Shareholders involved in environmental activism can reduce pollution

Can shareholder activism deliver real-world change? Absolutely, according to Lakshmi Naaraayanan, Assistant Professor of Finance at LBS. But for investors wanting to play their part in cleaning up industries that are lagging on environmental matters, there is a catch. “There’s no such thing as a free lunch,” he says. “You have to spend money, and that’s going to take a hit on your financial performance.”

Persuading large, polluting firms to reduce their negative impact on the environment is no easy task. You can regulate them, persuade consumers to stop buying their products – or try and change them from within.

In theory, having shares in a company means you can directly influence its policies by putting pressure on management. Until recently, however, it was not clear if that was the case.

Then Naaraayanan’s prizewinning 2020 paper The real effects of environmental activism was published in The Review of Financial Studies, and has since been revised and updated, the latest version in August 2026.

Co-authored with Kunal Sachdeva and Varun Sharma (of the University of Michigan and Indiana University, respectively), it is universally considered a landmark piece of research. Climate activism was still in its infancy then, and people were not convinced that it could make any difference.

“We took a lot of care and spent a lot of time thinking about this issue from different perspectives,” Naaraayanan recalls.

While environmental regulation is an essential tool for progress, the challenge is that companies often obfuscate their reporting. “Often it’s like whack-a-mole, with people complying with regulation by relocating environmental effects elsewhere in the supply chain,” Naaraayanan explains. “You can say ‘pollution went down’ but it is not true because somewhere else in the global supply chain there’s a leakage.”

Rather than relying on overall ESG scores, the researchers focused on several datasets that provided independently measurable variables such as air quality. Alongside these, they used information from the firm-level databases such as Compustat, the Center for Research in Security Prices (CRSP) and Institutional Shareholder Services (ISS).

Giving investors a voice

The Boardroom Accountability Project (BAP) provided one such set of data. Launched in 2014 by the New York Comptroller Scott Stringer and New York City Pension Scheme (NYCPS), the campaign pushed to give investors a voice on who should sit on corporate boards.

Naaraayanan and his colleagues used a ‘difference-in-differences’ methodology to compare the environmental impact of US firms targeted by the campaign with similar companies that had not been targeted. The campaign provided a unique setting that was typical in terms of assets and ownership, he says.

Other research has focused on how firms change their behaviour out of a desire to protect their reputation, but Naaraayanan was more interested in the investor link: “That is a much more predominant link in the economy, because both firms are owned and that ownership requires you to pursue a course of action.”

The composition of industries and the broad sample of firms targeted by BAP were significant. The NYCPS did not announce in advance the BAP campaign or the identities of the corporations it would approach, but it targeted firms based on their underlying carbon reserves. These firms had massive carbon footprints: their plants were contributing around a quarter of the total emissions by all US firms before the BAP campaign.

“Our conversations with the Assistant Comptroller of the NYCPS indicated that they used the Fossil Free Index (FFI) to target firms for inadequate redressal of climate change risk,” the researchers state. “This list, which is compiled and maintained by the Carbon Underground 200, identifies the top 100 coal and the top 100 oil and gas publicly traded reserve holders globally, ranked by total carbon reserves.”

Naaraayanan and his colleagues analysed robust datasets, including detailed, plant-chemical-level pollutive activity reported under the Environmental Protection Agency’s Toxics Release Inventory Program, which monitors substances that harm human health.

Mercury, for example – a byproduct emitted when coal is burned in power plants – is highly toxic, even in small amounts. In growing children, it can impact the nervous, digestive, immune, pulmonary, renal, dermatological and ocular systems, according to the World Health Organization.

A key finding was that targeted facilities cut toxic chemical discharges, greenhouse gases and carcinogenic pollutants by 13%. This was not, however, through scaling down production. Rather, the targeted firms were investing in upgrading operations with better practices, controlling pollution.

This is where the cost comes in: the plants had paid to implement new onsite source reduction initiatives including process and equipment modifications, improve operating practices, and install spill and leak prevention systems.

Naaraayanan and his colleagues also found a significant increase in capital expenditures relating to abatement at these plants – investments confirmed by the firms’ own sustainability reporting disclosures.

Naaraayanan presented the paper to hundreds of investment conferences and pension funds all over the world.

“Eventually we were able to convince them, with good scientific evidence and backing, that environmental activism investing does make a difference.” The top takeaway for leaders?

Naaraayanan’s message for investors considering walking away from companies that are behaving poorly on environmental dimensions is: do not divest! Hold your shares and use the influence that you have.

“Institutional investors’ engagements provide a countervailing force to parts of the market that are difficult to monitor and regulate,” he concludes.