The Effects of Mutual Fund Decarbonization on Stock Prices and Carbon Emissions
64 Pages Posted: 22 Jun 2020 Last revised: 11 May 2021
Date Written: May 11, 2021
This study answers the question of whether mutual fund decarbonization affects stock prices of divested firms and if this contributes to the reduction of the carbon emissions of these firms. Using a new methodology to identify decarbonization trades in a comprehensive dataset of equity mutual fund holdings and firm-level carbon emissions, we calculate a metric of funds’ decarbonization sell pressure (DSP) on stocks. Controlling for endogeneity and selection bias, we find that high DSP sustainably pressures stock prices downwards. Furthermore, we find that divested firms experiencing a stock price decline subsequently reduce their carbon emissions compared to non-divested firms. This is consistent with well-known theoretical predictions. Various tested alternative explanations like shareholder intervention and financial selling pressure cannot diminish these results. Overall, our findings support the divestment movement’s hope that a critical mass of investors are able to reduce firms’ carbon emissions.
Keywords: Mutual funds, decarbonization, divestment, price pressure, carbon intensity, climate change, carbon emissions, impact investing
JEL Classification: G11, G12, G14, G23, Q51, Q54
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