New research has discovered that many companies who appear to sell, or ‘divest,’ their toxic plants, actually retain relationships with their buyers. Despite the fact that pollution is not reduced, these firms enjoy more government contracts and fewer regulatory fines.  

Q: Why did you choose to study greenwashing?

We started this research project because we were intrigued by the recent trend of parent companies divesting some of their pollutive assets and units, and we wanted to better understand what was driving this trend and what its consequences were. Notably, we did not start this project with greenwashing in mind. As trained economists, we are used to thinking about the real asset market as a market that facilitates the efficient reallocation of assets and resources. Therefore, our prior theory was that divestitures would help reduce pollution by reallocating pollutive plants to new owners that were better at treating pollution.

As we started digging more into this topic, however, we realized that the reality of divesting pollution is more complex. Companies are facing strong pressures from activists, regulators and governments to do something about pollution, and divesting their pollutive assets (also called “dirty” assets) is a quick way to alleviate those pressures. But just because a plant is sold off does not necessarily mean that pollution is reduced, especially if the plant is bought by someone else.  This alternative view alludes to a greenwashing motive, whereby firms sell dirty assets to appear environmentally sound while pollution is not reduced, but simply transferred to a new owner.

Since there was little direct evidence about whether divestitures really help reduce firms’ environmental impact, or are mostly driven by greenwashing, we decided to tackle this issue head-on by studying the triggers and consequences of pollutive asset divestitures. In our new paper, we aim to distinguish between these alternative views by examining what triggers the divestitures of pollutive assets, how toxic releases change around the transfer of ownership, and how the sellers can benefit from those transactions.

“By selling the assets to someone else, companies are rewarded by regulators, rating agencies, and government procurement agencies.”

Q: Why did companies sell their pollution-generating power plants?

While we cannot directly observe the reasons, we can infer them based on the triggers of divestitures and the benefits that sellers derive from them. To investigate these issues, we studied 719 divestitures of pollutive plants from 2000 to 2020. We could directly observe the amount of toxic pollution released by each one of these plants before and after its divestment.

We find that firms are more likely to sell pollutive plants when facing pressure from activists, investors, and regulators. The plants they sell are usually the heaviest polluters. We measure environmental, social, and governance (ESG)-related pressures based on public occurrences of negative events related to ESG risks, and particularly, environmental risks. These risk incidents typically involve criticisms and fines pertaining to climate change, greenhouse gas emissions, coal-fired power plants, gas flaring, carbon credits, etc. Our findings show that divestitures may help alleviate environment-related public pressures.

We also find that companies derive substantial benefits along several other dimensions. First, after selling pollutive assets, companies enjoy a considerable increase in their ESG ratings, especially environmental ratings. Second, sellers are much less likely to be hit with enforcement actions from the Environmental Protection Agency (EPA). Furthermore, even when the sellers do receive an EPA fine, the costs associated with the enforcement action drop dramatically. Third, following the divestment of pollutive assets, sellers receive on average $23.5 million more in government contracts due to eligibility criteria tied to pollution levels imposed by the federal government. Importantly, firms only receive the above benefits when selling pollutive assets, but not when selling non-pollutive assets. Hence, these benefits are only associated with offloading pollution.

Taken together, our results show that divesting pollution helps firms alleviate public and regulatory pressures concerning their environmental impact. By selling the assets to someone else, companies are rewarded by regulators, rating agencies, and government procurement agencies.

Q: How were those companies able to keep the benefits of those plants?

Interestingly, after selling those plants, companies maintain access to their products. One way to do so is to sell to “friends,” i.e., other firms with business ties to the seller. We find that pollutive assets are more likely to be sold to firms that are suppliers, customers, or firms that have established joint ventures with the sellers. Even if the buyers did not have a pre-existing relationship with the sellers, they are more likely to develop additional business relationships with the sellers after they acquire their dirty assets. We infer from these results that firms do not completely lose access to products from the sold plants.

Q: What does this mean for overall pollution levels, and what would you recommend to improve them?

A main takeaway from our study is that asset sales do not lead to less pollution. We track the changes in plant-level pollution around divestitures. We quantify pollution in two ways: (1) the total amount of toxic release (volume) and (2) the ratio of toxic release to the number of employees (intensity). We find no difference in pollution volume at divested plants compared to plants that were not divested, and an increase of 11-14% in pollution intensity at divested plants compared to plants that were not divested. In other words, it seems that the buyers are not any better at reducing or treating pollution, but tend to shrink the labor force at the acquired plants.

Overall, our interpretation of the results is that firms use divestitures strategically to mitigate environmental pressures. These divestitures earn companies significant benefits without doing anything for pollution levels or the environment. One way to curb such behavior and potentially improve pollution levels would be to pay closer attention to divestitures and trace pollution levels across firms’ supply chains and strategic partnerships. Doing so will eliminate the “gains from trade” that companies earn through such divestitures, which cosmetically redraw the boundaries of companies but do not influence their toxic release.

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