The Effects of Mutual Fund Decarbonization on Stock Prices and Carbon Emissions
1 Pages Posted: 22 Jun 2020 Last revised: 8 Jul 2022
Date Written: October 29, 2021
This study seeks to determine whether mutual fund decarbonization affects the stock prices of divested firms and contributes to the reduction of these firms’ carbon emissions. Using a new methodology to identify equity mutual funds’ decarbonization trades, we calculate a metric of decarbonization selling 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 finding is consistent with theoretical predictions. Various tested alternative explanations, such as 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 is able to reduce 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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