Investor Attention to Fossil Fuel Divestment Movement and Stock Returns.

• Author: Ouadghiri, Imane El

1. INTRODUCTION

   The fossil fuel divestment (FFD) movement aims to urge investors--particularly institutional investors--to divest their holdings of investment in firms that extract coal, gas, and oil. As nearly two-thirds of carbon dioxide (C[O.sub.2]) emissions come from the burning of fossil fuels, (1) the proponents of this social movement posit that reducing capital flows to the fossil fuel sector could help address climate change (Belfiori, 2021).

   The FFD movement was born at U.S. universities in 2010 and has become increasingly popular over time. For instance, the number of institutions (including pension funds, large banks, faith-based organizations, and philanthropic foundations) committed to divestment from fossil fuel assets rose from 50 in 2013 to 1,225 in 2020, representing more than $14 trillion in assets. (2) Historically, the FFD movement has grown faster than any other previous divestment movements including those against tobacco industry and apartheid policies in South Africa (e.g., Vaughan, 2014).

   While many prominent financial institutions have made public statements about embracing the FFD movement, in reality, few of them are actively divesting assets related to the fossil fuel industry. For instance, according to a recent report from several climate organizations, of the 60 world's largest banks, 33 have increased their supply of financial capital to the fossil fuel industry between 2016 and 2020 (Kirsch et al., 2021). In the same vein, the CEO of BlackRock, one of the world's largest investment firms, had stated in 2020 that he is taking measures to "exit investments that present a high sustainability-related risk, such as thermal coal producers and launch new investment products that screen fossil fuels". (3) However, one year after this statement, BlackRock is still massively investing in firms producing coal for a total of $85bn assets under management (Cuvelier et al., 2021).

   In fact, even though the real amounts divested from fossil fuel companies are still moderate, the FFD movement might have side effects such as the stigmatization of the fossil fuel industry (Ferns et al., 2021). As a symbolic tool of stigmatization, the FFD movement might pressure fossil fuel-related firms to reduce their carbon emissions and the government to enact new policy changes and regulations against the extraction of fossil fuel-based energy sources (e.g., Byrd and Cooperman, 2017). This may drive a large number of investors to revise downwards their subjective probability of future net cash flows which may, in turn, lead to a revision of their estimates of the intrinsic value of stigmatized firms. Another potential consequence of this social movement is the reduction of the investor demand for fossil fuel-related stocks that might drive down their stock returns.

   Notwithstanding the expansion of the FFD movement worldwide, we still have limited knowledge of their potential implications for fossil fuel-related stocks. In particular, we do not know whether the FFD movement, as a stigmatization process, affects returns on fossil fuel stocks. In this study, we shed light on this question by examining how investor attention to the FFD phenomenon might affect the prices of fossil fuel-related stocks.

   Existing research on FFD is relatively scarce, and the majority of the available papers investigate the financial consequences of applying a FFD strategy--a portfolio strategy that simply excludes fossil fuel-related stocks--from the investor point of view (e.g., Henriques and Sadorsky, 2017; Trinks et al., 2018; Plantinga and Scholtens, 2021). They document a marginal difference in risk-adjusted returns between portfolios with and without fossil fuel-related stocks. However, it is not because a screening strategy which consists in excluding fossil fuel stocks from the portfolio has no significant impact on the financial performance of that portfolio, that fossil fuel stocks have not been affected by the FFD movement. As such, these studies do not advance our understanding of the financial effects of the FFD movement from the perspective of the fossil fuel companies. In particular, they do not explicitly explore whether and to what extent the FFD movement affects the stock returns on fossil fuel companies. Thus, our paper contributes to this strand of literature by being the first to explicitly investigate the potential consequence of this social movement on stock prices of companies targeted by this movement.

   As with all social movements, it is arguable that the strength of the FFD movement depends, at least in part, on the investor attention it generates. Therefore, to address our main question, we empirically assess the effect of investor attention to FFD on the weekly excess stock returns for U.S. firms that supply coal, gas, or oil in comparison with U.S. non-fossil fuel firms. In line with the literature on investor attention (e.g., Cziraki et al., 2021; Focke et al., 2020), we use three complementary indicators of investor attention to the FFD movement: (1) the U.S. weekly Google Search Volume Index on the topic "fossil fuel divestment," (2) the U.S. weekly media coverage of FFD, and (3) the number of weekly visits to the Wikipedia page on "fossil fuel divestment."

   Contrary to what might be potentially expected by the FFD campaigners, our econometric estimations report a positive relationship between investor attention to FFD and the excess returns on fossil fuel-related stocks from U.S. firms. This positive effect is remarkably robust even after we control for firm-level and energy-level variables as well as for widely accepted risk factors, such as market, size, value, and momentum. This finding also holds when we consider alternative investor attention proxies and alternative empirical approaches including difference-in-differences analyses.

   We advance one possible mechanism that would explain the positive effect of investor attention to the FFD movement on the returns on fossil fuel-related stocks. Specifically, we show that increased attention to the FFD movement leads investors to follow fossil fuel-related stocks more closely. Therefore, profit-motivated traders might view fossil fuel-related stocks as structurally undervalued and find it financially beneficial to allocate resources to those stocks. In line with this explanation, our sample data reveal indications of that potential undervaluation. Indeed, we find that, on average, fossil fuel-related U.S. stocks did worse than U.S. non-fossil fuel stocks in terms of their mean returns and standard deviation of returns, and they have lower averaged price-to-book ratios over the period 2012-2020. (4) These results are consistent with the idea that the fossil fuel industry is an industry neglected by a portion of stock market participants such as sin industries (e.g., gambling, tobacco, or alcohol). As such, previous studies on sin industry (e.g., Hong and Kacperczyk, 2009; Fabozzi et al., 2008) reveal for instance that sin stocks are undervalued and experience higher expected returns than comparables. They explain this result by societal norms leading an important portion of investors to neglect sin stocks, making them cheaper than other stocks, and thus depressed relative to their fundamental values.

   Our study makes several important contributions to the literature. First, we contribute to the narrow literature on the effect of social movements, such as activist protests (e.g., King and Soule, 2007) and divestment campaigns in reaction to apartheid policies in South Africa (e.g., Wright and Ferris, 1997), on the market value of targeted firms. We analyze a novel social movement--the movement to divest from fossil fuels--and reveal that it positively influences the returns on fossil fuel-related stocks.

   Second, fossil fuel-related stocks, to a certain extent, are comparable to "sin" stocks, i.e., those related to gambling, tobacco, or alcohol. This type of stock might be stigmatized because of potential reluctance by investors to finance companies that promote human vices or that make profits by exacerbating climate change. Therefore, our research expands the literature that examines the financial performance of assets neglected by some stock market participants (e.g., Fabozzi et al., 2008; Hong and Kacperczyk, 2009; Colonnello et al., 2019).

   Third, our empirical analyses reveal that investor attention to the FFD movement has become an important driver of the financial performance of fossil fuel-related stocks. This result adds to the literature on fossil fuel industry stocks that examines the determinants of their financial performance. In particular, this body of literature points out the importance of changes in energy prices (e.g., Arouri, 2011; Broadstock et al., 2016; Dhaoui et al., 2020; Rahman and Serletis, 2019) and social as well as environmental scores (Brzeszczyxski et al., 2019) in explaining returns and volatility of energy-related stocks.

   Finally, we extend the emerging literature that analyzes how investor attention to environmental issues, such as natural disasters (e.g., Kollias and Papadamou, 2016), climate change (e.g., El Ouadghiri et al., 2021), global warming (e.g., Choi et al., 2020), and climate-related policy events (e.g., Monasterolo and De Angelis, 2020), influence returns on sustainable stocks.

   The paper proceeds as follows. Section 2 presents the data and summary statistics. Section 3 describes the methodology. Section 4 provides and discusses the empirical results. Section 5 concludes the article.

2. DATA

   We use various sources to examine the influence of investor attention to FFD on the stock returns for U.S. firms that supply coal, gas, or oil in comparison with U.S. non-fossil fuel firms. In this section, we describe the datasets we use and the variables we consider in our econometric analyses.

   2.1. Investor Attention to the Fossil Fuel Divestment Movement

   We use the U.S. weekly Google Search Volume...