The financial impact of fossil fuel divestment

Abstract

The fossil fuel divestment movement tries to increase awareness about the need for climate action and heralds divestment from fossil fuel producers as a means to combat climate change. Financial investors are increasingly showing interest in the nonfinancial impact of companies they invest in, i.e. responsible investing. However, they also want to be assured of sufficient returns and limited risks to support the living costs of their ultimate beneficiaries. In this context, we investigate the impact of divestment and the transition of the energy system on investment performance. We rely on an international sample of almost seven thousand companies and study a period of forty years. Further, we investigate scenarios with very different pathways to the transition of the energy system. We find that the investment performance of portfolios that exclude fossil fuel production companies does not significantly differ in terms of risk and return from unrestricted portfolios. This finding holds even under market conditions that would benefit the fossil fuel industry. We conclude that divesting from fossil fuel production does not result in financial harm to investors, even when fossil fuels continue to play a dominant role in the energy mix for some time. Key policy insights. Financing the exploration and exploitation of fossil fuel resources is increasingly being regarded as controversial, leading to divestment from this industry.. Fossil fuel divestment does not seem to significantly harm financial investors and is not at odds with the fiduciary duty of institutional investors. This paves the way for more extensive initiatives to promote fossil fuel divestment.. A smooth energy transition will most likely erode the profitability of fossil fuel firms and their ability to invest. Therefore, governments cannot rely on the fossil fuel industry to finance the energy transition.

The 2021 report of the Lancet Countdown on health and climate change: code red for a healthy future

“…Indicator 4.2.3: funds divested from fossil fuels-headline finding: the global value of funds committing to fossil fuel divestment between 2008 and 2020 was US$14•52 trillion, with health institutions accounting for $42 billion By reducing financial interests in the fossil fuel industry, divestment both reduces the social licence of fossil fuel companies and hedges against investors' risk of losses due to so-called stranded assets in an increasingly decarbonising world (panel 5). 251,252 Investors can also effect change through shareholder action, exemplified recently by activist hedge fund Engine No 1 taking seats on ExxonMobil's board. 253 Concerned with the immediate and long-term damages of continued fossil fuel use, health institutions have the imperative to lead the way in divesting.…”

Fossil fuel divestment and climate change: Reviewing contested arguments

“…A university must weigh up potential financial risks and climate gains from divestment as well as the effects it may have on its primary role as an institution. Incidentally, Plantinga and Scholtens (2016) and Trinks et al (2018) find that fossilfree portfolios do not significantly underperform compared with an unconstrained market portfolio.…”

Sustainable pensions, democratic governance, and EU law

“…Wind turbines, solar cells, and clean transport are now cheaper sources of energy than fossil-fuel generation, as coal, oil, and gas comprise the worst-performing asset class every year since 2017 (Naumann, 2019). 26 As recently as 2016, it was seen that divesting from fossil fuels subtracted no value from portfolios; but now, fossil-fuel companies actively reduce the value of portfolio investment (Plantinga and Scholtens, 2016). Every pension that remains invested in fossil fuels is being damaged (Mooney, 2019).…”