Showing papers on "Divestment published in 2019"

Fossil fuel divestment and climate change : Reviewing contested arguments

Abstract: The strategy of fossil fuel divestment has attracted considerable attention in recent years, particularly in the press and social media. Spearheaded as a movement based on ethical principles, divestment has been suggested to play a potential role in shaping public opinion and policymaking on climate change. The growing size of the movement has prompted debate about the extent of its impact on fossil fuel companies and climate change mitigation efforts. This article investigates the potential effectiveness of the divestment movement according to the end goal of climate campaigners – to bring about a complete break from fossil fuels. We collect and qualify the key arguments as found mainly in the informal debate, and to a lesser extent in the academic literature. This will help readers to make an informed judgement that can contribute to a constructive debate about the effectiveness of divestment. We organize the literature into arguments for and against divestment, and explain how these relate to each other. In addition, we derive suggestions for further research on divestment.

Fossil Fuel Divestment Strategies: Financial and Carbon-Related Consequences:

Abstract: Fossil fuel divestment is discussed controversially with regard to its financial consequences and its effect on decarbonizing the economy. Theory and empirical studies suggest arguments for both fi...

The Impact of Divestment Announcements on the Share Price of Fossil Fuel Stocks

Abstract: Several prominent institutional investors concerned about climate change have announced their intention or have divested from fossil fuel shares, to limit their exposure to the industry. The act of fossil fuel divestment may directly depress share prices or stigmatize the industry’s reputation, resulting in lower share value. While there has been considerable research conducted on the performance of the fossil fuel industry, there is not yet any empirical evidence that divestment announcements influence share prices. Adopting an event study methodology, this study measures abnormal deviations in stock prices of the top 200 global oil, gas, and coal companies by proven reserves, on days of prominent divestment announcements. Events are analyzed independently and in aggregate. The results make several notable contributions. While many events experienced short-term negative abnormal returns around the event day, the effects of events were more pronounced over longer event windows following the New York Climate March, suggesting a shift in investor perception. The results also find that divestment announcements related to campaigns, pledges, and endorsements all have a significant effect over the short-term event window. Finally, the results control for the general underperformance of the industry over the estimation window, attesting that the price change is caused by divestment announcements. Several robustness tests using alternate expected returns models and statistical tests were conducted to ensure the accuracy of the result. Overall, this study finds that divestment announcements decrease the share price of the fossil fuel companies, and thus, we conclude that ‘divestors’ can influence the share price of their target companies. Theoretically, the result adds new knowledge regarding the efficacy of the efficient market hypothesis in relation to divestment.

Treasured trash? A consumer perspective on small Waste Electrical and Electronic Equipment (WEEE) divestment in Ireland

Abstract: Small Waste Electrical and Electronic Equipment (sWEEE) is a particularly problematic category of electronic waste. A growing body of research indicates that sWEEE tends to be either stockpiled or disposed of improperly (references). However, despite this, little attention has been given to the meanings people ascribe to their electronic and electrical possessions; meanings which continue to apply even when they are disused or broken. The purpose of this study was to generate insight into this area and to identify opportunities for intervention to increase sWEEE recycling. A quasi-ethnographic approach was used to investigate sWEEE disposal behaviour from the perspective of Irish consumers. The rationale for this approach was the need to reconcile the policy perspective on sWEEE with the subjective experiences and interpretations that drive people’s behaviour. The findings reveal that from the time electronic and electrical devices enter consumers’ lives until their disposal, they exist in fluid in-between states of meaning and have perceived value. Before divestment, sWEEE typically undergoes a four-stage journey: a) once electrical and electronic equipment (EEE) is no longer used, it tends to be either consciously stored or abandoned in the home (inactive EEE); b) a trigger prompts consumers to divest of the inactive EEE (critical moment); c) provoked to take action, consumers must decide precisely what to discard and how (transition from EEE to WEEE); d) consumers decide to recycle or not (divestment). The paper concludes by discussing the implications of these findings in terms of encouraging increased sWEEE recycling.

The Perils of Service Contract Divestment: When and Why Customers Seek Revenge and How It Can Be Attenuated:

Abstract: Profitability considerations lead service providers to divest from customer service contracts, either by service contract demotion (cutting back services) or by service contract termination (ending...

Spatial conservation planning under uncertainty: adapting to climate change risks using modern portfolio theory

Abstract: Climate change and urban growth impact habitats, species, and ecosystem services. To buffer against global change, an established adaptation strategy is designing protected areas to increase representation and complementarity of biodiversity features. Uncertainty regarding the scale and magnitude of landscape change complicates reserve planning and exposes decision makers to the risk of failing to meet conservation goals. Conservation planning tends to treat risk as an absolute measure, ignoring the context of the management problem and risk preferences of stakeholders. Application of risk management theory to conservation emphasizes the diversification of a portfolio of assets, with the goal of reducing the impact of system volatility on investment return. We use principles of Modern Portfolio Theory (MPT), which quantifies risk as the variance and correlation among assets, to formalize diversification as an explicit strategy for managing risk in climate-driven reserve design. We extend MPT to specify a framework that evaluates multiple conservation objectives, allows decision makers to balance management benefits and risk when preferences are contested or unknown, and includes additional decision options such as parcel divestment when evaluating candidate reserve designs. We apply an efficient search algorithm that optimizes portfolio design for large conservation problems and a game theoretic approach to evaluate portfolio trade-offs that satisfy decision makers with divergent benefit and risk tolerances, or when a single decision maker cannot resolve their own preferences. Evaluating several risk profiles for a case study in South Carolina, our results suggest that a reserve design may be somewhat robust to differences in risk attitude but that budgets will likely be important determinants of conservation planning strategies, particularly when divestment is considered a viable alternative. We identify a possible fiscal threshold where adequate resources allow protecting a sufficiently diverse portfolio of habitats such that the risk of failing to achieve conservation objectives is considerably lower. For a range of sea-level rise projections, conversion of habitat to open water (14-180%) and wetland loss (1-7%) are unable to be compensated under the current protected network. In contrast, optimal reserve design outcomes are predicted to ameliorate expected losses relative to current and future habitat protected under the existing conservation estate.

A systematic review of the literature on industrial divestment

Abstract: The purpose of this paper is to review the existing research on industrial divestment in order to identify the reasons for it, the process whereby it is achieved, and the outcomes of industrial sell-offs and closures. The study reports the main findings that have gained acceptance in the literature, gaps in the research and potential directions for future research.,A three stage systematic literature review protocol was used to conduct this review. The results are organized according to an “Antecedents – Process – Outcomes” framework.,The traditional accounts of industrial divestment have been framed in terms of firms’ weak performance and over-diversification as antecedents to divestment, leading to corporate governance issues. However, the list of antecedents of industrial divestment is more extensive. There is no consensus over the impact of some factors on divestments, as is the case of firm and unit size. The results are not conclusive as to whether firm performance improves after divesting.,Future research should analyze the relationship between the antecedents of investment and divestment. The divestment process is not well studied and more studies that engage in theory building are needed, namely, on primary data and examining the short-term and long-term impacts of divestment on performance.,This review offers a comprehensive synthesis of the antecedents, the process and outcomes of divestment through sell-offs and closures. Factors such as environmental conditions and the entry mode strategy are important in determining the divestment of subsidiaries. Divestments may be positively or negatively regarded by shareholders, depending on the context of the firm. Promoting managerial changes facilitates divestment.,This paper synthesizes knowledge of the main reasons as to why firms completely dispose of their assets, contributing to this under-researched field.

Do multiple large shareholders reduce agency problems in state-controlled listed firms? Evidence from China

Abstract: In this article, we investigate how the emergence of an ownership structure with multiple large shareholders (MLS) affects principal-agent as well as principal-principal conflicts of interests in Chinese listed firms having the government as controlling shareholder. Thereby, we account for the source of MLS entry by distinguishing between a non-state investor buying shares when the government divests vs. retains its ownership stake. We find that MLS entry alleviates principal-agent problems, as evidenced by a lower managerial perk consumption and a higher pay-for-performance sensitivity of managerial compensation, as well as principal-principal problems, as reflected by a smaller ratio of related-party transactions and a lower labor redundancy. Interestingly, and except for the reduction in excess personnel, we find that the above effects arise only when the newly entered non-state investor accumulated a stake without corresponding government divestment. In contrast, the curtailing effect of MLS entry on labor redundancy only occurs when the government was willing to give up a non-trivial part of its ownership. In line with the above findings, we show that MLS entry significantly enhances the firm's stock market valuation, with this effect predominantly arising from the anticipated reduction in excess personnel.

Practice makes progress: Evidence from divestitures

Abstract: This paper examines the role of firm-level experience in the context of divestitures. We find that divesting firms that have recent divestiture experience (hereafter, experienced divestors) are more likely to sell peripheral or underperforming units, and to divest during industry merger waves. Experienced divestors earn higher returns on divestiture announcement, have stronger operating performance post-divestiture, and tend to reinvest sale proceeds in expansion programs using acquisitions. Importantly, we show that divestiture experience at the firm level dominates other measures of experience, including divestiture experience of CEOs or boards, and experience in acquisitions. We take steps to mitigate concerns about econometric and sampling issues. These findings suggest that a strategy of restructuring through divestitures can improve firm value.

Sustainable finance: political challenges of development and implementation of framework conditions

Abstract: According to the 2015 Paris Agreement, a long-term goal is the commitment to "making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development." Reconciling climate change objectives and financial flows is an enormous challenge in the 21st century. States in general and Germany in particular have various instruments at their disposal to initiate appropriate measures. On the one hand, the state can exert direct influence by orienting its own activities towards sustainability, for example by meeting sustainability standards for investments and participations by public institutions and by anchoring divestment strategies in law. On the other hand, the development of suitable framework conditions is a requirement for encouraging private financial market players towards sustainability. A key requirement for the development of sustainable financial system is a uniform taxonomy of sustainability. Standards and labels for identifying business activities can then be implemented. The development of political framework conditions is currently facing far-reaching challenges at European and national level: There is a risk that current approaches will only be applied to a limited extent. Sustainable investments currently account for approximately 3% of the total market (2017). This article aims to focus on the extent to which policy frameworks currently being developed at national and European level can contribute to the development of sustainable finance. In addition to the challenges of implementing and developing new policy approaches, the limits of existing instruments will be identified. Beyond the indirect influence of the state, investment strategies and criteria of public institutions and procurement are analysed, which represent a direct influence of the state for the development of a sustainable financial sector. A case study on the Divestment Strategies is used for this purpose.

Investment Commonality across Insurance Companies: Fire Sale Risk and Corporate Yield Spreads

Abstract: Insurance companies often follow highly correlated investment strategies. As major investors in corporate bonds, their investment commonalities subject investors to fire sale risk when regulatory restrictions prompt widespread divestment of a bond following a rating downgrade. Reflective of fire sale risk, the clustering of insurance companies in a bond has significant explanatory power for yield spreads, controlling for liquidity, credit risk, and other factors. The effect of insurer clustering on bond yield spreads is more evident for bonds held to a greater extent by capital-constrained insurance companies, those with ratings closer to National Association of Insurance Commissioners risk categories with larger capital requirements, and during the financial crisis.

The importance of fossil fuel divestment and competitive procurement for financing Europe’s energy transition

Abstract: For Europe to meet its climate targets, large financial investments in the energy sector are required. Cost reductions for low-carbon power generation are critical to achieve these targets. Particularly pertinent are decreases in financing costs as measured by the WACC. The cost of capital has a bigger impact on the LCOE for renewable energy than for fossil fuel-based power production. It is therefore essential that policy makers and project developers increase their understanding of what drives the cost of capital, including (perceived) investment risks. We believe two areas deserve special attention: (1) the use of competitive bidding for renewable energy projects, which can put downward pressure on their financing costs, and (2) the divestment from fossil fuel projects, which can drive up their financing costs. Using the integrated assessment model TIAM-ECN we demonstrate that Europe’s future energy system is highly sensitive to the level of financing costs.

Does the Fossil Fuel Divestment Movement Impact New Oil & Gas Fundraising?

Abstract: This paper explores whether increasing fossil fuel divestment commitments are related to the reduction of capital flows into the oil & gas sector, based on an analysis of syndicated lending, equity and bond underwriting across 33 countries from 2000 to 2015. We find that increasing oil & gas divestment pledges in a country are negatively related with new capital flows to domestic oil & gas companies. This effect is enhanced in more stringent environmental policy regimes and diminished in countries which heavily subsidise fossil fuels. However, the divestment movement may have an unintended effect, insofar as domestic banks situated in countries with high divestment commitments and stringent environmental policies provide more finance to oil & gas companies abroad. We explain these findings through the lens of institutional theory, and show how both regulatory and socially normative elements of institutions shape this dynamic.

Divestiture of prior acquisitions: competing explanations of performance

Abstract: There are multiple perspectives of divestiture and its performance that require reconciliation. While research finds a positive market response to divestment announcement, divestiture of prior acquisitions are generally viewed negatively. The purpose of this paper is to develop and empirically test different explanations for the divestment of prior acquisitions.,This research employs event study to capture market reaction at acquisition announcement and subsequent divestments in a sample of 69 public US high-technology acquisitions between 2003 and 2008 that were divested by 2015. Only initial acquisitions involving public firms were included from the Thomson One Banker SDC database. Public press releases and companies’ SEC filings were reviewed to track divestitures back to prior acquisitions. Ordinary least squared regression was used to estimate coefficients.,Results indicate a positive relation between acquisition and divestiture performance around announcement dates. This finding rejects the correction of mistake explanation, suggesting that a negative stigma surrounding divestments is largely unwarranted and that investors reward capable acquirer’s divestiture decisions.,Investors do not treat all information signals at divestiture equally. For example, acquisitions made by larger and more profitable firms, or acquisitions paid for with stock, are associated with lower return upon divestiture announcement.,This study finds that investors view divestiture as a proactive strategy, suggesting firms can improve performance by actively managing acquisitions and divestments to optimize their portfolio of businesses.

Valuing Peace: The Eects of Financial Market Exposure on Votes and Political Attitudes

Abstract: Financial markets expose individuals to the risks and returns of the broader economy. Can they also lead to a reevaluation of the costs and benets of conict and peace initiatives? Can this happen even in the context of persistent ethnic conict, and even aect voting decisions? Prior to the 2015 Israeli elections, we randomly assigned nancial assets to likely voters and gave them incentives to actively trade for up to seven weeks. The assets included stocks of Israeli and Palestinian companies. We also randomly assigned their initial amounts and divestment dates. We nd that the exposure to stocks caused systematic shifts in voting behavior

Disclosure Effects of Korean Firms’ Divestment from China

Abstract: Purpose – We examine the disclosures on foreign divestment from China by 77 Korean firms between 2007 and 2016 to identify the effects (and their determinants) on parent firm value. Design/methodology – We analyze how divestment affects firm value by examining the disclosure of divestment from China by Korean firms. Then, we examine the determinants of these disclosure effects using cross-sectional regression analyses. Findings – We find negative effects on parent firm value in the short and medium term, and both the KOSPI and KOSDAQ stock markets show negative correlations between foreign divestment and firm value. The parent firm’s financial condition and profitability and the reason for divesting are statistically significant determinants. Practical implications – Most Korean firms in China belong to the manufacturing industry. As a result, divestment signifies a loss of important manufacturing bases and assets. Originality/value – We analyze foreign direct divestment, which has not been studied in detail previously owing to a lack of data. In addition, this research is the first to compare the disclosure effects in the KOSPI market with those in the KOSDAQ market for the same period.

State investments and human rights? The case of the Norwegian Government Pension Fund Global

Abstract: The purpose of this paper is to explore how the Norwegian Government incorporated its responsibility for human rights into the investment practices of its Global Pension Fund and how human rights issues were negotiated when exclusion was considered.,Drawing on a series of interviews the authors analyse the way in which responsibility for human rights has been translated into the practices of the Norwegian Government Pension Fund Global.,The paper documents how a large investment fund used several mechanisms to address human rights risks. The authors demonstrate that different logics among actors sometimes impeded addressing human rights issues. The findings demonstrate that sovereign wealth funds (SWF) can be held accountable for human rights.,The paper illustrates the difficulty of co-operation between actors with different logics. This can result in institutional conflict, but also in positive outcomes for human rights.,Attempts to introduce human rights into state investments may result in increased institutional complexity. The findings indicate that state investors can address human rights issues, but that the ability to do so is diminished where divestment creates political tension.,Large investors can influence companies on specific human rights issues.,This is one of the first empirical investigations of the human rights practices of a SWF. The authors contribute to the literatures on accounting and human rights, SWF and institutional theory.

Taking away a 'social licence' : neo-Gramscian perspectives on an international fossil fuel divestment norm

Abstract: The international fossil fuel divestment norm formulates a standard of appropriate behaviour to withdraw investments from fossil fuel assets and reinvest them into climate-friendly solutions. Its ultimate objective is to take away the industry’s “social licence to operate”. In other words, the norm fundamentally questions the legitimacy of an industry because of its major impact on climate change. This paper offers a neo-Gramscian view as to how a radical divestment norm seeks to delegitimise the role of fossil fuels and the industry in society and how it only partly succeeds in doing so. This analytical interpretation of norm diffusion offers a rich understanding of the discursive and relational aspects of energy transitions and how societal consent to elite practices—and not just their coercive power—is pivotal in successfully maintaining or transitioning away from a fossil fuel-based society. I trace the origins and analyse the current state of the campaign and argue that four drivers are key to understanding norm diffusion: (legitimacy of) norm entrepreneurs; framing and discursive contestation; political opportunity structures; extant normative environment. I conclude that although there is certainly room for counter-hegemonic norm articulation, the constraining effects of a liberal social order, epitomised by liberal environmentalism, reduces its radical aspects to a passive revolution.

Holders of Last Resort: The Role of Index Funds and Index Providers in Divestment and Climate Change

Abstract: This paper demonstrates that index funds and index providers have agency and thus responsibility for the companies contained within their financial products. As a growing number of institutional asset owners are divesting from coal assets, index funds are becoming the holders of last resort. The common wisdom has it that index funds cannot sell out of individual stock holdings. They have a “voice” but no ability to “exit.” This paper investigates the relationship between index providers and index funds and finds the traditional understanding that index investors cannot sell to be false. Instead an increasing prevalence of index investors switching both indices and index providers is noted. Such changes provide investors with the opportunity to exclude specific stocks. This paper therefore suggests a number of solutions for index funds to reduce the carbon intensity of their funds, such as switching the indices their funds employ, discontinuing niche ETFs that are carbon intensive, reducing fees on low-carbon investments, or making use of their financial clout as index providers’ biggest customers to advocate for selective index amendments. Adding the threat of exit will increase the power of voice. Doing so will ensure, that rather than functioning as insulators from sustainability pressures, they act as conductors.

The Importance of Climate Risks for Institutional Investors

Abstract: According to our survey about climate risk perceptions, institutional investors believe climate risks have financial implications for their portfolio firms and that these risks, particularly regulatory risks, already have begun to materialize. Many of the investors, especially the long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks. Although surveyed investors believe that some equity valuations do not fully reflect climate risks, their perceived overvaluations are not large.

Divest, Disregard, or Double Down? Philanthropic Endowment Investments in Objectionable Firms

Abstract: How much, if at all, should an endowment invest in a firm whose activities run counter to the charitable missions the endowment funds? I offer the first model characterizing this type of investment decision. I introduce a strategy called "mission hedging," where—in contrast to traditional socially responsible investing—foundations may benefit from skewing investment toward the objectionable firm in order to align funding availability with need. I characterize the trade-offs driving foundation investment decisions. By leveraging the idiosyncratic firm risk typically diversified away in profit-maximizing portfolios, foundations may find that bad actors provide good opportunities to hedge mission-specific risks.

Activism Pressure and the Market for Corporate Assets

Abstract: We investigate the impact of hedge fund activism on corporate transaction markets. We find that activism targets as well as firms exposed to hedge fund threats increase divestitures and receive more merger bids. On balance, they also make fewer acquisitions, but this effect is entirely due to large firms. Activism targets and firms under hedge fund threats contribute about equally to the overall effect. We estimate that the increase in sales and reduction in purchases of assets reduces real asset liquidity by about 35% for asset sellers in industries with strong activist activity. The liquidity squeeze produces two effects: industry outsiders provide liquidity by purchasing more industry assets, and transaction prices are reduced. We find that activism positively affects the efficiency of divestitures and of acquisitions by small firms when firms are activism targets, but not when they act under activism threat.

Divestment cycles in the Portuguese electrical and electronics industry – an historical, multilevel analysis (1975–2015)

Abstract: This article deals with the topic of divestment. In the early 1990s, the Portuguese electrical and electronics industry (EEI) attracted high levels of foreign direct investment. This increase in ca...

Foreign Divestment in the Retail Sector – The Host Market’s Perspective

Abstract: Transnational grocery retailers increasingly dispose of their foreign subsidiaries. The existing literature on this development mainly focuses on the perspective of transnational retailers on their own divestments, and neglects the view of the actors in the remaining market. Addressing this bias, this paper analyses the dynamics and drivers of foreign divestment from the host market perspective. It is based on data from qualitative interviews with host market competitors and sold subsidiaries of transnational retailers in Turkey. The research reveals that, while home market actors present their divestments as strategic decisions, for the host market’s actors the TNCs’ divestments are stories of failure. We propose a holistic framework of the foreign divestment decision process showing that a divestment decision is not just the inverse of an investment decision. This framework incorporates pull factors (reasons to reallocate resources), push factors (host market hurdles) and foreign retailers’ possibilities to take on the challenges in foreign markets.

Utility Divestitures in Germany: A Case Study of Corporate Financial Strategies and Energy Transition Risk

Abstract: Germany is in the midst of a radical transformation of its power sector, which in 2016 led two of its main electric utilities, EON and RWE, to undertake dramatic restructurings. EON spun off its fossil fuel and trading segments, while RWE carved out its renewable energy, retail and grid business. The paper examines the drivers of these divestitures. Building on corporate finance literature, the paper uses a mix of comparative descriptive statistics, interviews and event studies to test four groups of hypotheses. The evidence rejects drivers related to operations and management, biased investment and investor preferences and instead points to financing-related drivers. Among the financing-related drivers, debt overhang and risk contamination seemed to have played the main role. Utilities restructured to save their healthy assets (renewables and grid infrastructure) from losses at their conventional power generation business (fossil fuel and nuclear plants). The paper uses existing research on divestitures in an empirical case that has implications for the evolution of European power markets. The results suggest that exiting conventional technologies as part of the transition to a more renewable energy mix can cause substantial costs. If these are not clarified and allocated ex ante, policy makers find themselves forced to either burden tax payers or endanger utilities that are of systemic relevance to the energy sector.