Introduction

This report examines whether green investors can influence corporate greenhouse gas emissions through divestment or engagement. The research specifically focuses on public pension funds, categorised as green or non-green based on political control. It explores whether green investors have a greater impact by divesting from polluters or engaging with management to drive change. The findings provide valuable insights into the effectiveness of investor strategies on reducing corporate emissions.

Data and sources

The study draws on data from 685 publicly traded companies and their greenhouse gas emissions from 2010 to 2021. The primary data source is the Environmental Protection Agency’s (EPA) Greenhouse Gas Reporting Program, which provides facility-level emissions data. The report also includes pension fund holdings data from the 50 largest public pension funds in the United States, with a focus on public equity investments. This data is combined with political information regarding the control of these funds to categorise them as green or non-green, based on the governing political party.

Definition of green funds and descriptive information

Public pension funds are classified as green if controlled by Democratic trustees or a Democratic state governor. These green funds are assumed to favour decarbonisation, while non-green funds (controlled by Republican trustees or governors) are less likely to prioritise carbon reduction. The study tracks changes in green and non-green fund ownership of corporate stocks over time to evaluate their impact on emissions.

Green ownership reduces emissions
The report finds that companies with higher green ownership reduce emissions more effectively. A 1% increase in green fund ownership corresponds to a 3.08% reduction in carbon emissions over four years. By contrast, companies with non-green fund ownership do not demonstrate significant emission reductions. This suggests that green investors, particularly those with active engagement strategies, play a crucial role in driving corporate decarbonisation efforts.

Why green ownership reduced emissions: responsive managers, pressure, and persuasion
The report identifies three key mechanisms through which green investors influence corporate emissions: responsive managers, pressure, and persuasion. Managers of companies with green investors are more likely to align their policies with shareholder preferences. Active engagement, such as voting on shareholder proposals or opposing management in director elections, exerts pressure on firms to reduce emissions. Additionally, green investors use persuasive engagement, fostering dialogue with management to encourage sustainable practices.

How companies reduced emissions: output reduction, sell-offs, and innovation
Companies reduced emissions primarily through output reductions rather than technological innovation or asset sales. Facilities with green ownership were more likely to cut production in their dirtiest plants to reduce emissions. The report finds no evidence of greenwashing through asset sales, as green ownership did not increase the likelihood of companies selling high-emission facilities. Although green investors support innovation, the study found no significant increase in green patents filed by companies with green ownership.

Conclusion
The report concludes that green investors, particularly those engaging actively with management, significantly influence corporate carbon emissions. Divestment, however, may lead to increased emissions as polluting companies replace green investors with less environmentally focused ones. The findings suggest that finance professionals should focus on active ownership and engagement to drive corporate sustainability and achieve long-term emissions reductions.