A common criticism of divestment is that not only does it have little financial impact because there are too many willing buyers on the other side of the market, but it also gives up the voting power of responsible investors. Therefore, engagement is considered a better approach to address 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 helps change social preferences. Divestment pledges are statements of disapproval echoed through social media and the press, heard by policymakers, customers, employees and boards of directors. We show how Fossil Free’s divestment move has a far greater impact than the reduction in stock held by responsible investors reflects. Divestment promises that have gone viral have depressed share prices of all major carbon emitters, including those that have not undergone a significant divestment. By stigmatizing target companies, divestment campaigns have increased reputational and asset tie-up risks. The impact of the fossil fuel divestment movement is also reflected in the net zero commitments of many countries, regions, cities and companies, which pose additional risks to investing in high carbon emitters, making rational for risk-averse investors to decarbonize portfolios.
The case of Ireland illustrates the wider importance of divestment promises. 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 passed the Divestiture Act. Fossil Fuels which has instructed the Irish Strategic Investment Fund (ISIF) to fully divest from companies that derive more than 20% of their revenues from fossil fuels. At the time, ISIF held positions in 38 fossil fuel companies with a portfolio value of €72 million. The shares were sold in December 2018 and early January 2019 and both announcements went viral on Twitter. The amounts divested were negligible compared to the market capitalization of the fossil fuel majors. Yet there were negative abnormal returns of -3.4% and -4.1% for the 40 US companies with the largest coal, oil and gas reserves, summing up to losses of 31 billion and $21 billion over a seven-day window around the events. Additionally, in 2020, the country passed legislation committing to net zero by 2050 that will affect all carbon emitters, not just fossil fuel companies. As a result, ISIF has committed to decarbonising its portfolio by 50% by 2025. Ireland’s decision to divest from fossil fuels was a principled decision and reinforced the net zero commitment of the country. 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 article reveals that Ireland is not an isolated case. Our empirical analysis proceeds as follows. We begin by describing the origin and developments of the Fossil Free divestment movement and explaining how the movement can best be understood through the lens of an economic narrative (Shiller, 2017). We then document the growth of the Fossil Free divestment movement and the accompanying narrative on Twitter. First, we report Twitter IDs associated with the movement and descriptive statistics about tweets, hashtags, and followers. Second, we perform basic network analysis that treats movement Twitter IDs as nodes. Third, we present a time series of the movement’s Tweet volumes. Next, we analyze Fossil Free’s divestment campaigns in more detail using Twitter data: we track the pledges of institutions that are divesting, then we measure their “virality” on social media.
We then move on to conducting an event study to test whether viral tweets associated with divestment campaigns and pledges had an impact on stock market returns. We examine the impact of viral divestment campaigns on the stock returns of three different groups: (1) the Carbon Underground 200 (CU 200) companies that have been specifically targeted by the Fossil Free divestment movement; (2) fossil fuel companies not included in the CU 200 list; and (3) carbon-intensive companies in other sectors, such as cement or airlines. Our results show significant negative cumulative average abnormal returns (CAAR) around viral divestment pledges for all three groups. The largest negative CAARs relate to the group (1), CU200 companies, representing a loss of -0.9% for a three-day event window (for US companies), which corresponds to impairments market share of $87 billion in total (over the most viral 25 days). However, we observe negative and significant CAARs (-0.2% in a three-day event window) also for group (3), other high carbon emitters, suggesting a broader effect of the divestment. Our general conclusion shows that there is more to the widespread financial assumption that divestment occurs primarily through selling pressure on stock prices. The effects of divestment are much broader, also changing social preferences and, in turn, increasing transition risk for all major carbon emitters.
Finally, we examine whether viral divestment pledges are a leading indicator of credible net zero pledges by cities, regions, companies, and countries. To test the main indicator hypothesis, we built a database of net zero commitments using data from Net Zero Tracker (NZT) and then compared it to our database of net zero commitments. divestment promises using the geographical location of the ceding institutions. Our results show a statistically significant correlation between the geographical location of divested institutions and zero net liabilities of 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 media coverage and targeting of prominent institutions. The paper presents evidence that viral divestment pledges increased the carbon premium for all high-profile issuers and predated net zero commitments from divested entities and countries where ceding institutions have social influence. Voice through divestment could also be effective for other environmental, social or governance issues, but only if linked to a broader social movement around a compelling economic narrative.
Our article is available for download here.