A growing trend in corporate finance, following pressure from activists, regulators, and governments, is to divest polluting assets. While this trend reflects mounting concerns about climate change, it raises the question of how effective such divestment is. On the one hand, environmental, social, and governance (ESG) supporters can point to the success of campaigns that have encouraged many firms to sell off dirty assets. On the other hand, selling assets does not directly help the planet because another entity acquires them. Moreover, divestment might even harm the environment because it can remove the option to engage with firms to reduce pollution. Thus, divesting polluting assets can simply be a greenwashing strategy through which firms falsely give the impression that they are more environmentally sound.

Our research aims to shed new light on this question by analyzing the sales and acquisitions of polluting industrial plants to understand the reallocation of industrial pollution in response to environmental pressures. We began by studying how firms respond to environmental pressures: Do they divest polluting plants, close them down, or increase their abatement efforts? To do this, we constructed measures of the environmental pressures that firms face from investors, ESG rating agencies, policymakers, and the public. These measures include a firm’s coverage by ESG rating agencies, pension fund holdings, the political climate where the company is headquartered, the occurrence of environmental risk incidents, and a composite index that is the average of these measures. Using these variables, our research finds that divestment is a prominent response to environmental pressures. Specifically, an increase of one standard deviation in the environmental pressure index led to a 54 percent relative increase in the likelihood of divestment, compared with smaller 9–31 percent relative increases in the likelihood of plant closures or abatement efforts. Therefore, the remainder of our analysis focuses on the implications of environmental pressures for divestment.

We compiled a dataset of 888 divestitures of polluting industrial plants from 2000 to 2020 and produced several findings. First, firms were more likely to divest polluting plants when they faced stronger environmental pressures, and these effects were more pronounced when the plants polluted more. Second, buyers of polluting plants were firms that faced significantly weaker environmental pressures than sellers. Buyers were 5.5 percentage points more likely to be privately held, 4.7 percentage points less likely to be covered by ESG rating agencies, 5.4 percentage points more likely to be headquartered in a Republican county, and 5.2 percentage points more likely to have not experienced environmental risk incidents prior to the purchase. These effects are large: 8–34 percent greater than the average values of these measures among all firms. Third, divestment did not impact pollution. Specifically, following the transfer of ownership, there was no difference in how much pollution levels changed between divested and nondivested plants. Similarly, there was no difference in pollution abatement efforts between those plants. However, divestment was not random: It is possible that sellers chose to keep plants whose pollution they could reduce and divest plants whose pollution they could not reduce. Further, buyers may have adjusted production and pollution levels at their other plants after acquiring new plants. Under this scenario, we would have expected declines in overall pollution levels. However, our research finds that the combined pollution levels of sellers’ and buyers’ plants did not decrease following divestments.

A possible interpretation of our findings is that firms responded to environmental pressures through greenwashing: divesting polluting plants to mitigate stakeholder pressures without affecting pollution levels. Our research presents several findings that support this interpretation. First, firms with complex organizational structures and more dispersed ownership were more likely to respond to environmental pressures by divesting polluting plants. This observation suggests that divestment was more likely when it was more difficult for stakeholders to monitor firms’ environmental performance, consistent with greenwashing. Second, firms that bought divested plants often had preexisting supply chain relationships and joint ventures with the sellers, or they developed new ones. This finding lends further support to the theory of a greenwashing strategy: Firms responded to environmental pressures by divesting polluting plants along their supply chain, which nominally reduced their pollution footprint but allowed them to maintain access to these plants. Third, during conference calls with investors, sellers were considerably more likely to emphasize improvements in their environmental policies following divestitures of polluting plants than at other times.

Last, our research finds that trade produced gains for both parties. For sellers, divestment increased their environmental rating by 160 percent on average and their overall ESG rating by 103 percent. The likelihood of an enforcement action by the Environmental Protection Agency against sellers dropped by roughly 5 percentage points, a large effect given that the average likelihood of an enforcement action was 7 percent. The costs of regulatory enforcement, including fines and cleanup costs, also declined considerably. Sellers’ investors experienced higher cumulative average returns following divestitures, and the returns were higher when firms divested their most polluting plants. Buyers of polluting plants also benefited by paying discounted prices, an effect more pronounced for plants that polluted more. In particular, buyers of the most polluting plants earned roughly $400 million more in market capitalization growth than sellers. This finding is consistent with buyers’ advantage in owning and operating polluting plants insulated from environmental pressures.

Overall, our findings show that companies responded to environmental pressures by selling their polluting plants to firms facing weaker environmental pressures and firms along their supply chain, thereby improving their environmental ratings and regulatory compliance without losing access to these plants. Critically, divestment did not reduce total pollution levels. Further, because most of our findings occurred only for divestitures of polluting plants and not for nonpolluting ones, they appear related to environmental pressures rather than general features of asset sales. Thus, our findings are consistent with greenwashing and suggest that ESG rating agencies, environmental regulators, and prosocial investors fail to recognize that divesting polluting plants does not reduce industrial pollution.

Note
This research brief is based on Ran Duchin et al., “Sustainability or Greenwashing: Evidence from the Asset Market for Industrial Pollution,” Journal of Finance 80, no. 2 (April 2025): 699–754.