Achieving the European Commission’s ambition to reach a net-zero greenhouse gas emitting economy by 2050 under the EU Green Deal requires on the one hand investing heavily in low green solutions, as defined by the EU Green Taxonomy, but equally crucial, it requires defunding fossil fuel businesses and activities, and actually reducing the carbon emissions of portfolios in line with the EU Paris Aligned Benchmarks. Nevertheless, divesting from fossil fuel funds towards green energy is not a straightforward task for financial markets. The risk profile of fossil fuel industries cannot be fully compared with green counterparts, as these industries are funded across different asset classes. Thus, this paper proposes to study whether fossil fuel companies are riskier that their peers in the industrial, non-fossil fuel and utilities sectors, and understand whether investors divesting from fossil fuels equities and bonds can find risk reduction opportunities in other sectors of the economy. In particular, the following paper studies the downside risk measures for the equity and bond market of 404 fossil fuel companies and 3009 peers from the industrials and non-fossil fuel energy and utilities sector across the time period 2010 – 2020. Furthermore, it employs standard regression models as well as difference-in-difference settings around the Paris agreement and/or the COVID-19 pandemic. Specifically, it shows that industrials, non-fossil energy and utilities companies highlight better downside risk protection than fossil peers across both equity and bond secondary markets.
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