Does divestment work?

The success of fossil fuel divestment campaigns

In this paper, Becht et al. analyze the financial impact of the Go Fossil Free divestment movement which is defined as: “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 favor of climate-friendly alternatives.”
They use an event study to examine the impact of viral divestment campaigns on stock returns in four different groups of high CO2 emitting companies:

1. The Carbon Underground 200* (CU 200) companies which were specifically targeted by the Fossil Free divestment movement, saw a cumulative average abnormal returns (CAAR) decrease of -0.9% for the three-day event window. This implies that for the 25 days of the viral campaign, these companies experienced market value losses of 87 billion dollars in total.
2. Fossil fuel companies not included in the CU 200 list experienced similar decreases in CAAR as the above group.
3. High carbon-emitting companies in other sectors, such as cement or airline companies also experienced a decrease in CAAR of 0.2% for the three-day event window.
4. A placebo group of best-in-class CDP Climate A-List companies (designated by the non-profit CDP organization to be at the apex of environmental leadership) were not unaffected.

Divestment has a much larger impact than is reflected in the reduction in shares held by responsible investors because it increases reputation and regulatory risk for fossil fuel companies and high carbon emitters; its effect goes far beyond the negative price pressure on the stock.

Voice Through Divestment
Authors: Marco Becht, Anete Pajuste, Anna Toniolo
From Solvay Brussels School of Economics and Management, Stockholm School of Economics, Harvard University

Divestment policies of banks

Green and Vallee study the effectiveness of coal lending bans by banks around the world. They develop a comprehensive algorithm to capture the rich heterogeneity and multi-dimensionality of the divestment policies announced by banks across the world and then construct a shift-share instrument that captures the heterogeneous exposure of coal firms to bank divestment policies. The authors use this instrument to estimate the causal effects of the divestment policies on borrower financial and real outcomes. Their findings include:

• Most banks active in commercial bank lending have been implementing coal divestment policies.
• There is evidence consistent with a significant reduction in the bank borrowing of firms that are in a banking relationship with banks implementing a strong divestment policy. Substitution between divesting lenders and non-divesting ones, and into bond and equity markets, an important concern over the effectiveness of such policy, appears to be limited.
• A large sample of coal-fired power plants, those with parent companies more exposed to bank divestment policies are more likely to be decommissioned in the years following the 2015 Paris Climate Agreement.

Can Finance Save the World? Measurement and Effects of Coal Divestment Policies by Banks
Authors: Daniel Green, Boris Vallee
From: Harvard Business School