The effects of mutual fund decarbonization on stock prices and carbon emissions

A B S T R A C T 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 pres -sure (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 con-sistent with theoretical predictions. Various tested alternative explanations, such as shareholder inter-vention 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. Short presentation: English version: https://youtu.be/dorMMn2BBn4 , German version: https://youtu.be/ i3r30iRbtI8 . (c) 2021 Elsevier B.V. All rights reserved.