Net-zero transition and divestments of carbon-intensive assets

  • An unfamiliar term in the not-too-distant past, “net zero” has become a headline-maker in the business and financial world with the growing importance of climate change. Succumbing to increasing pressure, companies and financial institutions around the world have come to adopt net-zero transition plans and targets, pledging to hit certain emission-reduction targets in a long-term period. Moreover, regulators around the world have started to require the disclosure or adoption of net-zero transition plans and targets. However, an unintended consequence of net-zero transition commitments has been the increased popularity of divestments. That is, many firms seeking to fulfill a net-zero plan are passing on carbon-intensive assets (i.e., oil, gas, and coal assets) to other firms that are likely to be non-committal to environmental goals or that operate under less pressure from investors, stakeholders, and regulators. Such divestments, technically mergers and acquisitions (M&A) transactions, present an ideal opportunity to improve a divesting firm’s environmental record and reach ambitious net-zero goals, creating the impression that an emission reduction has occurred. However, the key is how acquiring firms handle these assets. If they continue operating as before, there will not be an overall improvement for the global climate. Worse, such assets can be operated by new owners in a way that causes more emissions. In any case, such divestments undermine the credibility and value of net-zero ambitions by allowing firms to reach targets by simply divesting assets. This article explores the reasons and motivations for divestments or, more broadly M&As of carbon-intensive assets and explains why the increased role of net-zero commitments can be undermined by those transactions. We provide some evidence to illustrate the landscape of such transactions and the concerns they give rise to. Lastly, we explore several policy options to address the problem.

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Author:Alperen Afşin GözlügölORCiDGND, Wolf-Georg RingeORCiDGND
Series (Serial Number):SAFE working paper (386)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2023
Year of first Publication:2023
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2023/05/31
Tag:Net-zero transition; climate change; divestments; mergers and acquisitions; net-zero arbitrage; net-zero plans and targets; regulatory arbitrage
Edition:May 2023
Page Number:51
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:G Financial Economics / G1 General Financial Markets / G18 Government Policy and Regulation
K Law and Economics / K2 Regulation and Business Law / K22 Corporation and Securities Law
K Law and Economics / K3 Other Substantive Areas of Law / K32 Environmental, Health, and Safety Law
Licence (German):License LogoDeutsches Urheberrecht