The traction of moral virtues compared to risk-return fundamentals in fossil fuel-related investments

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

The fundamental view that investors require compensation aligned to the risk attributes they discern in their investments runs at odds with efforts to curb climate risks. Moral considerations should play an important role in climate-related investments (Hulme, 2014). However, in the case of fossil fuel investments, the moral virtues in decisions are blurred. This article aims to determine the extent of moral virtues in investment decisions involving fossil fuels amidst risk-return principles. Document analysis is used from a population of 60 banks identified as increasing or reducing fossil fuel financing from the Cable News Network website. In addition to a random sampling of banks, market prices, and ten-year government bonds data are obtained from Macrotrends and Yahoo.com websites to compute the cost of equity over a seven-year period using the capital asset pricing model (CAPM). The t-test proves that the required returns for increasing fossil fuel financing remain higher than those for decreasing, while regression reflects that the moral virtue gap remains an existential threat to climate mitigation. These results demonstrate that the curbing of climate risks remains elusive unless investors place moral considerations above monetary returns. In conclusion, the need for adequate monetary compensation for investing in fossil fuels far outweighs the moral obligation.

Keywords: Banking Groups, Climate Risks, Green Financing, Investment Returns, Moral Virtue

Authors’ individual contribution: Conceptualization — C.N.; Methodology — C.N.; Software — C.N.; Validation — H.M.v.d.P.; Formal Analysis — C.N.; Investigation — C.N.; Resources — C.N. and H.M.v.d.P.; Data Curation — C.N.; Writing — Original Draft — C.N.; Writing — Review & Editing – H.M.v.d.P.; Visualization — C.N.; Supervision — H.M.v.d.P.; Project Administration — C.N.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G11, G18, G21, G31

Received: 25.10.2023
Accepted: 06.06.2024
Published online: 10.06.2024

How to cite this paper: Nkwaira, C., & van der Poll, H. M. (2024). The traction of moral virtues compared to risk-return fundamentals in fossil fuel-related investments [Special issue]. Journal of Governance & Regulation, 13(2), 374–381. https://doi.org/10.22495/jgrv13i2siart13