Determinants of fossil fuel divestment in European pension funds

Florian Egli,David Schärer,Bjarne Steffen

doi:10.1016/j.ecolecon.2021.107237

Abstract

Divestment from fossil fuel companies could help align financial flows with climate targets and reduce the related risk exposure of investors. Yet, investors reach different conclusions whether to divest. In this article, we derive hypotheses for financial and non-financial divestment motives to explore the determinants of divestment. Using a newly compiled data set on the 1000 largest European pension funds, we find that 129, or 13%, of these funds, representing USD 2.6 trillion in assets under management (33%), have divested from fossil fuels. Most of these funds (n = 75, AUM = USD 2.1 trillion) have committed to divesting from coal only, while some have committed to divest from all fossil fuels (n = 16, AUM = USD 109 billion). We find that divestment is more likely among larger and publicly owned pension funds. Among privately owned pension funds, we find that open funds competing for clients are more likely to divest compared with company funds restricted to employees. Hence, we identify size, ownership and market competition as key determinants for divestment decisions. Furthermore, we find weaker evidence for sectoral differences (e.g., higher likelihood in financial sector), albeit independent of carbon intensities, and a positive effect of climate policy stringency.

Highlights

Runaway climate change imposes risks on the financial system, to which long-term investors like pension funds are exposed (Battiston et al, 2017)
The analysis of European pension funds shows that the het erogeneity in divestment strategies can be explained to a significant extent by observable pension fund characteristics such as size, owner ship, and type of beneficiary
We illustrate that several hypotheses derived from financial and non-financial motives are in line with the fossil fuel divestment decisions

Summary

Introduction

Runaway climate change imposes risks on the financial system, to which long-term investors like pension funds are exposed (Battiston et al, 2017). Investors use various risk-mitigation strategies, such as changing their capital allocations and engaging with the management of com panies that they invest in, as well as indirect measures, such as the public stigmatisation of a company's image (Kolbel et al, 2020). A common form of changing capital allocation is to withdraw funds from companies in the fossil fuel industry, often termed fossil fuel divestment. Some investors opt to invest freed-up funds in so-called ‘climate-posi tive’ companies, a strategy sometimes called divest-invest. In addition to these variations in scope, investors sometimes formulate divestments conditional on other interventions (e.g., direct engagement) turning out to be unsuccessful (Rempel and Gupta, 2020). We analyse these statements individually and categorise them according to their scope (see Fig. 1 below)

Methods

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Discussion

Conclusion