Divestment and greenhouse gas emissions: an event-study analysis of university fossil fuel divestment announcements

ABSTRACT

An event-study analysis of U.S. university fossil fuel divestment announcements on public fossil fuel companies’ abnormal returns (AR) is used to estimate divestment’s impact on fossil fuel companies’ greenhouse gas (GHG) emissions. These ARs could affect the companies’ capital development, and subsequent GHG emissions. The event-study is paired with a probit regression analysis of annual fossil fuel companies’ Securities and Exchange Commission (SEC) filings, to ascertain whether divestment is viewed as a material risk to capital expansion. This analysis finds a statistically significant negative average AR for divestment announcements on event day negative one and a statistically insignificant three-day cumulative average AR. Furthermore, this study finds that a 1% decrease in the average or cumulative average AR is associated with a statistically significant increase in the probability that firms disclose divestment. Therefore, while the overall change in GHG emissions is still ambiguous, there may be evidence for divestment’s efficacy.

KEYWORDS:

• Divestment
• Socially responsible investing (SRI)
• Environmental Social Governance (ESG)
• Institutional investors
• Greenhouse gas emissions‌
• Impact investment

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The cost of capital represents the return a company needs to achieve in order to justify the cost of a capital project. (Hayes 2021)

2 While at first the Apartheid divestment was not driven for financial reasons, later on financial incentives for divesting increased (Meznar, Nigh, and Kwok 1994; Hunt, Weber, and Dordi 2016). However, as the FFD movement can still be considered in the beginning to middle of its lifespan, we can compare with the early Apartheid movement.

3 The final two events listed in Table 2, in July (University of Vermont) and October (University of Illinois), were unable to be included because the estimation windows needed to perform the Fama-French regressions to estimate the abnormal stock returns were not available.

4 10K annual filings are intended to provide the financial condition and performance of the company for an annual period, and are required for U.S. companies with securities trading in the U.S. by the SEC (“SEC.gov | Forms List.” 2021).

5 20-F annual reports are annual and transition reports of Foreign Private Issuers and are required for non-US and non-Canadian companies listed on the U.S. stock exchange (“SEC.gov | Forms List.” 2021).

6 40-F reports are required for Canadian companies with securities trading in the U.S., and are essentially the same as the 20-F annual reports (“SEC.gov | Forms List.” 2021).

7 The Naropa University press release is no longer available online, but was available during the time that research for this paper took place at: https://www.naropa.edu/media/pressreleases/press-2013/naropa-divests-from-fossil-fuels.php.