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Dissertation/Thesis Abstract

The Best Capital: Essays on Fossil Fuel Divestment, Green Reinvestment, and Climate Risk
by Weathers, Brandt, Ph.D., The New School, 2020, 120; 28255426
Abstract (Summary)

Proponents of fossil fuel divestment advocate for the removal of fossil fuel (oil, gas, and coal) stocks from investment portfolios. Their goal is to signal to the market costs related to climate change and lead the market to a sustainable future. Industry trade groups argue that eliminating stock holdings in fossil fuel companies will result in known, substantial costs. They claim this is due to the unique characteristics of fossil fuel stocks and costs due to lowered diversification. This question (whether or not there are known costs associated with eliminating fossil fuels from an investment portfolio) has extraordinary implications. Legally, Investment Advisers (who oversee trillions of dollars in managed wealth globally, including funds held by universities, charities, and most of the world’s retirement funds) are mandated to act in the “best interest” of their clients. If research using tools from financial economics can establish whether these costs exist, it may lay the intellectual groundwork for strategies like divestment (or even sustainable investment) to be legally viable. This dissertation explores this question in three Chapters.

In the first chapter, I summarize the available research. This includes the current debate around fossil fuel divestment as well as the debate that historically preceded it around socially responsible investment (SRI). Broadly speaking, my research indicates that, due to how easy it is to capture the gains of diversification, it is unlikely that fossil fuel divestment would result in statistically significant costs.

In the second chapter, I test the conclusions reached in Chapter 1. To do this, I perform a Monte Carlo simulation on multiple portfolio types based on stock returns going back 50 years. I find that according to standard performance indicators, and against expectations, divested portfolios exhibit better performance. However, the differences in performance between broad portfolios with and without fossil fuels are not statistically significant, confirming my original hypothesis.

The third chapter extends these tests to assess the performance of reinvesting the divested funds in renewable or green assets. Here I re-perform the same Monte Carlo simulations across multiple portfolio types, and find that, based on recent data, green assets provide better performance (i.e. Sharpe ratios) than fossil fuel assets, primarily through their lower risk levels. These results hold up against statistical tests of significance. Further, by analyzing fossil fuel asset return distributions via a ‘fat tails’ analysis, I find that the oil industry has persistently high kurtosis levels throughout its history, more significantly so during periods of poor performance. Ultimately, I conclude that, though more research is needed, broadly invested green assets offer a useful substitute for fossil fuel assets. This is particularly true, given my additional conclusion, that the future for fossil fuel asset performance remains erratic and unreliable.

Indexing (document details)
Advisor: Semmler, Willi
Commitee: Setterfield, Mark, Mattei, Clara, Lee, Benjamin
School: The New School
Department: Economics
School Location: United States -- New York
Source: DAI-A 82/10(E), Dissertation Abstracts International
Source Type: DISSERTATION
Subjects: Economics, Finance, Sustainability
Keywords: Climate risk, Energy economics, Fossil fuel divestment, Monte Carlo simulation, Socially responsible investment, Sustainable finance
Publication Number: 28255426
ISBN: 9798597084466
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