An Event Study Analysis of the Fossil Fuel Divestment Movement by Truzaar Dordi A thesis presented to the University of Waterloo in fulfilment of the thesis requirement for the degree of Master of Environmental Studies in Sustainability Management Waterloo, Ontario, Canada, 2016 © Truzaar Dordi 2016 AUTHOR’S DECLARATION I hereby declare that I am the sole author of this thesis. This is a true copy of the thesis, including any required final revisions, as accepted by my examiners. I understand that my thesis may be made electronically available to the public. ii ABSTRACT In a relatively short time, the fossil-fuel divestment movement has emerged with global momentum, in light of the industry’s influence on carbon induced anthropogenic climate change. Divestment is pursued by investors as a means to either mitigate against the risks of a tightening carbon budget and of stranding assets or as a means of activism to force change on the fossil fuel industry. Literature on the topic to date suggests that divestment may have a direct impact on share prices or indirect impact stigmatizing the fossil fuel industry. Conversely, skeptics argue that divestment may be too small to have a measurable impact. However, there is no empirical study that distinctly measures the impact of divestment and related events on the fossil fuel industry. The objective of this thesis is to objectively measure the impact of divestment events and compare its efficacy relative to similar events. Thus, the purpose of this thesis is two-fold, asking whether divestment events impact the fossil fuel industry and whether divestment events are more impactful than events on the carbon budget and stranded assets. In line with existing literature from the anti-Apartheid divestment movement, this study adopts the event study methodology to measure the impact. The findings indicate that announcements of fossil-fuel divestment, stranded assets, and the carbon budget do negatively impact the share price of fossil fuel firms equally, on and around the event date. These results infer that the financial market perceives divestment and related events to be a material threat to the performance of fossil fuel firms. This thesis contributes to existing literature on fossil-fuel divestment by strengthening the ethical case that divestment can not only ‘do well’ as a financial tool but ‘do good’ as an activism tool as well. Keywords: Fossil Fuel Divestment, Carbon Budget, Stranded Assets, Event Study iii ACKNOWLEDGEMENTS I would like to take this opportunity extend my appreciation for the support and guidance I have received over the course of my Master’s degree. First, I would like to extend my appreciation to the faculty and staff at the School of Environment, Enterprise and Development, for their support over the years. A special thank you to Dr. Olaf Weber, for his endless support and enthusiasm, motivating me to strive for the best. I would also like to thank my committee member Dr. Michael Wood, and external examiner Dr. Jason Thistlethwaite for their expertise and guidance with this thesis and beyond. Next I would like to extend my appreciation to my mentors, for their guidance throughout my academic career. A special thank you to Sylvain Dion, for his words of wisdom and unbounded support for as long as I can remember. I would also like to thank Rick Ekstein and the Weston Forest Group for their support throughout my Masters program. Finally, I would like to extend my appreciation to my family and friends for always encouraging me to pursue my dreams, achieve my goals, and recognize my potential. A special thank you to Zarine for being there for me at a moments notice, to Burjis for believing in me throughout, and to Tanya, for challenging me. I would also like to thank some of my oldest and best friends, Kenyon, Alex, Maks, and Dan, my schoolmates Boye, Dayo, Ola, Chelsie, and Ranjit, and to Evelyn, all for their endless support. iv TABLE OF CONTENTS LIST OF FIGURES ................................................................................................................. vii LIST OF TABLES .................................................................................................................. viii CHAPTER 1. INTRODUCTION .............................................................................................. 1 CHAPTER 2: DIVESTMENT ................................................................................................... 3 2.1 Defining Divestment ........................................................................................................ 4 2.1.1 Divestment as a Socially Responsible Investment .................................................... 5 2.1.2 Divestment as a Social Movement ............................................................................ 5 2.2 The History of Divestment Campaigns............................................................................ 6 2.2.1 The anti-Apartheid Divestment Campaign ............................................................... 6 2.2.2 The Fossil-fuel divestment Campaign ...................................................................... 7 2.2.3 Comparing the Divestment Campaigns .................................................................... 7 2.3 The Two Sides of Divestment.......................................................................................... 8 2.3.1 Investors as Shareholders .......................................................................................... 8 2.3.2 Investors as Stakeholders ........................................................................................ 10 2.4 Conclusion and Next Steps ............................................................................................ 12 CHAPTER 3: THE CARBON BUDGET AND STRANDED ASSETS ................................ 13 3.1 The Carbon Budget ........................................................................................................ 14 3.1.1 Carbon Dioxide and Climate Change ..................................................................... 14 3.1.2 Quantifying the Carbon Budget .............................................................................. 14 3.1.3 Industry Response to the Carbon Budget ................................................................ 15 3.1.4 Investor Response to the Carbon Budget ................................................................ 16 3.2 Stranded Assets .............................................................................................................. 17 3.2.1 Risks to Asset Stranding ......................................................................................... 17 3.2.2 Industry Response to Stranded Assets .................................................................... 19 3.2.3 Investor Response to Stranded Assets .................................................................... 20 3.3 Conclusion and Next Steps ............................................................................................ 21 CHAPTER 4: RESEARCH ..................................................................................................... 22 AND THEORY ........................................................................................................................ 22 4.1 Literature Gap ................................................................................................................ 23 4.2 Research Question ......................................................................................................... 23 4.3 Theory and Hypothesis .................................................................................................. 24 4.3.1 Efficient Market Hypothesis ................................................................................... 24 4.3.2 Stakeholder Theory ................................................................................................. 25 4.4 Limitations of the Study................................................................................................. 27 4.5 Conclusion and Next Steps ............................................................................................ 28 CHAPTER 5: METHOD ......................................................................................................... 29 5.1 The Event Study Method ............................................................................................... 30 5.1.1 Applications of Event Studies ................................................................................. 30 5.1.2 Validity ................................................................................................................... 32 5.2 The Model Design.......................................................................................................... 33 5.2.1 Define the Event ..................................................................................................... 33 5.2.2 Define the Event Windows ..................................................................................... 37 5.2.3 Define the Sample ................................................................................................... 39 5.3 The Statistical Design .................................................................................................... 41 v 5.3.1 Expected Returns .................................................................................................... 41 5.3.2 Abnormal Returns ..................................................................................................