Recently, a number of institutional investors, including Caisse de dépôt et placement du Québec in Canada and Norway’s sovereign wealth fund, announced their intent to reduce their exposure in investments linked to fossil fuels.
The announcements show that investors withdraw their funds to either mitigate financial risks or for ethical reasons. But the question remains whether divestment and divestment announcements have a financial impact on the share price of fossil fuel companies.
We’re a team of researchers at the School of Environment, Enterprise and Development (SEED) at the University of Waterloo. We recently conducted an analysis that suggests divestment announcements have a statistically significant negative impact on the price of fossil fuel shares. Our study aggregates the impact of more than 20 announcements across 200 publicly traded fossil fuel companies.
The results suggest that share prices dropped on the days that institutional investors announced they were divesting of fossil fuels.
We’ve concluded that investors, and the market as a whole, perceive divestment as integral to the long-term valuation of the fossil fuel industry. Lower share prices increase the costs of capital for the fossil fuel industry, which in turn decreases their ability to explore new resources and exploit proven resources.
And if the majority of proven reserves remains in the ground, we may be able to meet our climate change goals.
Reserves must stay grounded
The continued exploitation of fossil fuel reserves alone has the potential to increase greenhouse gases and global temperature well beyond the 2°C threshold required to prevent the worst effects of climate change.
To achieve the 2°C target, however, no more than one-fifth of the current proven fossil fuel reserves can be burned.
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