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VoxEU Column Climate Change Financial Markets

Measuring the unintended consequences of public pension fund disinvestment from fossil fuel companies

Environmentalists are pursuing new strategies to pressure major polluters to decarbonise, including calling for widespread disinvestment from companies currently in the fossil fuel business. This column presents evidence that this strategy may be misguided. Focusing on public pension funds in the US, the authors find that companies reduced their greenhouse gas emissions when stock ownership by green funds increased, and did not alter their emissions when ownership by non-green funds changed. Ownership and constructive engagement were more effective than confrontational tactics such as voting or shareholder proposals.

At the COP28 meetings in the United Arab Emirates, held in December 2023, the world’s diplomats gathered to address the climate change challenge. After weeks of negotiations, the group could only agree to a vaguely worded statement calling for a “beginning of the end of the fossil fuel era” (UNFCCC 2023).

Climate change poses a fundamental global free-rider problem, as every nation has an incentive to keep using fossil fuels while hoping that other nations incur costs to reduce their emissions (Nordhaus 2019). Carbon mitigation optimists point to national initiatives such as the US Inflation Reduction Act, which offers generous subsidies for producing and purchasing electric vehicles and incentives to decarbonise the electricity grid (Bistline et al. 2023). China is using generous incentives to subsidise the production of electric vehicles and renewable power equipment with an eye to increasing its future green exports (Barwick et al. 2019).

Despite these initiatives, global greenhouse gas emissions continue to rise as the world’s population and per-capita income grows. While global carbon emissions per dollar of GNP (carbon intensity) fell by 71% from 1990 to 2020, total carbon dioxide emissions per year have grown by 51% (Climate Watch 2023).

Aware of these trends, environmentalists are pursuing new strategies to pressure major polluters to decarbonise faster. One strategy is to call for major investors to disinvest from companies in the fossil fuel business. In recent years, the pension funds of both New York City and New York State have divested. In California, the State Legislature is considering legislation to force the state’s giant public pensions to divest. In 2023, California State Senate Majority Whip Lena Gonzalez proposed Senate Bill 252, “public retirement systems: fossil fuels: divestment” (Capitol Track 2023).

“This bill would prohibit the boards of the Public Employees’ Retirement System and the State Teachers’ Retirement System from making new investments or renewing existing investments of public employee retirement funds in a fossil fuel company, as defined. The bill would require the boards to liquidate investments in a fossil fuel company on or before July 1, 2031.”

In 2021, ABP – a major public pension plan in Holland – announced that it would divest $18 billion invested in fossil fuel companies by 2023 (Sterling and Jessop 2021).

Environmentalists such as Bill McKibben and leading newspapers such as the Los Angeles Times have supported this strategy. Supporters of divestment argue that divesting protects pension holders from future carbon stranded asset risks associated with declining asset values for firms such as Exxon in a decarbonising world that is adopting carbon pricing. They also argue that divesting fossil fuel stocks will force the industry to shrink, and make more capital available for companies with green technologies. Mark Carney has been a leading proponent of this view (Carrington 2019). For an economic evaluation of the links between a firm’s access to finance and its choices over green investment, see Popov and De Haas (2018) and Schweiger et. al. (2021). Recent research using data from Italy has documented an association between access to credit and firm level green investment (Tomasi et. al. 2022). Divestment activists claim that $40 trillion of assets under management have so far been committed to divestment.

At the same time, some environmental activists argue that divestment is more likely to hinder than help the effort to decarbonise. The two major California public pension plans (California Public Employee Retirement System and the California School Teacher Retirement System), both of which have strong reputations as activists for carbon reduction, strongly oppose divestment, going so far as to say that they will not divest even if the California legislature passes a law charging them to do so. They argue that selling stock and walking away from fossil fuel companies deprives them of having a voice in corporate decisions that they would have as investors. They believe they can be effective working from the inside, seeking to persuade managers to cut emissions.

Measuring the unintended consequences of divestment

An implicit assumption made by those who support divestment is that corporate engagement and a ‘voice’ from green investors is not effective at decarbonising these firms. In a recent paper, we find evidence against this claim (Kahn et al. 2023). We study whether companies are more likely to cut emissions if the fraction of green shareholders increases or decreases. “Green shareholders” are public pension funds with a majority of trustees who are Democrats or are in states with a Democratic governor. By this measure, California’s and New York State’s public pension funds are green; Florida’s and Texas’s funds are not.  We find that fossil fuel companies are more likely to decarbonise when green shareholders hold more shares.

This correlation could be due to a selection effect (the investors buy shares in firms that were already decarbonising) or a treatment effect (the investors use their clout to pressure firms to invest time and effort to decarbonise). To disentangle selection effects from treatment effects,  we leverage two sources of exogenous variation: shifts in political control in a state that affects the partisan makeup of the trustees, and unusually high or low returns in other assets of a pension fund’s portfolio that require it to acquire or sell stocks to restore target ratios. Across our OLS and instrumental variable estimates, we consistently find that more green investors leads to more emissions cuts. Green investors produce green companies.

Why ownership matters: Activism, passive support, and confrontation

The ‘responsive managers’ hypothesis posits that managers will adjust their emissions based on the preferences of their shareholders, without requiring active engagement by the shareholders. This would happen if managers seek to maximise shareholder welfare, an idea that has received some attention recently among corporate governance reformers. We don’t find this to be the case. To test the hypothesis, we identify pension funds with high activity levels and compare company responses to ownership by these funds with less active examples. Our estimates indicate that active green funds led to more significant emission reductions than less-active green funds, implying that the reductions were not solely driven by managers responding automatically to ownership changes; it seems that change required the active engagement of green investors.

Investors can engage with management in two ways: adversarial methods include sponsoring or supporting an opposing slate of director candidates or proposing shareholder resolutions in opposition to management; persuasion includes informing management about investor preferences and sharing insights on corporate strategies. Shareholder proposals are usually opposed by managers, and are thus a form of adversarial pressure. One indicator that green investors bring about change through adversarial methods would be an increase in the number of environmental shareholder proposals that are put forward and passed. Our econometric findings indicate no support for this hypothesis, challenging the idea that green ownership operates through adversarial pressure. However, in new results we find that activist pension funds are more likely to vote against management on shareholder proposals and director elections. One way to interpret these findings is that active funds engage in some sabre rattling in order to establish that they are willing to escalate if necessary, but they don’t end up actually forcing policies on management. This suggests that persuasive engagement is the core means by which green investors induce companies to cut carbon emissions, but that adversarial pressure may be a complementary means in their toolkit.


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Bistline, J, N Mehrotra and C Wolfram (2023), “Economic Implications of the Climate Provisions of the Inflation Reduction Act”, NBER Working Paper No. 31267.

Carrington, D (2019), “Firms ignoring climate crisis will go bankrupt, says Mark Carney”, The Guardian, 13 October

Climate Watch (2023), “Historical GHG Emissions”, World Resources Institute.

De Haas, R and A Popov (2018), “Finance and pollution”,, 5 October.

Kahn, M E, J Matsusaka and C Shu (2023), “Divestment and Engagement: The Effect of Green Investors on Corporate Carbon Emissions”, NBER Working Paper No. 31791.

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Schweiger, H, R Martin, M Muuls and R De Haas (2021), “Barriers to net-zero: How firms can make or break the green transition”, 19 March.

Sterling, T and S Jessop (2021), “Dutch pension giant spurns fossil fuels as funds shift before COP26”, Reuters, 26 October.

Tomasi, M, E Garcia-Appendini, G Barboni, M Cascarano and A Accetturo (2022), “Credit Supply and Green Investment”,, 1 December.

UNFCCC (2023), “COP28 Agreement Signals ‘Beginning of the End’ of the Fossil Fuel Era”, 13 December.