The impact of fossil fuel divestments and energy transitions on mutual funds performance

Abstract

• Fossil fuel divestments are an important medium to foster low energy transitions. • The financial benefits emerging from such divestitures can incentivize investors. • We assess the comparative performance of fossil and non-fossil fuel investment funds. • Results show no difference between the risk-adjusted performance of the two types. • Results imply that investors can opt for low-carbon firms. Fossil fuel divestments are increasingly becoming an important medium to foster smooth energy transitions, particularly to sources that can be considered as pro- environment. Ultimately, the financial benefits emerging from such divestitures can incentivize investors. Therefore, following the same context, this paper assesses the comparative performance of 4712 fossil, and non-fossil fuel investment funds of the Eurozone, over a span of eleven years. Our findings show that there is no difference between the risk-adjusted performances of the two categories. This suggests that the fossil fuel investment style does not yield any incremental benefit for the investors. We have also documented that the performance tends to improve when the funds have rebalanced their portfolios, in order to transition from high emission companies to cleaner firms. Moreover, the results in this regard also remained robust for various specifications of performance. Our findings thus imply that investors can opt for low-carbon firms, without compromising on their investment targets and bottom lines.