Academics Auke Plantinga and Bert Scholtens from the University of Groningen have published a new paper examining the financial impacts of fossil fuel divestment.
They studied stock returns from nearly 7,000 companies, over a 40 year period, in order to examine the exposure to risk from investing in fossil fuel companies. They also looked at portfolio performance with and without fossil fuel stock, and the financial implications of different pathways for an energy transition.
Some of their key findings included:
- Returns from fossil fuel stocks are not significantly different than from other types of stocks. Although there are higher absolute returns over time from fossil fuel stocks, this is due to a higher level of risk.
- Divestment from fossil fuels has no significant impact on the risk or returns of a well diversified portfolio.
- Regardless of the type of energy transition that occurs, the tested scenarios show no significant difference between portfolios with or without fossil fuel stocks
Based on the empirical results of their study, Plantinga & Scholtens present several conclusions and policy recommendations:
- Fossil fuel divestment does not conflict with the fiduciary duty of institutional investors, such as pension funds.
- Governments should not rely on the fossil fuel industry to finance the energy transition. In a “smooth” energy transition, fossil fuel companies will become unprofitable, and lack the funds to invest in renewable energy.
- Governments should expect to play an active role in financing the energy transition.
- Divestment is not the only option for investors, and it is not sufficient alone to address climate change, however, it remains important to change mindsets towards reducing fossil fuel use.
Read the full article here.