Governance Drivers of Fossil Fuel Divestment: Evidence From Global Banks

ABSTRACT Climate change poses increasing transition risks for the banking sector, as financial institutions remain exposed to fossil fuel activities despite growing sustainability commitments. This study examines whether corporate governance influences banks' decisions to adopt fossil fuel divestment policies. Using a global panel of banks observed between 2014 and 2023, the analysis investigates the relationship between governance quality and the probability of adopting divestment commitments. The results show that stronger corporate governance is positively associated with fossil fuel divestment. In particular, higher scores in overall governance quality, management practices, shareholder protection, and CSR strategy are linked to a greater likelihood of adopting divestment policies. Financial strength also plays a role, as larger and better capitalized banks are more likely to commit to divestment. By contrast, a negative relationship between ESG controversies and divestment suggests that divestment commitments may, in some cases, reflect reputational considerations rather than purely sustainability‐driven decisions. These findings highlight the importance of governance structures in shaping banks' strategic responses to climate‐related risks and contribute to the literature on sustainable finance by identifying governance as a key driver of fossil fuel divestment decisions in the banking sector.