Investors’ Moral and Financial Concerns—Ethical and Financial Divestment in the Fossil Fuel Industry

Round 1

Reviewer 1 Report

Interesting article. The research is performed by applying relevant methodology.

I suggest the following improvements:

• TITLE "Investors moral and financial concerns. Ethical and financial divestment in the fossil fuel industry"
• Introduction quite comprehensive
• OBJECTIVES AND RQ. This section should be adequately improved to reflect the research gap, the research framework and justify the design of the article.
• MATERIALS AND METHODS please better support the choice of the sample (cu200), why and how it is relevant and representative? Functions, variables and their relations should be explained 

 

Author Response

Dear Reviewer

Thanks a lot for your helpful comments. We have addressed all of your comments (see below and in the track changes of the manuscript) and hope that the manuscript meets your expectations.

• TITLE "Investors moral and financial concerns. Ethical and financial divestment in the fossil fuel industry"
• We changed the title accordingly
• Introduction quite comprehensive
• We shortened the introduction. Please see the part we removed in the track changes of the paper.
• OBJECTIVES AND RQ. This section should be adequately improved to reflect the research gap, the research framework and justify the design of the article.
• We addressed the research gap at the end of the section ‘2.1. Ethical aspects of investing in the fossil fuel industry’:

• There is a research gap, however, with regard to the impact of ethically motivated investment on the outcomes of the fossil fuel industry. It is still not clear whether divestment is able to decrease the production and the sales of fossul fuels. We will address this gap in our first research question, whether changes in financial factors have an impact on sales (see below).

• Furthermore, we added a description of the second research gap at the end of the section ‘2.2. Financial aspects of investing in the fossil fuel industry’:

• However, though stranded assets are assumed in many studies, it is still unclear whether the risks of stranded assets leads to investor reactions and consequently to divestment. We will address this gap in our second research question, whether changes in sales have an impact on financial factors (see below).

•  
• MATERIALS AND METHODS please better support the choice of the sample (cu200), why and how it is relevant and representative? Functions, variables and their relations should be explained 
• We added some explanations to the choice and the relevance of the sample in the Materials and Methods section:
• We used this sample because of data availability that is not given for non-publicly traded firms. Also, the sample consists of companies with the highest carbon emissions and is, therefore, representative for high emitting firms on the North American market. Therefore, it represents the companies with the highest risks of stranded assets. Hence, investor reactions to the companies are more likely. Secondly, ethically motivated investors often address firms with potentially high GHG emissions to prevent them from using their resources.

To explain the function, we added:

The study uses two production functions based on the Cobb-Douglas production function. Such a function models the interaction between production input factors, such as employees,  property / plant / equipment (PPE), intangibles, inventories, cash & equivalents, long-term debt, preferred stock, common stock, capital surplus, and retained earnings and production output factors, such as sales [39]. The “required” capital flow factors represent input production factors in the form of various assets. These factors are necessary to support productivity and consequently sales. These are employees,  property / plant / equipment (PPE), intangibles, inventories, cash & equivalents. The “available” capital flow factors represent the financing sources in the form of multiple equities and debt used to input production factors. These financial factors are long-term debt, preferred stock, common stock, capital surplus, and retained earnings.

We also removed the final sentence before Table 1 because it is not relevant.

Furthermore, we added:

We used the indicators representing the required and available capital flow factors described above and in Table 1 to construct our production functions that are transformed logarithmically (see Equation 1 and Equation 2.

Finally, we added additional information about available and required cash flows:

The “required” and “available” cash flow is adopted to assess the long-term liquidity of a company. The “available” cash flow is the financing resources, such as long-term debts and equities that is needed in addition to the required capital.

Reviewer 2 Report

The Manuscript ID sustainability-1543329, title “Moral and Financial Concerns of Investors – Ethical and Financial Divestment”. Submitted for publication in the MDPI journal Sustainability is a well-written piece of information. The overall conceptualization and inferences are scientifically alright and make sense.

The authors need to focus on the presentation of the key results in the graphical format and present the comparison.

Discussion part can be improved with numerical data supporting your statements followed by the discussion referenced from other sources.

The reference style needs to be rechecked and try to incorporate the latest published studies.

Author Response

Dear Reviewer

Thanks a lot for your helpful comments. We have addressed all of your comments (see below and in the track changes of the manuscript) and hope that the manuscript meets your expectations.

The authors need to focus on the presentation of the key results in the graphical format and present the comparison.

We added a description of the results and a comparison including a figure at the end of the Results sections

The key results are summarized in Figure 1. The results suggest that there is a causal effect of the financial factors on sales as well as a causal effect of sales on financial factors. This means, ethically driven divestment decreases future sales, and decreasing sales influence financially driven divestment. Since, the r squared are relatively similar for the the lagged financial factors and lagged sales as well as for the available and required financial factors, we cannot assume the one specific cause effect direction dominates.

Figure 1: Summary of the results. Numbers represent adjusted R²

 

Discussion part can be improved with numerical data supporting your statements followed by the discussion referenced from other sources.

We added numerical data to the discussion. See, for instance:

Also, the factors “Employees” (coefficient_model1 = .302, coefficient_model2 = .590) “Property & Plant & Equipment (PPE)” (coefficient_model1 = .776, coefficient_model2 = .504), “Inventories” (coefficient_model1 = .024, coefficient_model2 = .007), “Long-term Debt” (coefficient_model2 = .504), “Contributed Capital” (coefficient_model2 = .079), and “Retained Earnings” (coefficient_model2 = .007) have significant effects on the lagged (previous-year) “Sales” of the fossil fuel companies. The decrease in previous-year sales of the fossil fuel industry negatively influences the following-year cash flow factors. This finding supports the concept of stranded assets [10, 29], as the decrease of industrial sales or market demand in the previous year negatively affects the next-year values and holdings of various production factors and financing sources, which are in the form of assets, equities, and debts. In this case, investors divest because of possible stranded assets [38, 39].

The reference style needs to be rechecked and try to incorporate the latest published studies.

We re-checked the referencing style and made it consistent with the journal guideline.

Furthermore, we added references, including new publications, to compare the results. The additions and changes of the Conclusions can bee checked in the review mode of the manuscript.

Round 2

Reviewer 1 Report

The manuscript is now acceptable for publication.

Congratulations to the authors for their effort in improving their manuscript.