Introduction

This study explores the financial and carbon-related effects of fossil fuel divestment strategies and compares them with the benchmark. The Canadian stock index TSX 260 for 5 years interval between 2011 and 2015 serves as the empirical analysis source. Empirical evidence shows that strategic divestment is more than just an ethical approach to investment. It can help to manage climate change-related, financial risks and at the same time, mitigate carbon footprint exposure.

Literature review

Many empirical studies on socially responsible investing (SRI) report mixed results. Some suggest it performs similarly to conventional investments, while others indicate lower financial performance. This report uses pesticide divestment strategies such as divesting from fossil fuel stocks and compares them to other divestment strategies. The results of this study demonstrate that divestment can increase risk-adjusted returns while also improving the carbon intensity of investor portfolios.

Methodology

This study uses the Carhart four-factor model, which analyses the financial performance of divestment portfolios. It compares their carbon intensity and addresses the connection between the two factors. The method applied involves calculating the carbon intensity of different investment strategies using carbon footprinting and analysing the fossil fuel exposure of each strategy.

Results

The study results show that fossil fuel divestment can help manage financial risks associated with climate change and reduce carbon exposure in portfolios compared with benchmarks. Stricter divestment strategies, excluding more fossil fuel stocks, result in higher risk-adjusted returns and less carbon intensity than those excluding fewer stocks. The study concludes that divestment is not only an ethical strategy but also an effective financial strategy.

Recommendations

The financial impact of fossil fuel divestment is highly contentious. This study provides evidence for investors and institutional asset managers considering divestment as an approach to manage financial, climate-change-related risks and carbon intensity in their portfolios. Investors should consider their specific investment goals and risk tolerance when evaluating divestment strategies. Additionally, the study suggests that divesting from the fossil fuel industry increases risk-adjusted returns and helps mitigate climate change-related financial risks.