Patient Capital Is Abandoning Polluters
After a big toxic spill or emission, institutional investors sell off the bonds of polluting firms

Institutional investors such as pension plans, mutual funds and insurers are generally known as purveyors of patient capital. If for day traders the horizon can be measured in hours, for institutional investors, particularly those in the bond market, it can be decades.
Given their long-term perspective on sustainability and control of more than $86 trillion globally, these big investors are often seen as a key constituency to ease industry into a more carbon-friendly future. Indeed, there are ample signs institutional investors are engaging with company executives and divesting when possible. Yet global emissions — and levels of fossil fuel investments — continue to rise.
Looking beyond the headlines, this working paper from the Institute for Sustainable Finance offers a cause-and-effect picture of how institutional investors treat polluting companies in their portfolios. Specifically, it asks, How do big bond investors behave in the aftermath of significant pollution events?
It is an important question. If patient capital is getting impatient with polluters, it could have knock-on effects in capital markets by making it that much harder for “dirty” firms to raise funds via new bond releases.
So did the ISF-supported researchers find a smoking gun?
How was the study designed?
The study focuses on firms regulated by the U.S. Clean Air Act between 2012 and 2021. It uses information on firms’ polluting activities from the Toxic Release Inventory database that is maintained by the Environmental Protection Agency. The study defines a significant pollution event as one that is above a firm’s baseline level of pollution.
The dataset includes information on corporate bond holdings by 17,000 mutual funds, pension funds and insurance companies. It measures the proportion of a firm’s bonds outstanding that is sold by mutual funds following a significant pollution event.

What did the study find?
- Corporate investors divest their holdings of polluters’ corporate bonds following significant toxic release events. Depending on the type of investor, sales vary between seven and 40 per cent of the investor’s holdings of the polluting firm’s bonds over the year following a pollution event.
- Informed investors — those that have a relationship with the polluting firm’s underwriter — are more likely to sell than uninformed investors after toxic releases, and they sell a greater proportion of the firm’s outstanding bonds. The most informed investors cumulatively sell off on average 1.7 per cent of outstanding bonds over the three quarters following the abnormal pollution event.
- Bonds sold by informed investors experience a permanent cumulative abnormal price decline of -1.3 per cent over the year following divestment, compared to insignificant price declines for bonds exclusively held by uninformed investors.
What do I need to know?
Institutional investors tend to divest corporate bonds of big polluters, and the effect can be significant. According to the researchers’ estimates, the impact of a bond sell-off following a pollution event is similar in magnitude to the impact of fire sales by institutional investors following significant credit downgrades.
This is bad news for firms that are responsible for toxic spills and emissions. There is the negative signal delivered by informed investors seeking to reduce their exposure to the risk of the dreaded stranded asset (an asset that becomes essentially worthless due to changing environmental, technological, regulatory or other factors).
A more significant impact is that a bond sell-off raises the cost of new bond issues, for two reasons. One, evidence shows that, in general, the cost of capital declines with informed institutional investors on board. And two, without institutional investors, firms with new bond issues would have to court investors willing to look the other way — in exchange for discounted bond rates.
This study is a lagging indicator of how institutional investors view polluting firms in their portfolio. A leading indicator would be their willingness to avoid exposure to these firms in the first place. Recent research of institutional investors in Norway, Sweden and the UK suggests that the best informed investors are re-orienting their holdings in favour of low-carbon firms but struggling to kick their oil addiction.
According to the study, investments in renewable energy firms increased significantly in recent years; the funds that were part of the study are now investing up to five per cent of assets in renewables. They are also divesting from coal. But institutional investors still support fossil fuel production despite ever more dire warnings from climate scientists (prescribed capital allocation requirements may have something to do with that).
Institutional investors tolerate a minimum level of pollution by the firms in which they invest. Major pollution events, however, may be the trigger that finally moves bond holders to more consequential action.
Study title: Toxic Assets: Divestment of Polluting Firms’ Bonds by Institutional Investors
Authors: Evan Dudley and Minkang (Michael) Kim (both Smith School of Business)
Published: Working paper available for download from the Institute for Sustainable Finance