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Does disinvestment from fossil fuels reduce the financial performance of responsible sovereign wealth funds?

Author

Listed:
  • Khalil Al Ayoubi

    (IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - Université Gustave Eiffel)

  • Geoffroy Enjolras

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UGA - Université Grenoble Alpes)

Abstract
This paper examines the effects of negative screening on the financial performance of sovereign wealth funds (SWFs). SWFs have been under pressure to invest responsibly and divest from fossil fuel firms by their respective governments and citizens. Yet, such a strategy may reduce the financial performance of these funds. This study examines the extent to which excluding fossil fuel firms from SWF portfolios in order to comply with ethical standards reduces their financial performance. By using asset pricing models, namely the capital asset pricing model and the Carhart four-factor model, we find that excluding firms has a statistically insignificant impact on the financial performance of SWFs. We document similar results regarding the performance of SWF fossil fuel portfolios, suggesting that fossil fuel divestment will not impact SWF performance. We also test for differences between “extraction and production” and “refining and integrated” fossil fuel firms to explain why some SWFs divest only from extraction and production firms. Our findings indicate that, to some extent, extraction and production companies generate lower returns. We conclude that socially responsible investment, by negative screening of fossil fuel firms does not reduce SWF performance.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Khalil Al Ayoubi & Geoffroy Enjolras, 2022. "Does disinvestment from fossil fuels reduce the financial performance of responsible sovereign wealth funds?," Post-Print hal-03982863, HAL.
    • Handle: RePEc:hal:journl:hal-03982863
    DOI: 10.1016/j.mulfin.2022.100731
    Note: View the original document on HAL open archive server: https://hal.science/hal-03982863
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    Cited by:

    1. Farah Durani, 2024. "Time-varying Relationship between Fossil Fuel-Free Energy Indices and Economic Uncertainty: Global Evidence from Wavelet Coherence Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 14(1), pages 663-672, January.
    2. Gangi, Francesco & Mustilli, Mario & Varrone, Nicola & Graziano, Domenico, 2023. "Target firms’ characteristics and the effects of sovereign wealth funds’ investments: Does cultural context of SWFs matter?," Research in International Business and Finance, Elsevier, vol. 65(C).
    3. Tumala, Mohammed M. & Salisu, Afees & Nmadu, Yaaba B., 2023. "Climate change and fossil fuel prices: A GARCH-MIDAS analysis," Energy Economics, Elsevier, vol. 124(C).
    4. Rahat, Birjees & Nguyen, Pascal, 2022. "Risk-adjusted investment performance of green and black portfolios and impact of toxic divestments in emerging markets," Energy Economics, Elsevier, vol. 116(C).
    5. Leonardo STANLEY & Francisco CASTAÑEDA & Nassib SEGOVIA, 2024. "Sovereign Wealth Funds’ investments and climate change," CIRIEC Working Papers 2406, CIRIEC - Université de Liège.
    6. Balestra, Anna & Caruso, Raul & Di Domizio, Marco, 2024. "What explains the size of Sovereign Wealth Funds? A panel analysis (2008–2018)," Finance Research Letters, Elsevier, vol. 62(PB).

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    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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