Related to the defunding of large fossil fuel companies, we find that the value of total assets pledged for divestment in a given country is negatively associated with capital flows to domestic oil and gas companies, particularly when divestment is led by NGOs. A more stringent environmental policy regime enhances the effectiveness of divestment commitments in reducing fossil fuel financing whereas a more generous fossil fuel subsidy regime undermines fossil fuel divestment efforts.

These findings are relevant for policymakers looking to design sustainable finance and low carbon investing policies as well as for entrepreneurs, NGOs and companies impacted by the low carbon transition.