The financial impact of divestment from fossil fuels
Auke Plantinga () and
Bert Scholtens ()
No 16005-EEF, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)
Divesting from fossil companies has been put forward as a means to address climate change. We study the impact of such divesting on investment portfolio performance. To this extent, we systematically investigate the investment performance of portfolios with and without fossil fuel company stocks. We investigate mispricing in stock returns and test for the impact of (reduced) diversification by excluding fossil fuel companies from the portfolio. While the fossil fuel industry outperforms other industries based on returns only, we show that this is due to the higher systematic risk of this industry, as there is no statistically significant difference between the riskadjusted performance of stocks in the fossil fuel sample and the non-fossil fuel sample. We conclude that divesting from fossil fuels does not have a statistically significant impact on overall portfolio performance, and only a very marginal impact on the utility derived from such portfolios. The policy implication is that investors can divest from fossil fuels without significantly hurting their financial performance.
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