Voice Through Divestment

A common criticism of divestment is that not only it has little financial impact as there are too many willing buyers on the other side of the trade, but it also jettisons responsible investors’ voting power. Therefore, engagement is considered a better approach to addressing environmental, social and governance (ESG) issues (Broccardo, Hart, and Zingales 2020; Heinkel, Kraus, and Zechner 2001).

In our new paper, we argue that divestment is a form of voice when it contributes to change social preferences. Divestment pledges are statements of disapproval echoed through social media and the press, heard by policy makers, customers, employees, and boards. We show how the Fossil Free divestment movement has a much larger impact than is reflected in the reduction in shares held by responsible investors. Divestment pledges that went viral have depressed share prices of all high carbon emitters, including those with no significant divestment. By stigmatising target companies, divestment campaigns have increased reputation and stranded asset risks. The impact of fossil fuel divestment movement is further reflected in the net-zero commitments of many countries, regions, cities, and companies, which pose additional risks to investing in high-carbon emitters, making it rational for risk averse investors to decarbonize portfolios.

The case of Ireland illustrates the broader significance of divestment pledges. The Republic of Ireland was one of the first countries to divest from fossil fuel companies in 2018. After pressure from educational and faith-based organizations, on July 12, 2018 the Irish parliament adopted the Fossil Fuel Divestment Act that instructed the Irish Strategic Investment Fund (ISIF) to fully divest from companies that derive more than 20% of their revenue from fossil fuels. At the time, ISIF had positions in 38 fossil fuel companies with a portfolio value of Euro 72 million. The shares were sold in December 2018 and in early January 2019 and the two announcements went viral on Twitter. The divested amounts were negligible when compared to the market capitalization of fossil fuel majors. Yet, there were negative abnormal returns of -3.4% and -4.1% for the 40 U.S. companies with the largest coal, oil, and gas reserves, summing up to losses of 31 billion and 21 billion dollars over a seven-day window around the events. Moreover, in 2020 the country passed a law committing to net-zero by 2050 that will affect all carbon emitters, not just fossil fuel companies. Accordingly, ISIF has committed to decarbonize its portfolio by 50% by 2025. Ireland’s fossil fuel divestment decision was a principle-based decision and pushed the country’s net-zero commitment. The decarbonization decision was a risk-based decision and reflects the new social and political environment. The Irish example illustrates the effectiveness of voice through divestment.

Our paper reveals that Ireland is no isolated case. Our empirical analysis proceeds as follows. We begin by describing the origin and the developments of the Fossil Free divestment movement and by explaining how the movement can be better understood through the lens of an economic narrative (Shiller, 2017). We then document the growth of the Fossil Free divestment movement and its accompanying narrative on Twitter. First, we report the Twitter handles associated with the movement and descriptive statistics on tweets, hashtags, and followers. Second, we perform basic network analysis that treats the movement’s Twitter handles as nodes. Third, we present a time series of the movement’s Tweet volumes. After, we further analyze the Fossil Free divestment campaigns using Twitter data: we track the pledges from divesting institutions and then we measure their “virality” on the social media.

We next turn to conduct an event study to test if viral tweets associated with divestment campaigns and pledges had an impact on stock returns. We examine the impact of viral divestment campaigns on stock returns of three different groups: (1) the Carbon Underground 200 (CU 200) companies that were specifically targeted by the Fossil Free divestment movement; (2) fossil fuel companies not included in the CU 200 list; and (3) high carbon emitting companies in other sectors, such as cement or airline companies. Our results show significant negative cumulative average abnormal returns (CAAR) around viral divestment pledges for all the three groups. The largest negative CAARs are for group (1), the CU200 companies, amounting to a -0.9% loss for a three-day event window (for US companies), which corresponds to market value losses of 87 billion dollars in total (over the 25 most viral days). However, we observe negative and significant CAARs (-0.2% in a three-day event window) also for group (3), other high carbon emitters, which suggests a broader effect from the divestment campaign. Our general finding shows that there is more to the prevalent finance hypothesis that divestment primarily operates through selling pressure on stock prices. The effects of divestment are far broader, also shifting social preferences and, in turn, increasing transition risk for all high-carbon emitters.

Finally, we investigate whether viral divestment pledges are a lead indicator for credible net-zero commitments from cities, regions, companies, and countries. To test the lead indicator hypothesis, we constructed a database of net-zero commitments using data from Net Zero Tracker (NZT) and then we match it to our divestment pledges database using the geographic location of the divesting institutions. Our findings show a statistically significant correlation between the geographic location of the divesting institutions and net zero-commitments from entities in the same jurisdiction.

In conclusion, the Fossil Free divestment movement has been an effective form of “voice,” driving changes in social preferences through its mass-media coverage and targeting of prominent institutions. The paper presents evidence that viral divestment pledges increased the carbon premium for all high-level emitters and have preceded net-zero commitments from divested entities and countries where the divesting institutions have social influence. Voice through divestment could be effective for other environmental, social or governance issues as well, but only if it is linked to a broader social movement around a compelling economic narrative.

Our paper is available for downloading here.