This paper explores the contribution of sustainable investing (SI) to social and environmental outcomes through analysing the mechanisms of investor impact. The study identifies three impact mechanisms: shareholder engagement, capital allocation, and indirect impact. The authors found that shareholder engagement is well supported in the literature, whereas the impact of capital allocation is partially supported and indirect impact lacks empirical support.

Shareholder engagement, the most reliable mechanism, can bring about improvements in the quality of company practices. Investors who want to stimulate real-world impact should use shareholder engagement as a widespread approach focusing on requests with good chances of success that yield more substantial improvements.

Capital allocation can be used, with a condition that sustainable companies’ growth is limited by external financing circumstances, to create a positive impact. Investors can allocate capital to these companies to support their growth and contribute to environmental and social outcomes.

Indirect impacts, including benchmarking, endorsement, stigmatization, and demonstration, require further empirical support in the literature. It suggests using demonstration as a proxy for indirect impact, demonstrating examples or intermediate proxies of factors that make indirect impacts more tangible.

The study highlights the need for rating agencies to develop investor impact metrics, as most existing SI fund ratings provide a snapshot of company impact of the portfolio constituents. Policymakers can aid the diffusion of good business practices by recommending the encouragement of sustainable practices through policies. However, sustainable investing, albeit useful, is unlikely to drive more profound advancements without additional policy measures.