Does disinvestment from fossil fuels reduce the financial performance of responsible sovereign wealth funds?

Khalil Al Ayoubi and Geoffroy Enjolras
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Khalil Al Ayoubi: IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel

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Abstract: This paper examines the effects of negative screening on the financial performance of sovereign wealth funds (SWFs). SWFs have been under pressure to invest responsibly and divest from fossil fuel firms by their respective governments and citizens. Yet, such a strategy may reduce the financial performance of these funds. This study examines the extent to which excluding fossil fuel firms from SWF portfolios in order to comply with ethical standards reduces their financial performance. By using asset pricing models, namely the capital asset pricing model and the Carhart four-factor model, we find that excluding firms has a statistically insignificant impact on the financial performance of SWFs. We document similar results regarding the performance of SWF fossil fuel portfolios, suggesting that fossil fuel divestment will not impact SWF performance. We also test for differences between "extraction and production" and "refining and integrated" fossil fuel firms to explain why some SWFs divest only from extraction and production firms. Our findings indicate that, to some extent, extraction and production companies generate lower returns. We conclude that socially responsible investment, by negative screening of fossil fuel firms does not reduce SWF performance.

Date: 2022-06
Note: View the original document on HAL open archive server: https://hal.science/hal-03982863v1
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Published in Journal of Multinational Financial Management, 2022, 64, pp.100731. ⟨10.1016/j.mulfin.2022.100731⟩

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Journal Article: Does disinvestment from fossil fuels reduce the financial performance of responsible sovereign wealth funds? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03982863

DOI: 10.1016/j.mulfin.2022.100731

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