Divesting Fossil Fuels: The Implications for Investment Portfolios

Trinks, Arjan and Scholtens, Bert and Mulder, Machiel and Dam, Lammertjan (2017): Divesting Fossil Fuels: The Implications for Investment Portfolios.

Abstract

Fossil fuel divestment campaigns urge investors to sell their stakes in companies that supply coal, oil, and gas. However, avoiding investments in such companies can be expected to impose a financial cost on the investor because of reduced opportunities for portfolio diversification. We compare the risk-adjusted return performance of investment portfolios with and without fossil fuel companies over the period 1927-2015. Contrary to theoretical expectations, we find that fossil-free investing does not seem to impair financial performance. These findings can be explained by the fact that fossil fuel company portfolios do not generate above-market performance and provide relatively limited diversification benefits. Significant performance impacts of a divestment strategy, however, are observed over short time frames and when applying divestment to less diversified investment portfolios.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fossil Fuel Divestment, Socially Responsible Investing, Portfolio Performance, Risk-adjusted returns, Market Capitalization, GARCH
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply ; Prices

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