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Sustainability And Ethical Selling In The Renewable Energy And Green Technology Sector

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Received: December 21, 2021 / Revised: January 24, 2022 / Accepted: January 27, 2022 / Published: February 9, 2022

There is a heated debate about whether divestment causes a decline in sales in the fossil fuel industry or whether investors are withdrawing from the fossil fuel industry due to stranded assets. Moreover, it is unclear what consequences these actions might have for the fossil fuel industry. Therefore, the study examined the direction of the causal relationship between cash flow factors such as production factors, financing sources, and sales for the fossil fuel industry using lagged regression models and applying the Granger causality test. Our sample consists of fossil fuel firms from the Carbon Underground 200. Since the R-squared values for both lagged financial factors and lagged sales factors were similar, we propose “bidirectional causality” between financial flow factors and sales. We conclude that divestment (for ethical reasons) may lead to lower sales and that lower sales may lead to divestment due to concerns about stranded asset risk. Because the third factor tends to produce bidirectional causes, we conclude that the need to reduce greenhouse gas emissions from the fossil fuel industry is the third factor that influences the moral and financial motivations for divestment. Therefore, the study contributes to the theoretical approach to corporate divestiture.

Investing in the fossil fuel sector is controversial because its business activities make it a significant contributor to the climate crisis. In addition, some fossil fuel companies are also engaged in efforts to reduce climate actions and policies [1, 2]. As a result, many studies have shown lower returns and risks of stranded assets for investors [3, 4]. To address these issues, fossil fuel divestment aims to withdraw capital from the fossil fuel sector to weaken its ability to explore, produce and utilize fossil fuel resources and to pressure the industry to shift its economic activities in a climate-friendly direction. In addition, the divestment movement attempts to influence governments to enact policies to mitigate climate change, such as banning future drilling and taxing carbon emissions [5]. Since the movement gained momentum in 2013 [1], fossil fuel divestment announcements have attracted increasing media attention and significantly impacted fossil fuel stock prices [6].

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Investors who adopt a fossil fuel divestment strategy are mainly guided by two considerations: ethical considerations and financial considerations [7]. Ethical investors are adopting this strategy to divest financial capital from the fossil fuel sector because they do not want to support an industry that has a serious negative impact on climate change [7]. For example, Fossil Free, an organization that represents “a global movement to end the age of fossil fuels and build a community-led renewable energy world for all,” recognizes fossil fuel divestment as “common business” and “ethical business.” [8]. The organization states that combating climate change must become a social norm, as fossil fuel consumption accounts for two-thirds of global carbon dioxide emissions.

For financial reasons, return-oriented investors are concerned about the financial risks arising from stranded assets caused by the transition to a low-carbon economy. According to Heede and Oreskes [9], only 20 percent of current fossil fuel resources can be burned to keep temperature rise below 2°C. This may lead to stranded assets, defined as unexpected or premature write-downs and depreciation of assets such as fossil fuel reserves [10]. Therefore, the purpose of this article is to understand the relationship between financial factors and sales in the fossil fuel industry. First, capital is transferred for ethical reasons before sales decline. According to general production functions, the withdrawal of capital should lead to a decline in fossil fuel sales. Second, reallocation of capital occurs for financial reasons as a result of declining sales. In this study, we lagged investment and disposal for two models of divestment drivers. Therefore, our research questions are (1) whether changes in financial factors affect sales (moral motivation) and (2) whether changes in sales affect financial factors (financial motivation).

To answer these questions, we assume two production functions with different cash flow coefficients. The sample consists of 90 fossil fuel companies selected from the North American capital market-listed Carbon Underground 200 Index. Granger causality tests analyze causality through lagged cash flow factors (various factors of production and financing sources) and sales, respectively. The high correlation between lagged financial factors and sales supports the concept of shifting capital for ethical reasons. The high correlation between sales lag and financial factors supports capital diversion due to financial motivation.

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We found that the lagged variables in the two production functions in the Granger causality test are significant. Our results suggest a bidirectional causal relationship between financial factors and sales, supporting the concepts of shifting capital for moral and financial reasons.

Moreover, the mutual interaction between these two concepts and the connection between ethical and financial issues can also be explained. Morally motivated capital change precedes stranded assets, and stranded assets precede financially motivated capital change. According to [11], bidirectional reasons can be explained by a third factor that may influence the moral and financial reasons for divestment, or by the interaction between the moral and financial motivations for divestment.

This study contributes to knowledge of the reasons and effects of non-investment in fossil fuels. We have shown that divestment can be ethically and financially motivated, and that both types of divestment interact and can be affected by a third variable, such as climate change.

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The remainder of this article is organized as follows: The literature review section discusses the ethical and financial issues associated with fossil fuel divestment, followed by an introduction to theory and methods. Regressions and Granger causality tests are then presented. The discussion section provides a detailed explanation of the two-way interaction between the variables. Finally, the concluding section summarizes the findings, contributions, limitations, and prospects for future research.

The following sections provide a review of the literature on the ethical and financial aspects of investing in fossil fuels and a general summary of fossil fuel divestment.

The financial sector can influence the economic activities of the fossil fuel industry by providing or not providing financing. Some projects with large adverse environmental impacts, such as pipelines, power plants, and new resource extraction projects, rely heavily on financial capital, making investors and lenders important players [12]. Divestment can significantly impact business operations and thus the stock prices of fossil fuel companies that are highly dependent on financing [13, 14]. Divestment announcements, such as campaigns, commitments and endorsements aimed at mitigating climate change and reducing greenhouse gases (GHG), may negatively impact the financial returns and stock prices of divested companies in the short term [6]. In addition, the capital invested can be reinvested to support green energy [4], contributing to the development of a low-carbon economy, making it an option for socially responsible investors. For example, Nicholas Stern recommends combining divestment and reinvestment as a better strategy to combat climate change [15]. Studies estimate that the global renewable energy industry needs $1 trillion annually [16] to achieve the Paris Agreement target.

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Because of the impact of finance on sustainable development and the impact of sustainable development on finance [17], financing must be done in a responsible manner [18, 19]. Given the potential risks of negative consequences of the transition to a low-carbon economy, as well as the risk of reputational loss, the financial industry is integrating environmental, social and governance (ESG) factors into its lending and investment processes [ 20 , 21 , 22 ]. ESG integration has given rise to new business lines such as climate finance [23] and socially responsible investing (SRI) [24].

Stakeholder pressures on the financial industry reinforce these ethical concerns because reputation and trust are one and the same thing

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