The Effect of Green Investors on Corporate Carbon Emissions

Can environmental problems be addressed through private markets, or is government regulation the only viable solution? Shareholder activists, skeptical of governments' ability to combat climate change, are testing this question by using capital markets to pressure polluters to reduce their carbon emissions. However, there is disagreement over the most effective strategy: is it divestment (selling fossil fuel stocks to deprive polluting companies of capital and allocate more resources to clean energy) or engagement (acquiring fossil fuel stocks and using ownership rights to press for pollution cuts)? Our study assesses how corporations adjust their carbon emissions in response to these investment strategies and finds that engagement reduces emissions while divestment may increase emissions. Proponents justify divestment as a way to redirect capital from dirty to clean energy, take a symbolic stand in support of sustainability, and reduce portfolio risk from holding carbon- related assets that may decline in value. Maine required its public pension funds to divest from fossil fuels, and New York State, New York City, and California funds may follow suit. Others argue that divestment is ineffective because companies can find new investors who care less about emissions. Some critics also claim that divestment is politically motivated; officials in some Republican- controlled states have threatened to withhold business from banks and investment companies that pursue divestment strategies. A survey found that many large environmental, social, and governance, or ESG, investors consider engagement a better approach than divestment.