Determinants of fossil fuel divestment in European pension funds

Abstract

Divestment from fossil fuel companies could help align financial flows with climate targets and reduce the related risk exposure of investors. Yet, investors reach different conclusions whether to divest. In this article, we derive hypotheses for financial and non-financial divestment motives to explore the determinants of divestment. Using a newly compiled data set on the 1000 largest European pension funds, we find that 129, or 13%, of these funds, representing USD 2.6 trillion in assets under management (33%), have divested from fossil fuels. Most of these funds (n = 75, AUM = USD 2.1 trillion) have committed to divesting from coal only, while some have committed to divest from all fossil fuels (n = 16, AUM = USD 109 billion). We find that divestment is more likely among larger and publicly owned pension funds. Among privately owned pension funds, we find that open funds competing for clients are more likely to divest compared with company funds restricted to employees. Hence, we identify size, ownership and market competition as key determinants for divestment decisions. Furthermore, we find weaker evidence for sectoral differences (e.g., higher likelihood in financial sector), albeit independent of carbon intensities, and a positive effect of climate policy stringency.