Abstract
We examine how the announcement of several large institutional investors to divest from fossil fuel stocks affects the systematic risk exposures of an equity portfolio. We find that fossil fuel stocks exhibit a highly significant positive exposure toward changes in the oil price. Consistent with this result, we observe that fossil fuel stocks outperform strongly during oil bull markets and underperform strongly during oil bear markets. For bull and bear scenarios concerning the energy sector itself, we find even more pronounced results. Within the equity market, the materials sector appears to offer the best hedge for fossil fuel stocks, but this sector also tends to have a high carbon footprint and environmental issues. Oil futures could be a direct hedge, but may be even less acceptable to investors who do not want fossil fuel exposure. Altogether, we conclude that excluding fossil fuel stocks comes down to an active bet against the oil price, which makes a portfolio vulnerable to significant underperformance in the short and medium term.
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