The Impact of Divestment Announcements on the Share Price of Fossil Fuel Stocks

Abstract

Several prominent institutional investors concerned about climate change have announced their intention or have divested from fossil fuel shares, to limit their exposure to the industry. The act of fossil fuel divestment may directly depress share prices or stigmatize the industry’s reputation, resulting in lower share value. While there has been considerable research conducted on the performance of the fossil fuel industry, there is not yet any empirical evidence that divestment announcements influence share prices. Adopting an event study methodology, this study measures abnormal deviations in stock prices of the top 200 global oil, gas, and coal companies by proven reserves, on days of prominent divestment announcements. Events are analyzed independently and in aggregate. The results make several notable contributions. While many events experienced short-term negative abnormal returns around the event day, the effects of events were more pronounced over longer event windows following the New York Climate March, suggesting a shift in investor perception. The results also find that divestment announcements related to campaigns, pledges, and endorsements all have a significant effect over the short-term event window. Finally, the results control for the general underperformance of the industry over the estimation window, attesting that the price change is caused by divestment announcements. Several robustness tests using alternate expected returns models and statistical tests were conducted to ensure the accuracy of the result. Overall, this study finds that divestment announcements decrease the share price of the fossil fuel companies, and thus, we conclude that ‘divestors’ can influence the share price of their target companies. Theoretically, the result adds new knowledge regarding the efficacy of the efficient market hypothesis in relation to divestment.

Doing well by doing good with the performance of United Nations Global Compact Climate Change Champions

“…In line with the findings of the divestment of fossil fuels firms and SRI literature (Dordi and Weber, 2019;Henriques and Sadorsky, 2018;Plantinga and Scholtens, 2021;Trinks et al, 2018), we find that UNGC-CCC firms in of themselves do not reward or penalize investor's performance. However, after joining UNGC, these firms show a positive effect.…”

“…Lee et al (2015) find a negative impact of climate change on firm value. Studies on market performance of portfolios that divested fossil fuels and utilities firms are based on this first generation of negative screening SRI strategy (Dordi and Weber, 2019;Henriques and Sadorsky, 2018;Plantinga and Scholtens, 2021;Trinks et al, 2018). Generally, these studies show no decrease in risk adjusted return performance.…”

Transforming Socially Responsible Investment: Lessons from Environmental Justice

“…As predicted by critiques of divestment from financial theory (Knoll, 2016 ), without a critical mass of divestors in South Africa’s large economy, divested stocks were quickly bought up by other members of a deep investor pool, resulting in little or no drop in the price of the stocks themselves (Kaempfer et al, 1987 ). Similarly, little effect on the fossil fuel industry has been observed because of divestment—though some short-term impacts have been demonstrated (Death, 2019 ; Dordi & Weber, 2019 ; Trinks et al, 2017 ).…”

Dampak Pengumuman Penurunan Harga BBM Terhadap Abnormal Return Pada Perusahaan Yang Tergabung Dalam Idx30

“…Penelitain dari (Dordi & Weber, 2019) menemukan bahwa pengumuman divestasi menurunkan harga saham perusahaan bahan bakar fosil, sehingga 'divestor' dapat mempengaruhi harga saham perusahaan target mereka. (Dananjaya, 2020) menemukan bahwa Penetapan Perpres Poin 55 Tahun 2019 terdapat perbedaan rata-rata Abnormal return negatif sebelum dan sesudah peristiwa.…”