Divest from the Carbon Bubble? Reviewing the Implications and Limitations of Fossil Fuel Divestment for Institutional Investors

Justin Ritchie () and Hadi Dowlatabadi ()
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Justin Ritchie: Institute for Resources, Environment and Sustainability, University of British Columbia 2202 Main Mall, Vancouver, BC V6T 1Z4, Canada
Hadi Dowlatabadi: Institute for Resources, Environment and Sustainability, University of British Columbia 2202 Main Mall, Vancouver, BC V6T 1Z4, Canada, http://blogs.ubc.ca/dowlatabadi/welcome/

Review of Economics & Finance, 2015, vol. 5, 59-80

Abstract: 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.

Keywords: Green investing; Climate change; Carbon bubble; Fossil fuel divestment; Low carbon economy; Financed emissions; Decarbonized portfolio; Unburnable carbon; Oil and gas equities; Stranded assets (search for similar items in EconPapers)
JEL-codes: G00 Q42 Q43 Q50 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (18)

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