Policy Brief

PB 10/2021: Equity portfolio divestment leads to lower CO2 emissions

  • To achieve climate goals, financial flows must be redirected from climate-damaging to climate-friendly economic activities.
  • A key approach is divestment, i.e., the systematic sale of stocks of climate-damaging companies to decarbonize investment portfolios by private, institutional, and public investors.
  • Theoretical research suggests a link between divestment, lower stock prices, and lower CO2 emissions.
  • A recently published study is the first to empirically analyze the effects of divestments by European and US equity funds on the share prices and CO2 emissions of companies.
  • The result is that large-scale divestments by funds have reduced the share prices of climate-damaging companies by an average of about 7%.
  • These declining prices led the affected companies to reduce their CO2 emissions by an average of around 10% compared to control group.
  • Therefore, private, institutional, and public investors may use divestment to effectively mitigate climate change.

Video (on YouTube): Summary of key findings

Original publication in the Journal of Banking & Finance: “The effects of mutual fund decarbonization on stock prices and carbon emissions”

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