No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Fossil Fuel Divestment and Portfolio Performance
Abstract
Fossil fuel divestment campaigns urge investors to sell their stakes in companies that supply coal, oil, or gas. However, avoiding investments in such companies might impose a cost on the investor in terms of foregone potentially profitable investments and reduced opportunities for portfolio diversification. We compare financial performance of investment portfolios with and without fossil fuel company stocks over the period 1927–2016. Contrary to theoretical expectations, we find that fossil fuel divestment does not seem to impair portfolio performance. These findings can be explained by the fact that, so far, fossil fuel company stocks do not outperform other stocks on a risk-adjusted basis and provide relatively limited diversification benefits. A more pronounced performance impact of divestment can be observed over short time frames and when applied to less diversified market indices.
... Some authors suggest that fossil-fuel divestment increases the costs of investing and reduces portfolio diversification due to stranded assets (Cornell, 2015;Fischel and Lexecon, 2015;Green and Newman, 2017;Trinks et al., 2018). Ethical investors rebalance their portfolios to reduce their carbon footprint (Frankel et al., 2015;Scipioni et al., 2012). ...
... The existing studies (Henriques and Sadorsky, 2018;Hunt and Iber, 2019;Trinks et al., 2018;Yook and Hooke, 2020) investigate the performance of fossil-fuel-free indices by using time-series models i.e., time-series OLS regression with portfolio implications (Hunt and Iber, 2019;Plantinga and Scholtens, 2021;Trinks et al., 2018), GARCH and GO-GARCH models (Henriques and Sadorsky, 2018), logistic regression (Egli et al., 2022), Fama-French factor models (Al Ayoubi and Enjolras, 2022;Reboredo et al., 2019). However, these approaches fail to consider the timevarying co-movements of fossil-fuel-free indices; specifically, the performance of these equity indices with economic uncertainty is not discussed in existing studies. ...
... The existing studies (Henriques and Sadorsky, 2018;Hunt and Iber, 2019;Trinks et al., 2018;Yook and Hooke, 2020) investigate the performance of fossil-fuel-free indices by using time-series models i.e., time-series OLS regression with portfolio implications (Hunt and Iber, 2019;Plantinga and Scholtens, 2021;Trinks et al., 2018), GARCH and GO-GARCH models (Henriques and Sadorsky, 2018), logistic regression (Egli et al., 2022), Fama-French factor models (Al Ayoubi and Enjolras, 2022;Reboredo et al., 2019). However, these approaches fail to consider the timevarying co-movements of fossil-fuel-free indices; specifically, the performance of these equity indices with economic uncertainty is not discussed in existing studies. ...
Considering the abysmal environmental impacts of anthropogenic activities, the entire world has been striving to shift toward a green economy. Also, the transition to a greener economy entails green financing, which escalates the pace and performance of environment-friendly economic activities. However, uncertain economic conditions might be a hindrance to green financing. Based on this, I investigate the co-movement of fossil-fuel-free energy equity indices returns and Twitter-based economic uncertainty using a wavelet coherence approach. The findings document that global, the US, and Japanese fossil-fuel-free indices show strong and positive co-movement with Twitter economic uncertainty for short- and medium-term investment horizons. However, a weak positive co-movement is observed during the Russia-Ukraine war. Based on these interesting findings, I suggest many policy implications.
... Board members and trustees that oversee endowments often raise concerns about the impact of divestment on financial performance. However, a growing body of research shows that investment portfolios which exclude fossil fuel companies perform similarly to the overall market [26][27][28], and excluding fossil fuel companies from an investment portfolio may not significantly impact risk or return when compared to an unrestricted portfolio [29]. While there still is some debate in the academic community as to the financial impact of divestment, it is clear that investors are increasingly considering climate change as an important risk factor when making investment decisions and protecting the long-term value of assets [30]. ...
As the urgency of climate change grows, higher education institutions are increasingly accounting for, and reporting, their annual greenhouse gas (GHG) emissions. An often-overlooked source of GHG emissions are those associated with loans and investments. The purpose of this work is to quantify financed emissions from investment holdings in a public research university endowment, using Northern Arizona University (NAU) as a case study. The methodology for calculating financed emissions is drawn from the Partnership for Carbon Accounting Financials (PCAF), which describes how to attribute GHG emissions from investee companies to the investor on an annual basis. Financed emissions from NAU’s endowment are estimated to be a substantial component of NAU’s GHG inventory, highlighting the significance of this emissions category for public research universities with endowments. The results are presented for individual investee companies and discussed as an indicator of climate-related financial risk. Further, the results show that the divestment of fossil fuel companies from NAU’s endowment would lead to a 22% reduction in financed emissions.
... Although a more environmentally aware business model makes banks more stable and profitable in the long term (Ameli et al., 2021), a too rapid decarbonization of assets could generate losses for banks, even if the literature presents conflicting data. While some argue that the impact is positive (Henriques and Sadorsky, 2018), others believe that divestment does not lead to clear differences in financial performance (Trinks et al., 2018), or that it could even lead to a negative impact (Cornell, 2018). Downstream effects may also be mixed. ...
The aim of this work is to assess how geopolitical tensions and risks can affect sustainable investment strategies and the approach to the transition that is dependent on a growing supply of critical raw materials. In particular, we analyze the effect that tensions in the US-China relation have on the US investment in renewables. Using the Electricity Installed Capacity Index, we show that an increase in tensions in the bilateral trade relations and, more generally, an increase in the uncertainty of the geopolitical context, can act as a stimulus for the renewable energy sector. Given the prudent strategy of the US financial institutions in funding green energy, this correlation is not much connected to better green investment yields but to the US governments attempts to decouple from China. It also shows that US trade policy will be used to help the development of US green technologies. JEL Classification: F50, G2, Q56
... Hong et al. (2019) showed that stock markets exhibit inefficiencies in processing information pertaining to drought trends, which climate scientists consider one of the most critical climate risks that are either induced or intensified by climate change. Bolton and Kacperczyk (2024) found robust evidence that carbon emissions significantly and positively affect stock returns; Trinks et al. (2018) found that portfolios divested from fossil fuels do not experience significant underperformance compared with unconstrained market portfolios over an extensive period. ...
Increasing awareness of climate change and its potential consequences on financial markets has led to interest in the impact of climate risk on stock returns and portfolio composition, but few studies have focused on perceived climate risk pricing. This study is the first to introduce perceived climate risk as an additional factor in asset pricing models. The perceived climate risk is measured based on the climate change sentiment of the Twitter dataset with 16 million unique tweets in the years 2010–2019. One of the main advantages of our proxy is that it allows us to capture both physical and transition climate risks. Our results show that perceived climate risk is priced into Standard and Poor's 500 (S&P 500) Index stock returns and is robust when different asset‐pricing models are used. Our findings have implications for market participants, as understanding the relationship between perceived climate risk and asset prices is crucial for investors seeking to navigate the financial implications of climate change and for policymakers aiming to promote sustainable financing and mitigate the potential damaging effects of climate risk on financial markets, and a pricing model that accurately incorporates perceived climate risk can facilitate this understanding.
... Environmental remediation projects leverage 3D ERT to delineate contaminant plumes, monitor groundwater flow patterns, and assess the effectiveness of remediation efforts (Cassiani et al., 2016;Liao et al., 2018). Furthermore, in archaeological surveys, 3D ERT proves invaluable for mapping buried structures, detecting ancient settlements, and identifying archaeological features without excavation (Trinks et al., 2018). Additionally, in civil engineering projects, 3D ERT aids in site characterization, foundation design, and infrastructure monitoring, providing valuable insights into subsurface conditions (Dahlin & Loke, 1998). ...
Tree roots pose risks to buildings and roads by applying pressure to foundations and pavements, causing structural defects and instability. Their growth can modify soil composition, impacting stability and drainage. Effective planning and management are vital to addressing these issues in construction projects. At the University of Benin, Faculty of Education open field, a geoelectric survey was conducted to assess tree root spread. Using Electrical Resistivity Imaging (ERI) with a Wenner-Schlumberger array, six traverses formed a 3D model, processed using RES3DINV software, and visualised in Voxler. The 3D model showed a distinct top layer, with resistivity values ranging from 895.00Ωm to 1549.00Ωm at a depth of approximately 8.20m. Notably, resistivity values exhibit spatial heterogeneity, influenced by both anthropogenic activities and natural features such as trees. Elevated resistivity zones between 10.00m and 187.00m are attributed to human activity, while variations along the horizontal axis are associated with the presence of tree roots. Our findings underscore the significance of integrating geophysical methods for detecting tree roots, which is essential for infrastructure planning and management.
... Trinks et al. compared portfolios with and without fossil fuel stocks over the period 1927-2016 and found that a fossil-free portfolio's performance was similar to that of a portfolio including fossil fuel stocks. 62 Grantham conducted a comparable study looking at nine major sectors in the stock market and the US-listed companies included in the S&P 500 Index over the past three decades. 63 He found that excluding any single sector made no significant difference in portfolio returns. ...
This anthology brings together a diversity of key texts in the emerging field of Existential Risk Studies. It serves to complement the previous volume The Era of Global Risk: An Introduction to Existential Risk Studies by providing open access to original research and insights in this rapidly evolving field. At its heart, this book highlights the ongoing development of new academic paradigms and theories of change that have emerged from a community of researchers in and around the Centre for the Study of Existential Risk. The chapters in this book challenge received notions of human extinction and civilization collapse and seek to chart new paths towards existential security and hope.
The volume curates a series of research articles, including previously published and unpublished work, exploring the nature and ethics of catastrophic global risk, the tools and methodologies being developed to study it, the diverse drivers that are currently pushing it to unprecedented levels of danger, and the pathways and opportunities for reducing this. In each case, they go beyond simplistic and reductionist accounts of risk to understand how a diverse range of factors interact to shape both catastrophic threats and our vulnerability and exposure to them and reflect on different stakeholder communities, policy mechanisms, and theories of change that can help to mitigate and manage this risk. Bringing together experts from across diverse disciplines, the anthology provides an accessible survey of the current state of the art in this emerging field.
The interdisciplinary and trans-disciplinary nature of the cutting-edge research presented here makes this volume a key resource for researchers and academics. However, the editors have also prepared introductions and research highlights that will make it accessible to an interested general audience as well. Whatever their level of experience, the volume aims to challenge readers to take on board the extent of the multiple dangers currently faced by humanity, and to think critically and proactively about reducing global risk.
... Our findings are becoming increasingly relevant given increasing awareness of morally relevant elements of investments in recent years. For example, there is a significant backlash against the fossil fuel industry for supplying dirty energy (Trinks et al., 2018), and against prominent technological companies for practices that hurt the psychological well-being of minors (Slotnik, 2021). The invasion of Russia on Ukraine means that people are not only averse to using products and services from Russia but might also be averse to companies that rely on Russian goods or commodities instead of using alternative sources (Arnold et al., 2022). ...
How strongly do higher investment premiums tempt people to invest in unethical assets, such as harmful 'sin stocks'? We present two experimental studies (Ntotal = 1,260) examining baseline willingness to invest in 'sin stocks' (without a premium), changes in investments as premiums increase, and how individual differences in deontological and utilitarian inclinations and dark personality traits impact baseline and changes to investments. We compare results to hypothetical models of sensitivity to higher returns: a) full resilience (to moral decay), where people increase investment in regular but not sin stocks with increasing premiums, b) partial resilience, where increasing premiums increases investment more slowly for sin than regular stocks, c) sin deduction: a flat baseline penalty for sin versus regular stocks resulting in similar sensitivity to increasing premiums, and d) decay, where investment differences in sin versus regular stocks reduce as premiums increase. On average, responses aligned best with the partial resilience model. Individual differences in morally-relevant traits moderated effects: most notably, people with higher deontological inclinations and lower dark traits showed greater resilience. However, 21-33% of participants exhibited full resilience, refusing to invest more in sin stocks even as premiums increased, which was more common in people with higher deontological inclinations and lower dark traits. These findings suggest that decisions to invest in sin stocks reflect the sensitivity to the sinfulness of the stock, which remains strong even after unethical investments are made more attractive. We conclude that increasing the economic reward of unethical investments does not crowd out moral concerns.
... It is in evaluating the effectiveness of the FFDM strategies to address this root cause that further collaboration with behavioral scientists could prove advantageous. There is ample evidence that divesting from fossil fuels does not increase the financial risk of the organizations that do so (Trinks et al. 2018;Bassen et al. 2021;Plantinga and Scholtens 2021). However, there is mixed evidence on whether divestments inflict significant economic harm on fossil fuel companies (Dordi and Weber 2019;Hansen and Pollin 2022;Zori et al. 2022). ...
The integration of behavioral science into conservation science and climate science has enabled the development of both novel research questions and practical interventions. However, most behavioral interventions aim to change private, individual behaviors, rather than transform the political economic systems that drive current biodiversity, climate, and social crises. In this paper, we argue that closer collaboration between behavioral scientists working on biodiversity and climate issues, on the one hand, and advocates for radical alternatives to current political economic systems, on the other, could advance such needed systemic transformation. While the work of both groups is subject to some critique, we suggest that closer collaboration could enable the strengths of each to address the others’ weaknesses. This complementarity is particularly true when behavioral interventions are co-designed with advocates and targeted towards powerful individuals whose behavior could affect systems-level transformation. We use the fossil fuel divestment movement as an illustrative example of one way in which this collaboration could be mutually beneficial, and then outline potential political, practical, and ethical implications that may accompany such collaborations in the biodiversity conservation and climate change fields.
... Other studies investigate the impact on firms' cost of capital and financial performance, as well as on the impact on investors (portfolio) performance [21,[37][38][39][40][41][42][43][44]. ...
... These issues are becoming more salient for at least two reasons. Firstly, sustainable investment has been gaining importance for many years (Trinks et al., 2018;Trinks & Scholtens, 2017). More and more people are now cognizant of the harm that some products or companies cause, and instead might want to invest in portfolios (e.g., mutual funds) that exclude companies operating in industries that are not to their taste (Statman, 2004). ...
The production of meat from farmed animals is problematic both on ethical and environmental grounds. However, we are on the eve of the mass production of cultured (lab) meat. This alternative to conventional meat should be both more environmentally sustainable and cause less harm to animals, making it more socially acceptable. In this paper, we investigate how people judge investing in meat producers, an issue that has become more salient with the increasing importance of socially responsible investment. We conducted two experimental studies (N=1301) aimed at answering whether people can separate associations towards meat when judging companies that produce them, resolving whether evaluations of meat producers as investment targets have a motivational or affective component, or not. Our findings show that people exhibit an aversion towards investment in both conventional (dconventional=–0.97) and cultured meat producers (dcultured=–0.26), consistent with the former. Concern for animal welfare exacerbates (dconventional=–1.34) or attenuates (dcultured=0.31) this aversion unless people feel disgust-towards-animal-flesh, which has a similar adverse effect regardless of meat origin. Our findings suggest that for many, cultured meat producers might remain controversial investment targets. We speculate that similar paradoxical patterns could be observed in other economic decisions, making them socially consequential.
... Some studies have focused on strategies of divestment from fossil fuels or the impact of CO 2 emissions on stock returns. For example, Trinks et al. (2018) analyse the financial performance of portfolios with and without fossil fuel company stocks over the 1927-2016 period. ...
It is recognised that climate risks (including carbon pricing policy) are a new source of risk for the financial system. We propose a modelling framework for medium-term projections of stock returns under different carbon price scenarios. First, we construct a green factor to augment the classic capital asset pricing model (CAPM) and capture a firm's exposure to climate policy risks. Then, we project to 2040 the factors of the CAPM, conditional on different carbon price pathways, using the estimated medium-scale Bayesian vector autoregressive model (MBVAR). Finally, we project the stock returns of each firm in the portfolio. Our scenarios suggest that the impacts of a carbon price policy are not confined to the most polluting firms (mining and quarrying, transportation and storage firms) for the effect of systematic risk. Moreover, in the short term, the negative impacts of a carbon price policy are more accentuated under a disorderly than an orderly transition. In the medium term, the projections suggest that the stock market progressively adapts to new conditions and believes in the benefits of rigorous carbon policies to incentivise the transition to a low-carbon economy. The proposed toolbox may represent effective support for investors in preparing portfolios for climate transition risks in the context of uncertainty regarding the timing of the introduction of a carbon policy. For policymakers, it can help shed light on how policies to prevent or mitigate climate change effects can affect financial stability.
... The reason we sold some $150 million in fossil fuel assets from our endowment was the reason we sell other assets: They posed a long-term risk to generating strong returns for UC's diversified portfolios" (Singh Bachher and Sherman, 2019). Some researchers have similarly found that the performance of FFD portfolios does not significantly differ in terms of risk and return from unrestricted portfolios (Trinks et al., 2018;Plantinga and Scholtens, 2020), which may have led some institutions to similarly reassess perceived risk from FFD. However, the recent invasion of Ukraine has driven up the value of some fossil fuel holdings (Nerlinger and Utz, 2022) leading to record profits for oil and gas companies in 2022 (Bousso, 2023), which has altered this dynamic, at least in the short run. ...
Since 2011, students and others have pushed U.S. higher education institutions (HEIs) to divest their endowments from fossil fuel producing industries. In the past decade, fossil fuel divestment (FFD) has become the fastest growing divestment movement in history, with over 140 U.S. HEIs announcing divestment commitments. We conduct a quantitative analysis of the phases of U.S. 4-year HEI divestment announcements (as well as rejections of divestment) to better understand the dynamics. Announcements began (2012–2017) with a number of schools divesting, followed by a second phase, where new divestment announcements slowed. The third phase, which began around 2019, showed a renewed increase in divestments. Formal rejections of divestment followed a similar pattern in the early years, where rejections were slightly more common and represented more endowment value but have declined as some schools reversed public positions. Schools that have divested from fossil fuels now represent roughly 3% of 4-year U.S. HEIs and 39% of HEI endowment value in our data. Roughly 133% more endowment value is now associated with U.S. schools that have publicly divested from fossil fuels than with those that have explicitly rejected it. Early divestments from all fossil fuels came nearly exclusively from schools with a relatively low endowment dependence (the share of operating expenses derived from the endowment) although qualitative factors were also likely important. We discuss the implications of these findings in the context of different theories of change for the divestment movement. In particular, we note that 99% of 4-year HEIs representing roughly 95% of endowment value in our dataset are less dependent upon their endowment than at least one recently divested HEI, suggesting that large endowment or high dependence on endowment are no longer strict barriers to FFD for most schools.
... Numerous studies have highlighted these critical concerns, emphasizing the necessity of transitioning towards more sustainable energy systems [1][2][3]. This shift towards a "fossil-free divestment" campaign extends beyond South Korea; it is evident in other coal-consuming nations like the United States and China [2,[4][5][6]. The international community actively engages in discussions and research to discover viable solutions and innovative approaches to energy generation. ...
Anthracite stands as a valuable precursor for carbon materials, owing to its high carbon content. However, producing activated carbon from anthracite presents significant challenges due to its elevated ash content (23–40 wt%) and crystalline nature. The high ash content not only fails to contribute to the activation process but also obstructs pore formation on the carbon surface. To address these challenges, this study explores the preparation of activated carbon from anthracite using KOH activation. This method demonstrates remarkable efficacy in enhancing reactivity beyond the inherent physical properties of anthracite. In contrast to physical activation, the utilization of KOH as a chemical agent substantially enhances the specific surface area, resulting in a production yield of 62% and a specific surface area that reaches up to 1596 m²/g at a KOH/anthracite weight ratio of 4.0. Moreover, rinsing the activated sample with tap water achieves an ash removal rate of about 37.9%, surpassing twice the rate achieved through acid pretreatment (67.0%). A noteworthy observation from this study is the substantial reduction in the content of major ash components, such as silicon (Si) and aluminum (Al), both of which are prominent constituents in anthracite ash. Following KOH activation, their levels decrease by approximately 54% to 65%, respectively. These findings highlight the potential of utilizing available anthracite, even with elevated ash content, as a superior carbon material. Fundamentally, the KOH activation method serves a dual purpose: it effectively reduces ash content and promotes pore creation within a highly alkaline environment. This dual advantage positions the method as a promising approach for the production of top-tier activated carbon.
... In terms of equity portfolio, there is academic consensus that screening out controversial stocks (such as alcohol, gambling, tobacco, adult entertainment, animal testing, fur and controversial weapons) limits portfolio diversification benefits and thereby lowers portfolio returns (Hong and Kacperczyk, 2009;Trinks and Scholtens, 2017). However, recent studies (Plantinga and Scholtens, 2021;Trinks et al., 2018) contradict the previous findings and show that screening out fossil fuel stocks has no impact on equity portfolios, thus, having important implications for policymakers and investors pushing for energy transition. Apart from negative screening approach, studies also measure the returns of equity portfolios built using positive screening approach such as by using KLD ratings (Kempf and Osthoff, 2007); eco-efficiency scores (Derwall et al., 2005) and employee satisfaction social screens (Edmans, 2011). ...
Purpose
Sustainable investments (SI) represent a promising class of investments, combining financial returns with mitigating environmental challenges, achieving SDG goals and creating a positive business impact. An enhanced global focus on climate change developments in the backdrop of COP26 and COP27, raised the need for comprehensive literature mapping, to understand the emerging themes and future research arenas in this field.
Design/methodology/approach
The authors apply a quali–quantitative approach of bibliometric methods coupled with content analysis, to review 1,022 articles obtained from the Web of Science (WoS) database for 1991–2023.
Findings
The results identify the leading authors and their collaborations, impactful journals and pioneering articles in sustainable investment literature. The authors also indicate seven major themes of SI to be financial performance; fiduciary duty; CSR; construction of ESG-based portfolios; sustainability assessment tools and mechanisms; investor behavior; and impact investing. Further, content analysis of literature from 2020 to 2023 highlights emerging research issues to be SDG financing via green bonds and social impact bonds; investor impact creation via shareholder engagement and field building strategies; and governance related determinants of firm-level sustainable investments. Finally, the authors discuss the research gaps across these themes and identify future research questions.
Originality/value
This paper crystallizes research themes in sustainable investment literature using a vast coverage of globally conducted studies published in reputed journals till date. The findings of this study coupled with future research questions provide a well-grounded foundation for new researchers to further explore the emerging dimensions of this field.
... Actually, there is still a lack of research on the portfolio of China's A-share market, and the main research direction is also focused on the research on the portfolio composed of a single industry. For example, Trinks, Scholtens and Mulder found that the divestment (fossil-free) portfolio did not perform noticeably worse than the unrestricted market portfolio over a significant period of time for various types of fossil fuel business and market indices and market indices, demonstrating that the removal of fossil fuels from a portfolio does not appear to harm performance [6]. Guo et al. studied three industries-aviation, retail, and e-commerce, as well as a portfolio of typical companies in each of the three industries: Delta Airlines, Walmart and Amazon [7]. ...
Since 2022, China has entered the post-pandemic era, with its strategic focus shifting from fighting the epidemic to economic recovery. The A-share market is under the influence of uncertain factors such as the novel coronavirus epidemic as well as the outbreak of conflict between Russia and Ukraine. In order to avoid risks and increase returns, optimizing investment portfolio has aroused people's attention and become the focus of research. This paper takes China's stock market as the research object, selects seven industries favored by investors, and selects a representative stock in each industry for portfolio construction and analysis. This paper collects data on the closing price of seven stocks from January 4 to April 1, 2022, and then randomly generates 100,000 different investment portfolios through Monte Carlo method. The portfolios with the lowest volatility and highest Sharpe ratio are built using the mean variance model. The effectiveness of these three portfolios was evaluated with real daily returns from April 6 to May 11, 2022, after acquiring the weights of these equities, and it was compared to the performance of the CSI 300 in the same time frame. The result indicates that the minimum variance portfolio has the largest cumulative return, which exceeds the cumulative return of CSI 300 in the same period, while equally weighted and the maximum Sharpe ratio portfolios generate lower yields than the market level.
... It is well-known that social norms influence investment practices (Hong and Kacperczyk, 2009). 2 For example, social norms against financing companies promoting human vice, like addiction and violence, spurred discussions around excluding investments in 'sin stocks' (Blitz and Swinkels, 2021;Hong and Kacperczyk, 2009). More recently, investors started shunning stocks with high carbon emissions (Trinks et al., 2018;Chambers et al., 2020). ...
Sustainable development requires more investment in sustainable companies and less in unsustainable firms. However, the factors driving sustainable investing are not well understood. To address this gap, this paper uses institutional theory to examine three determinants of sustainable investing: (1) investor commitment to sustainable investing initiatives; (2) normative pressure; and (3) home-country influences. The findings indicate that sustainable investing initiatives do not guarantee more sustainable asset allocation among members. Normative pressure correlates with reduced investment in unsustainable companies. Investors from home-countries with legal systems prioritizing diverse stakeholders, and with governments committed to achieving the Sustainable Development Goals (SDGs), tend to invest less in unsustainable companies. Conversely, investors from countries with limited SDG progress show higher investment in unsustainable firms, while those from more developed nations invest more in sustainable companies. These results highlight the need for a critical examination of institutional efficacy in promoting sustainable investing.
... Turning to empirical studies, little effect was found for the divestment movement that targeted South Africa (Gosiger 1986;Kaempfer et al. 1987). Divestment or exclusion does not necessarily negatively impact portfolio performance, as shown by Hoepner and Schopohl (2018), Trinks et al. (2018), andPlantinga andScholtens (2021). Hunt and Weber (2019) find that divestment of carbon intensive stocks results in investment strategies with higher risk-adjusted returns and lower carbon intensity. ...
A growing group of institutional investors use divestment strategically to deter misconducts that are harmful for the climate and society. Based on Kantian ethics, we propose that divestment represents investors’ universal and absolute moral commitment to socially responsible investing (SRI). Following categorical and hypothetical imperatives and reciprocity as a norm, we hypothesize how institutional investors’ commit to SRI through a divestment strategy against ethically reprehensible behaviour of banks, especially when these investors represent banks themselves. Using a hand-collected database of the revelation dates of enforcement actions on banks, we find evidence that banks are less likely to divest equity holding on banks with misconduct (fined banks) than their non-bank institutional investors peers. Banks that commit to invest responsibly by signing for the Principles for Responsible Investment (PRI) are not significantly more likely to divest on fined banks stocks than non-signatory banks. Moreover, divestment of fined banks whose own legitimacy to operate is in question is not significantly different from non-fined banks divestment. We find that European banks are more inclined to sell their holdings permanently on fined banks than their United States peers. Therefore, bank’s moral commitment to SRI via divestments is influenced more by cultural and reciprocity norms than their moral commitment to participate in the PRI.
... While the fossil fuel industry has financed studies to say that divestment would adversely affect institutional portfolios, Rockefeller Brothers Fund has divested and reported that this has not adversely affected their returns [39]. Other work has also supported the claim that divestment would not impair portfolio performance [40]. The argument is complex, because even as there are actions to divest from fossil fuel industries, banks and lending institutions con-rating to encourage the Teachers Insurance and Annuity Association (TIAA) to divest from fossil fuels [36]. ...
Climate change poses an existential threat to children's health. Divestment of ownership stakes in fossil fuel companies is one tool available to pediatricians to address climate change. Pediatricians are trusted messengers regarding children's health and therefore bear a unique responsibility to advocate for climate and health policies that affect children. Among the impacts of climate change on pediatric patients are allergic rhinitis and asthma; heat-related illnesses; premature birth; injuries from severe storms and fires; vector-borne diseases; and mental illnesses. Children are disproportionately affected as well by climate-related displacement of populations, drought, water shortages, and famine. The human-generated burning of fossil fuels emits greenhouse gases (GHG) such as carbon dioxide, which trap heat in the atmosphere and cause global warming. The US healthcare industry is responsible for 8.5% of the nation's entire greenhouse gases and toxic air pollutants. In this perspectives piece we review the principle of divestment as a strategy for improving childhood health. Healthcare professionals can help combat climate change by embracing divestment in their personal investment portfolios and by their universities, healthcare systems, and professional organizations. We encourage this collaborative organizational effort to reduce greenhouse gas emissions.
... Our findings are becoming increasingly relevant given increasing awareness of morally relevant elements of investments in recent years. For example, there is a significant backlash against the fossil fuel industry for supplying dirty energy (Trinks et al. 2018) and against prominent technological companies for practices that hurt the psychological well-being of minors (Slotnik 2021). The invasion of Russia on Ukraine means that people are not only averse to using products and services from Russia but might also be averse to companies that rely on Russian goods or commodities instead of using alternative sources. ...
Who is tempted by versus resilient to investment premiums from ‘sin stocks’ that produce social harm? We present a correlational (N = 218) and experimental study (N = 646) to examine a) willingness to invest in sin stocks without a return premium, b) how temptation increases as premiums increase, and c) moderation by individual differences in deontological and utilitarian sacrificial dilemma inclinations and dark personality traits. People exhibit an aversion to sin stocks without a premium, but most become increasingly willing to invest as premiums increase. However, people high in deontological inclinations demonstrated resilience, with lower baseline investment and lower responsivity to premium returns. Conversely, people high in utilitarian inclinations and Dark Triad traits showed higher responsivity to premium returns. Results suggest two independent aspects contribute to sin stock investment decisions: deciding whether to invest in sin stocks or not, and sensitivity to return premiums.
We study the pricing implication of the climate change news index proposed by Engle et al. (2020). Specifically, we find the significant risk premium associated with climate change news. The risk premium increases for firms in fossil‐fuel and carbon‐intensive industries, while decreasing for firms in low‐emission industries. Furthermore, we document that the impact of climate change news is more negative for “value” and “big” portfolios compared to “growth” and “small” portfolios, and the impact of climate change news varies for firms headquartered in Democratic states versus Republican states.
We investigate whether green (brown) portfolios constructed from clean energy ETFs (fossil fuel ETFs) yield positive (negative) returns conditional on climate-related risks. While the green portfolios do not unconditionally outperform the brown ones, the outperformance of green portfolios is statistically significant under the conditional setting using non-parametric estimates with imposing inequality restrictions. Our conditional studies also show that brown portfolios are riskier than green ones with various measurements. We present the heterogeneity in the effect of climate information on the return and risk of green and brown portfolios. Furthermore, we document that fund flows for green assets are higher than those for brown ones during periods of high climate risks. Our findings are robust to alternative specifications.
This paper presents a literature review with the aim of facilitating investment funds to understand the practical question of whether investing responsibly can make a fund's portfolios more sustainable without compromising their return/risk profiles. The study contains most of the leading ESG research from the past two decades. We conclude from this research that the relationship between ESG and return/risk profile is predominantly neutral or even positive. Many scholars have found evidence on the performance of stocks, bonds, and real estate. The findings apply to Environmental, Social, and Governance criteria separately and in different regions. We contribute to the body of knowledge accessible to ESG-asset-seeking funds by complementing the impact investment theory and by linking ESG investment to portfolio-level characteristics and investor preferences. Looking into the future, we identify recent trends and developments in this niche field of ESG at the end of the paper.
Institutional investors, who control as much as $154 trillion globally, may play an important role in shaping the energy transition as major stakeholders in fossil fuel producing, distributing and consuming companies. Research on investors and fossil fuels has focused largely on the divestment movement or on shareholder engagement. However, given their limited success to date, additional strategies to influence the fossil fuel sector are merited. This review paper expands the scope of attention to investors, asking: what strategies for influencing the fossil fuel industry are available to institutional investors and what are the implications of these for achieving an inclusive fossil fuel phase-out? Through a systematic review of 153 papers, we identify seven strategies for influencing the fossil fuel phase-out: divestment, shareholder engagement, hiring practices, engaging the financial sector, engaging indirect financial actors, litigation, and green investment. These strategies represent ways for investors to increase the impact of their engagements, as well as areas deserving greater attention from academics, policymakers, and activists. Across these strategies, we note trade-offs in favour of financial returns at the expense of social, ecological, and equity outcomes. We argue that future research should focus on: (a) the role of under-studied actors in aligning finance with climate goals; (b) the implications of investor action for an inclusive energy transition; and (c) policy solutions capable of overcoming investors’ short-term profit motives to instead incentivise long-term investor engagement with climate issues.
This study examines the impact of the COVID-19 crisis on the valuation of CO2 emissions by investors. Using the sample constituted by large French companies (SBF 120) having published their carbon emissions from 2016 to 2021, we show that investors are sensitive to firms’ carbon emissions and value them negatively over the period regardless the environmental sensitivity of the firm’s activity sector. We also demonstrate that under the pressure of the COVID-19 crisis, investors penalize more heavily high polluting firms while their valuation of low polluting firms does not seem to be impacted by the crisis. Therefore, our findings suggest that it is important for firms, especially high-emitting firms, to continue to reduce their carbon emissions in order to earn andmaintain investors’ confidence after the crisis. Our managerial contribution emphasizes the confirmation that the COVID-19 shock could be a good opportunity for both firm and investor to pursue their clean technologies development and investment to deal with climate change.
This study empirically analyses the exclusion of companies from investors’ investment universe due to a company’s business model (sector-based exclusion) or due to a company’s violations of international norms (norm-based exclusion). We conduct a time-series analysis of the performance implications of the exclusion decisions of two leading Nordic investors, Norway’s Government Pension Fund-Global (GPFG) and Sweden’s AP-funds. We find that their portfolios of excluded companies do not generate an abnormal return relative to the funds’ benchmark index. While the exclusion portfolios show higher risk than the respective benchmark, this difference is only statistically significant for the case of GPFG. These findings suggest that the exclusion of the companies generally does not harm funds’ performance. We interpret these findings as indicative that with exclusionary screening, as practiced by the sample funds, asset owners can meet the ethical objectives of their beneficiaries without compromising financial returns.
We present a simple dynamic investment strategy that allows long-term passive investors to hedge climate risk without sacrificing financial returns. We illustrate how the tracking error can be virtually eliminated even for a low-carbon index with 50% less carbon footprint than its benchmark. By investing in such a decarbonized index, investors in effect are holding a "free option on carbon." As long as climate change mitigation actions are pending, the low-carbon index obtains the same return as the benchmark index; but once carbon dioxide emissions are priced, or expected to be priced, the low-carbon index should start to outperform the benchmark.
This article charts the evolution of the divestment movement, a transnational advocacy network that uses a range of strategies to shame, pressure, facilitate, and encourage investors in general, and large institutional investors in particular, to relinquish their holdings of fossil fuel stocks in favour of climate-friendly alternatives. It describes the movement's central characteristics and the strategies it employs, it maps its basic architecture and the potential role it plays in the broader climate change regime complex, and shows how it represents a novel form of private investor-targeted climate change governance, operating primarily through symbolic political action and as a norm entrepreneur. Given the potential importance of the movement, the model it may provide for other forms of private governance, and the paucity of analysis of its implications for climate change mitigation, this article addresses an important descriptive and analytical gap in the climate policy literature.
We conduct the first comparative analysis of the financial performance of European green, black (fossil energy and natural resource) and conventional mutual funds. Based on a unique dataset of 175 green, 259 black and 976 conventional mutual funds, the investigation contrasts the financial performance of the three dissimilar investment orientations over the 1991–2014 period. Over the full sample period, green mutual funds significantly underperform relative to conventional funds, while no significant risk-adjusted performance differences between green and black mutual funds could be established during the same period. Environmentally friendly investment vehicles display a significant exposure to small cap and growth stocks, while black funds are more exposed to value stocks. Remarkably, the green funds’ risk-adjusted return profile progressively improves over time until no difference in the performance of the green and the conventional classes could be discerned. Further evidence suggests that the green funds are beginning to significantly outperform their black peers, especially over the 2012–2014 investment window.
This paper investigates the impact of negative screening on the investment universe as well as on financial performance. We come up with a novel identification process and as such depart from mainstream socially responsible investing literature by concentrating on individual firms’ conduct and by studying a much wider range of issues. Firstly, we study the size and financial performance of fourteen potentially controversial issues: abortion, adult entertainment, alcohol, animal testing, contraceptives, controversial weapons, fur, gambling, genetic engineering, meat, nuclear power, pork, (embryonic) stem cells, and tobacco. We investigate an international sample of more than 1,600 stocks for more than twenty years. We then analyze the impact of applying negative screens to a market portfolio. Our findings suggest that the choice for negative screening strategies does matter for the size of the investment universe as well as for risk-adjusted return performance. Investing in controversial stocks in many cases results in additional risk-adjusted returns, whereas excluding them may reduce financial performance. These findings suggest that there are opportunity costs to negative screening.
Climate change policies that rapidly curtail fossil fuel consumption will lead to structural adjustments in the business operations of the energy industry. Due to an uncertain global climate and energy policy framework, it is difficult to determine the magnitude of fossil energy reserves that could remain unused. This ambiguity has the potential to create losses for investors holding securities associated with any aspects of the fossil fuel industry. Carbon bubble risk is understood as financial exposure to fossil fuel companies that would experience impairments from assets stranded by policy, economics or innovation. A grassroots divestment campaign is pressuring institutions sell their fossil fuel company holdings. By September 2014, investors had responded by pledging to divest US $50 billion of portfolios. Though divestment campaigns are primarily focused on a moral and political rationale, they also regularly frame divesting as a strategy for mitigating stranded asset risk. We review aspects of the divestment movement alongside the context of carbon bubble risk. Several common hypotheses on reducing stranded carbon asset exposure through divestment are critically examined. We find that institutional investors are limited in their ability to reduce exposure to carbon through divesting and that the financial sector is likely to absorb many 'fossil free' funds.
This paper presents a quantitative analysis of the historic fossil fuel and cement production records of the 50 leading investor-owned, 31 state-owned, and 9 nation-state producers of oil, natural gas, coal, and cement from as early as 1854 to 2010. This analysis traces emissions totaling 914 GtCO2e—63 % of cumulative worldwide emissions of industrial CO2 and methane between 1751 and 2010—to the 90 “carbon major” entities based on the carbon content of marketed hydrocarbon fuels (subtracting for non-energy uses), process CO2 from cement manufacture, CO2 from flaring, venting, and own fuel use, and fugitive or vented methane. Cumulatively, emissions of 315 GtCO2e have been traced to investor-owned entities, 288 GtCO2e to state-owned enterprises, and 312 GtCO2e to nation-states. Of these emissions, half has been emitted since 1986. The carbon major entities possess fossil fuel reserves that will, if produced and emitted, intensify anthropogenic climate change. The purpose of the analysis is to understand the historic emissions as a factual matter, and to invite consideration of their possible relevance to public policy.
We show that a well-diversified portfolio of randomly chosen stocks must include at least 30 stocks for a borrowing investor and 40 stocks for a lending investor. This contradicts the widely accepted notion that the benefits of diversification are virtually exhausted when a portfolio contains approximately 10 stocks. We also contrast our result with the levels of diversification found in studies of individuals' portfolios.
This paper explores the effect of exclusionary ethical investing on corporate behavior in a risk-averse, equilibrium setting. While arguments exist that ethical investing can influence a firm's cost of capital, and so affect investment, no equilibrium model has been presented to do so. We show that exclusionary ethical investing leads to polluting firms being held by fewer investors since green investors eschew polluting firms' stock. This lack of risk sharing among non-green investors leads to lower stock prices for polluting firms, thus raising their cost of capital. If the higher cost of capital more than overcomes a cost of reforming (i.e., a polluting firm cleaning up its activities), then polluting firms will become socially responsible because of exclusionary ethical investing. A key determinant of the incentive for polluting firms to reform is the fraction of funds controlled by green investors. In our model, empirically reasonable parameter estimates indicate, that more than 20 % green investors are required to induce any polluting firmss to reform. Existing empirical evidence indicates that at most 10% of funds are invested by green investors.
The urgency of estimating the impact of climate risks on the financial system is increasingly recognized among scholars and practitioners. By adopting a network approach to financial dependencies, we look at how climate policy risk might propagate through the financial system. We develop a network-based climate stress-test methodology and apply it to large Euro Area banks in a ‘green’ and a ‘brown’ scenario. We find that direct and indirect exposures to climate-policy-relevant sectors represent a large portion of investors’ equity portfolios, especially for investment and pension funds. Additionally, the portion of banks’ loan portfolios exposed to these sectors is comparable to banks’ capital. Our results suggest that climate policy timing matters. An early and stable policy framework would allow for smooth asset value adjustments and lead to potential net winners and losers. In contrast, a late and abrupt policy framework could have adverse systemic consequences.
We use meta-analytical techniques to address the question“When does it pay to be green?” Existing meta-studies in this research field cover a range of ecological issues and synthesize a variety of environmental performance measurements. This precludes a detailed examination of how differences in measurement approaches account for variations in empirical results. In order to conduct such an examination, we focus on only one ecological issue, climate change, and one particular operational performance dimension: corporate carbon performance as expressed by a firm's level of carbon dioxide (CO2) emission equivalents. Our sample comprises 68 estimations from 32 empirical studies, covering a total of 101,775 observations. In addition to our examination of the causal relationship, we analyze whether differences in operationalizations of carbon performance and financial performance predetermine empirical outcomes. The meta-analytic findings indicate that carbon emissions vary inversely with financial performance, indicating that good carbon performance is generally positively related to superior financial performance. The results show that relative emissions are more likely to produce statistically significant results than absolute emissions. Furthermore, market-based measures of financial performance are more positively related to carbon performance than accounting-based measures. We conclude that measurement characteristics, which were not analyzed in detail by previous meta-studies, may present a great source of cross-study variability.
Finance ignores ecosystems, which has resulted in a growing list of environmental and social problems. In this article, the importance of ecology for finance is assessed. We suggest The piece also suggests that the financial intermediation perspective can align finance and ecology for the benefit of society. This requires that financial institutions account for information about the impact of finance on the environment and vice versa, and that they are held accountable by their supervisors in this domain.
Standard asset pricing models assume that (i) there is complete agreement among investors about probability distributions of future payoffs on assets, and (ii) investors choose asset holdings based solely on anticipated payoffs; that is, investment assets are not also consumption goods. Both assumptions are unrealistic. We provide a simple framework for studying how disagreement and tastes for assets as consumption goods can affect asset prices.
We model the pricing implications of screens adopted by socially responsible investors. The model reproduces the empirically observed abnormal return to sin stock and implies a premium for systematic investor boycott risk that affects targeted as well as nontargeted firms. The investor boycott premium is not displaced by litigation risk, measures of neglect effect, illiquidity, industry momentum, or concentration. The investor boycott risk factor is useful in explaining mean returns across industries, and its premium varies with the relative wealth of socially responsible investors and the business cycle.
The urgency of estimating the impact of climate risks on the �financial system is increasingly recognised among scholars and practitioners. However, traditional risk analysis is inadequate to deal with the intrinsic uncertainty of model estimates of the e�ffects of climate policies and calculations of expected losses/gains can be largely inaccurate. Here, we take a diff�erent approach based on the network analysis of the exposures of fi�nancial actors to all climate-relevant sectors. Using empirical data of the Euro Area, we show that while direct exposures to the fossil fuel sector are small (3-12%), the combined exposures to climate-policy relevant sectors are large (40-54%), heterogeneous, and possibly ampli�fied by indirect exposures via �financial counterparties (30-40%). Our results suggest that climate policies could result in potential winners and losers across �financial actors and would not have adverse systemic impact as long as they are implemented early on and within a stable framework.
This paper empirically assesses the relevance of information on corporate climate change disclosure and performance to asset prices, and discusses whether this information is priced appropriately. Findings indicate that corporate disclosures of quantitative GHG emissions and, to a lesser extent, carbon performance are value relevant. We use hand-collected information on quantitative greenhouse gas (GHG) emissions for 433 European companies and build portfolios based on GHG disclosure and performance. We regress portfolios on Carhart (1997) four factor models extended for industry effects over the years 2005 to 2009. Results show that investors achieved abnormal risk-adjusted returns of up to 13.05% annually by exploiting inefficiently priced positive effects of (complete) GHG emissions disclosure and good corporate climate change performance in terms of GHG efficiency. Results imply that, firstly, information costs involved in carbon disclosure and management do not present a burden on corporate financial resources. Secondly, investors should not neglect carbon disclosure and performance when making investment decisions. Thirdly, during the period analysed financial markets were inefficient in pricing publicly available information on carbon disclosure and performance. Mandatory and standardised information on carbon performance would consequently not only increase market efficiency but result in better allocation of capital within the real economy. This article is protected by copyright. All rights reserved
Investors and financial regulators are increasingly aware of climate-change risks. So far, most of the attention has fallen on whether controls on carbon emissions will strand the assets of fossil-fuel companies1, 2. However, it is no less important to ask, what might be the impact of climate change itself on asset values? Here we show how a leading integrated assessment model can be used to estimate the impact of twenty-first-century climate change on the present market value of global financial assets. We find that the expected ‘climate value at risk’ (climate VaR) of global financial assets today is 1.8% along a business-as-usual emissions path. Taking a representative estimate of global financial assets, this amounts to US24.2 trillion. These estimates would constitute a substantial write-down in the fundamental value of financial assets. Cutting emissions to limit warming to no more than 2 °C reduces the climate VaR by an expected 0.6 percentage points, and the 99th percentile reduction is 7.7 percentage points. Including mitigation costs, the present value of global financial assets is an expected 0.2% higher when warming is limited to no more than 2 °C, compared with business as usual. The 99th percentile is 9.1% higher. Limiting warming to no more than 2 °C makes financial sense to risk-neutral investors—and even more so to the risk averse.
With scientific evidence regarding the contribution of carbon emissions to global warming mounting, pressure is building for corrective policy actions. The potential for such policies poses a risk for invested capital. We describe how bond investors using traditional portfolio construction techniques can hedge portfolios against this climate risk without introducing unintended exposures that could sacrifice the portfolio's benchmark-tracking properties. We hypothesize how a pickup in low-carbon investing may send out a pricing signal and preempt the connoted price correction. In that event, the transition toward a world economy with a sustainable level of carbon pollution would be accelerated, which would be beneficial for both the low-carbon investor and the environment.
Using a new dataset of environmental, social, and corporate governance company ratings for the European market, this article examines whether socially responsible stock selection adds or destroys value in terms of portfolio performance. From 2004 to 2012, we find the following: (i) Negative screens excluding unrated stocks from a representative European stock universe allow investors to significantly outperform a passive investment in a diversified European stock benchmark portfolio. (ii) Additional negative screens based on environmental and social scores neither add nor destroy portfolio value, when cut-off rates are not too high. In contrast, governance screens can significantly increase portfolio performance under similar conditions. Thus, investors in the European stock market can do (financially) well while doing (socially) good. (iii) Because of a loss of diversification, positive screens can cause portfolios to underperform the benchmark. This implies that investors should concentrate on eliminating the worst firms. (iv) Our results are robust along several dimensions, namely, choice of performance measure, time, test parametrisation, portfolio weighting scheme, approximation of the risk-free rate, and consideration of transaction costs.
Studies that link corporate social and financial performance usually find a positive association between the two. However, the literature does not establish a significant impact of socially responsible investing on stock market returns. We develop a coherent economic framework of responsible investing to address this paradox. The framework offers theoretical underpinnings for all research on responsible investment as it provides the theoretical underpinnings for the actual behavior of market participants. We associate corporate social performance with key financial accounting ratios like the market-to-book ratio (market value of the firm in relation to accounting value), return on assets, and stock market return. We conclude that there is a strong theoretical foundation for a positive relationship between corporate social responsibility and financial performance, though the relation is conditional on which financial performance measure is considered. We illustrate that the empirical literature about responsible investing is well in line with our model's propositions.
A quarter-century after the Intergovernmental Panel for Climate Change (IPCC) completed its first assessment report, and two decades after the first ‘Conference of the Parties’ meeting at Berlin, the world is no closer to averting catastrophic climate change. During this time, CO2 emissions have only gone up and governments have relinquished regulatory power over companies. Therefore, campaigners are now targeting the companies themselves and calling for organisations to withdraw their invested funds from the fossil fuel industry. Michael Gross reports.
It is widely acknowledged that introducing a price on carbon represents a crucial precondition for filling the current gap in low-carbon investment. However, as this paper argues, carbon pricing in itself may not be sufficient. This is due to the existence of market failures in the process of creation and allocation of credit that may lead commercial banks — the most important source of external finance for firms — not to respond as expected to price signals. Under certain economic conditions, banks would shy away from lending to low-carbon activities even in the presence of a carbon price. This possibility calls for the implementation of additional policies not based on prices. In particular, the paper discusses the potential role of monetary policies and macroprudential financial regulation: modifying the incentives and constraints that banks face when deciding their lending strategy — through, for instance, a differentiation of reserve requirements according to the destination of lending — may fruitfully expand credit creation directed towards low-carbon sectors. This seems to be especially feasible in emerging economies, where the central banking framework usually allows for a stronger public control on credit allocation and a wider range of monetary policy instruments than the sole interest rate.
Responsible investment has witnessed significant changes in the past decade. It is estimated that about one fifth of assets under management in the US and about half of all assets under management in the EU are done on the basis of one of the seven responsible investment strategies. This paper discusses the prevailing responsible investment strategies and assesses the metrics used to account for responsible investment. It appears that the definition of responsible investing results in much degrees of freedom about reporting its size.
What are the investment implications of imposing social responsibility criteria on the management of institutional portfolios? What might the impact of these criteria be, in terms of risk, return, and diversification?
Policy makers have generally agreed that the average global temperature rise caused by greenhouse gas emissions should not exceed 2 °C above the average global temperature of pre-industrial times. It has been estimated that to have at least a 50 per cent chance of keeping warming below 2 °C throughout the twenty-first century, the cumulative carbon emissions between 2011 and 2050 need to be limited to around 1,100 gigatonnes of carbon dioxide (Gt CO2). However, the greenhouse gas emissions contained in present estimates of global fossil fuel reserves are around three times higher than this, and so the unabated use of all current fossil fuel reserves is incompatible with a warming limit of 2 °C. Here we use a single integrated assessment model that contains estimates of the quantities, locations and nature of the world's oil, gas and coal reserves and resources, and which is shown to be consistent with a wide variety of modelling approaches with different assumptions, to explore the implications of this emissions limit for fossil fuel production in different regions. Our results suggest that, globally, a third of oil reserves, half of gas reserves and over 80 per cent of current coal reserves should remain unused from 2010 to 2050 in order to meet the target of 2 °C. We show that development of resources in the Arctic and any increase in unconventional oil production are incommensurate with efforts to limit average global warming to 2 °C. Our results show that policy makers' instincts to exploit rapidly and completely their territorial fossil fuels are, in aggregate, inconsistent with their commitments to this temperature limit. Implementation of this policy commitment would also render unnecessary continued substantial expenditure on fossil fuel exploration, because any new discoveries could not lead to increased aggregate production.
With a meta-analysis of 85 studies and 190 experiments, the authors test the relationship between socially responsible investing (SRI) and financial performance to determine whether including corporate social responsibility and ethical concerns in portfolio management is more profitable than conventional investment policies. The study also analyses the influence of researcher methodologies with respect to several dimensions of SRI (markets, financial performance measures, investment horizons, SRI thematic approaches, family investments and journal impact) on the effects identified. The results indicate that the consideration of corporate social responsibility in stock market portfolios is neither a weakness nor a strength compared with conventional investments; the heterogeneous results in prior studies largely reflect the SRI dimensions under study (e.g. thematic approach, investment horizon and data comparison method).
In recognition of the cumulative effects resulting from financial decisions, a growing number of campaigns are advocating for the removal of investment funds from companies responsible for high levels of carbon emissions. A systematic approach can aid in examining the social, economic and environmental impacts that extend beyond political motivations to divest from fossil fuel companies. We have adapted publicly available economic input-output life cycle assessment models (EIO-LCA) to develop a Shadow Impact Calculator (SIC) for examining the potential environmental impacts of investment decisions. An investment portfolio's shadow impacts represent the economic, social and environmental effects underlying an investor's decision to place their funds in particular financial instruments. In this study, we focus on greenhouse gas emissions to show which sectors of the United States economy have particularly large or small carbon shadows and place those results in the context of volatility and earnings. To demonstrate how SIC may be used, we examine the endowment investments of a Canadian university in the context of divesting from fossil fuel companies. Our analysis suggests that large pooled funds choosing to direct their investments away from heavy carbon emitters may have less of an impact than would otherwise be expected.
Thesis (D.B.A.)--University of Washington. Bibliography: l. 96-100.
Prior literature on socially responsible investment has contended that excluding “sin stocks” from a portfolio (negative screening) will reduce performance and increase risk. Further, incorporating stocks of firms with positive social responsibility scores (positive screening) will improve performance and reduce risk. We simulate portfolios designed to mimic typical equity mutual funds’ holdings and investigate these propositions. We remove the potentially confounding influences of differences in manager skill, transaction costs and fees, and conduct a clean experiment on the effect of positive and negative portfolio screening. We find no difference in the return or risk of screened and unscreened portfolios. We conclude that a typical socially responsible fund will neither gain nor lose from screening its portfolio.
The use of fossil fuels has been a great boon to human civilization. However, given the issue of climate change, it has become clear that this is a time-limited strategy and that we will at some point need to severely curtail, and perhaps ultimately eliminate, this strategy of meeting our energy needs. Given this long-term perspective, the authors argue that continued public investment in fossil fuel industries and infrastructures reflects escalation of commitment, continued investment in a failing strategy. In this context, this paper reviews the research on escalation of commitment and factors that encourage de-escalation, highlighting strategies that citizens can use to encourage politicians and public administrators to protect long-term civic well-being by shifting investments away from fossil fuel industries.
Compared to conventional mutual funds, socially responsible mutual funds outperform during periods of market crisis. This dampening of downside risk comes at the cost of under performing during non-crisis periods. Investors with Prospect Theory utility functions would value the skewness of these returns. This asymmetric return pattern is driven by the mutual funds that focus on environmental, social, or governance (ESG) attributes and is especially pronounced in ESG funds that use positive screening techniques. Furthermore, the observed patterns are attributed to the socially responsible attributes and not the differences in fund management or the characteristics of the companies in fund portfolios.
In this paper, we empirically test the extent to which a portfolio of socially not responsible firms screened out of a market portfolio will trade at a discount. We create a set of global and domestic sin indexes consisting of a large number of publicly traded socially not responsible stocks around the world belonging to what we label as the Sextet of Sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. We compare their stock market performance directly with a set of virtue comparables consisting of the most important in-ternational socially responsible investment indexes. Employing a multi-factor performance measurement framework and recent boot-strap procedures for robust performance testing, we find no compelling evidence in the data that ethical and unethical screens lead to a sig-nificant difference in their financial performance.
We investigate the impact of oil price shocks at the industry level in the Euro area for the period 1983–2007. We use different oil price specifications and use dynamic VAR models and multivariate regression to investigate how 38 different industries respond to oil price shocks. We pay specific attention to the asymmetry of the industries' responses regarding oil price increases and decreases. We find that the impact of oil price shocks substantially differs along the different industries. We find that the significance of this result also differs along the various oil price specifications. The results are quite robust to the way in which we model the problem.
The aim of this paper is to construct and test alternative versions of the Fama-French and Carhart models for the UK market. We conduct a comprehensive analysis of such models, forming risk factors using approaches advanced in the recent literature including value weighted factor components and various decompositions of the risk factors. We also test whether such factor models can at least explain the returns of large firms. Despite these various approaches, we join Michou, Mouselli and Stark (2007) and Fletcher (2010) in demonstrating that such factor models fail to reliably describe the cross-section of returns in the UK.
The Jobson-Korkie-test of equal Sharpe Ratios is widely used in the performance evaluation literature. This letter has two purposes: First, it corrects a typographical error in the test statistic. Second, it shows that the test statistic can be simplified without loss of its statistical properties.
Applied researchers often test for the difference of the variance of two investment strategies;
in particular, when the investment strategies under consideration aim to implement
the global minimum variance portfolio. A popular tool to this end is the F-test for the
equality of variances. Unfortunately, this test is not valid when the returns are correlated,
have tails heavier than the normal distribution, or are of time series nature. Instead, we
propose the use of robust inference methods. In particular, we suggest to construct a studentized
time series bootstrap confidence interval for the ratio of the two variances and to
declare the two variances different if the value one is not contained in the obtained interval.
This approach has the advantage that one can simply resample from the observed data
as opposed to some null-restricted data. A simulation study demonstrates the improved
finite-sample performance compared to existing methods.
I use a sample of socially responsible stock mutual funds matched to randomly selected conventional funds of similar net assets to investigate differences in characteristics of assets held, portfolio diversification, and variable effects of diversification on investment performance. I find that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperform the Domini 400 Social Index and S&P 500 during the study period. 2005 The Southern Finance Association and the Southwestern Finance Association.
While discussions about global sustainability challenges abound, the financial risks that they incur, albeit important, have received less attention. We suggest that corporate risk assessments should include sustainability-related aspects, especially with relation to the natural environment, and encompass the flux of critical materials within a company's value chain. Such a comprehensive risk assessment takes into account input- as well as output-related factors. With this paper, we focus on the flux of carbon and define carbon constraints that emerge due to the disposition of fossil fuels in the input dimension and due to direct and indirect climate change effects in the output dimension. We review the literature regarding the financial consequences of carbon constraints on the macroeconomic, sector, and company level. We conclude that: a) financial consequences seem to be asymmetrically distributed between and within sectors, b) the individual risk exposure of companies depends on the intensity of and dependency on carbon-based materials and energy, and c) financial markets have only started to incorporate these aspects in their valuations. This paper ends with recommendations on how to incorporate our results in an integrated carbon risk management framework.
Changes in oil prices predict stock market returns worldwide. We find significant predictability in both developed and emerging markets. These results cannot be explained by time-varying risk premia as oil price changes also significantly predict negative excess returns. Investors seem to underreact to information in the price of oil. A rise in oil prices drastically lowers future stock returns. Consistent with the hypothesis of a delayed reaction by investors, the relation between monthly stock returns and lagged monthly oil price changes strengthens once we introduce lags of several trading days between monthly stock returns and lagged monthly oil price changes.
Applied researchers often test for the difference of the Sharpe ratios of two investment strategies. A very popular tool to this end is the test of Jobson and Korkie (1981), which has been corrected by Memmel (2003). Unfortunately, this test is not valid when returns have tails heavier than the normal distribution or are of time series nature. Instead, we propose the use of robust inference methods. In particular, we suggest to construct a studentized time series bootstrap confidence interval for the difference of the Sharpe ratios and to declare the two ratios different if zero is not contained in the obtained interval. This approach has the advantage that one can simply resample from the observed data as opposed to some null-restricted data. A simulation study demonstrates the improved finite
sample performance compared to existing methods. In addition, two applications to real data are provided.
Theories such as Merton [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510] predict a positive relation between idiosyncratic risk and expected return when investors do not diversify their portfolio. Ang, Hodrick, Xing, and Zhang [2006. The cross-section of volatility and expected returns. Journal of Finance 61, 259–299], however, find that monthly stock returns are negatively related to the one-month lagged idiosyncratic volatilities. I show that idiosyncratic volatilities are time-varying and thus, their findings should not be used to imply the relation between idiosyncratic risk and expected return. Using the exponential GARCH models to estimate expected idiosyncratic volatilities, I find a significantly positive relation between the estimated conditional idiosyncratic volatilities and expected returns. Further evidence suggests that Ang et al.'s findings are largely explained by the return reversal of a subset of small stocks with high idiosyncratic volatilities.
Estimates of the cost of equity for industries are imprecise. Standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993). These large standard errors are the result of(i) uncertainty about true factor risk premiums and (ii) imp ecise estimates of the loadings of industries on the risk factors. Estimates of the cost of equity for firms and projects are surely even less precise.