Does a mutual fund's exposure to pollution influence its environmental engagements?

Abstract

This paper studies the relationship between mutual fund management's direct experience with air pollution and the fund's engagements with portfolio companies on environmental issues. We find that higher air pollution in a mutual fund's headquarter county increases the propensity of the fund to vote in support of shareholders' environmental proposals and to liquidate its holdings of portfolio firms with lower environmental ratings. We also find that greater air pollution exposure of a mutual fund predicts better environmental performance at its portfolio companies. To establish causality, we use elevated air pollution produced by large wildfires in a mutual fund's headquarter county as an instrument and identify similar effects on the outcome variables. These results suggest that a mutual fund's direct exposure to pollution can inform its environmental engagements at its portfolio companies.