Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions

Abstract

This paper investigates if green investors can influence corporate greenhouse gas emissions
through capital markets, and if so, whether they have a bigger effect by divesting their stock and
limiting polluters’ access to capital, or by acquiring polluters’ stock and engaging with management.
We focus on public pension funds, classifying them as green or nongreen based on which political
party controlled the fund. To isolate the causal effects of green ownership, we use exogenous
variation caused by state-level politics that shifted control of the funds, and portfolio rebalancing in
response to returns on non-equity investment. Our main finding is that companies reduced their
greenhouse gas emissions when stock ownership by green funds increased and did not alter their
emissions when ownership by nongreen funds changed. Other evidence based on activist funds,
voting, and shareholder proposals suggests that ownership mattered because of active engagement
by green investors and not simply because management adapted proactively to changing
shareholder preferences. We do not find that companies with green investors were more likely to
sell off their high-emission facilities (greenwashing). Overall, our findings suggest that (a)
corporate managers respond to the environmental preferences of their investors; (b) divestment of
polluting companies may lead to greater emissions; and (c) private markets may be able to address
environmental challenges independent of government regulation.