Understanding the shadow impacts of investment and divestment decisions: Adapting economic input–output models to calculate biophysical factors of financial returns

•We adapt economic input–output models for use with financial investments.•Anticipated results of divesting a university from fossil fuel companies are analyzed.•Endowment ‘carbon shadow’ may be far larger than GHGs from operations it supports.•Reducing the shadow impacts of a large portfolio could prove a difficult task.

In recognition of the cumulative effects resulting from financial decisions, a growing number of campaigns are advocating for the removal of investment funds from companies responsible for high levels of carbon emissions. A systematic approach can aid in examining the social, economic and environmental impacts that extend beyond political motivations to divest from fossil fuel companies.We have adapted publicly available economic input–output life cycle assessment models (EIO-LCA) to develop a Shadow Impact Calculator (SIC) for examining the potential environmental impacts of investment decisions. An investment portfolio's shadow impacts represent the economic, social and environmental effects underlying an investor's decision to place their funds in particular financial instruments. In this study, we focus on greenhouse gas emissions to show which sectors of the United States economy have particularly large or small carbon shadows and place those results in the context of volatility and earnings. To demonstrate how SIC may be used, we examine the endowment investments of a Canadian university in the context of divesting from fossil fuel companies. Our analysis suggests that large pooled funds choosing to direct their investments away from heavy carbon emitters may have less of an impact than would otherwise be expected.

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