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

59 Pages Posted: 1 Nov 2023 Last revised: 6 Jul 2024

See all articles by Matthew E. Kahn

Matthew E. Kahn

University of Southern California; National Bureau of Economic Research (NBER)

John G. Matsusaka

University of Southern California - Marshall School of Business; USC Gould School of Law

Chong Shu

University of Utah - David Eccles School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: January 27, 2024

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.

Keywords: Carbon emissions, greenhouse gases, divestment, investors, shareholders, pension funds

JEL Classification: Q5, G3

Suggested Citation

Kahn, Matthew E. and Matsusaka, John G. and Shu, Chong, Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions (January 27, 2024). USC Marshall School of Business Research Paper Sponsored by iORB, European Corporate Governance Institute – Finance Working Paper No. 993/2024 , Available at SSRN: https://ssrn.com/abstract=4592023 or http://dx.doi.org/10.2139/ssrn.4592023

Matthew E. Kahn

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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John G. Matsusaka (Contact Author)

University of Southern California - Marshall School of Business ( email )

Department of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6495 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-6495 (Phone)

Chong Shu

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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