risk-adjusted returns and lower carbon intensity of the divestment strategies compared to the benchmark. We conclude that divestment is not only an ethical investment approach, but that it is able to address financial risks caused by climate change and, at the same time, is able to reduce the carbon exposure of investment portfolios.

The 2020 report of The Lancet Countdown on health and climate change: responding to converging crises

“…By encouraging investors to reduce their financial interests in the fossil fuel industry, divestment efforts both remove the social licence to operate and guard against the risk of losses due to stranded assets in a world in which demand for fossil fuels rapidly decreases. 194,195 This indicator tracks the total global value of funds divested from fossil fuels and the value of divested funds coming from health institutions by use of data provided by 350.org, with annual data and full methodology described in the appendix (pp 126-127). 196 From 2008 to the end of 2019, 1157 organisations, with cumulative assets worth at least $11•51 trillion, have committed to fossil fuel divestment (figure 24).…”

Finance and Management for the Anthropocene

“…They are mainly focused on short-term profit maximization, though some leading companies, such as Unilever (James, 2018), start to challenge the system in favor of a more sustainable business model and concepts such as impact investing, divestment, and socially responsible investment-a move away from exclusively relying on pure financial models and concepts. Currently, even some big pension funds divest from controversial investments (see also Hunt & Weber, 2018, in this issue).…”

The Impact of Divestment Announcements on the Share Price of Fossil Fuel Stocks

“…First, investors may choose to divest to purposefully depress the share prices of fossil fuel stocks and pressure the companies to change their practices [23]. Secondly, they might divest because they expect reduced financial returns of fossil fuel-related investments caused by stranded assets through the rapid devaluation of fossil fuel reserves [14,15,24].…”

“…Trinks et al [13] suggest that fossil fuel companies have not contributed to portfolio diversification since as early as 1927. Hunt and Weber [14] find that divestment not only results in higher risk-adjusted returns but also reduces the carbon exposure of investment portfolios. Therefore, some investors try to divest from their fossil-fuel holdings to decrease the GHG exposure of their portfolio [26].…”