New study shows investors may unknowingly motivate polluting companies to postpone crucial steps toward going green

Rochester, New York – A new academic study is raising uncomfortable questions about one of the most popular ideas in sustainable finance: that investing in environmentally harmful companies will push them to clean up faster. For years, socially responsible investors—often called SRIs—have promoted the belief that if they direct money toward “dirty” firms, their influence and capital can guide those businesses toward greener behavior. The approach has been described as a way to transform the “bad” by giving it the financial room to become “good.”

But recent research conducted by finance professors from the University of Rochester, Johns Hopkins University, and the Stockholm School of Economics suggests that this well-intended logic contains a surprising flaw. Instead of speeding up environmental improvements, their model shows that SRIs may unintentionally motivate firms to delay reforms.

“It’s surprising at first,” says study coauthor Alexandr Kopytov, an assistant professor of finance at URochester’s Simon Business School, “but when you think about this from the correct angle, it makes sense.”

The idea challenges a long-standing assumption: that buying into polluting firms is inherently helpful because it puts constructive pressure on managers. The study argues, however, that the existence of SRIs—specifically investors openly looking for imperfect companies they can help “fix”—can actually alter the timing of when firms choose to make environmental upgrades.

Why Waiting Can Seem Like a Better Deal

The research team built a scenario resembling a common real-world situation. Imagine a profitable factory that pollutes but could become cleaner through an investment upgrade. The owner faces a choice: implement the reforms now or wait and sell the business later at a higher price to a socially responsible investor who wants the challenge of improving a “dirty” company.

This second option, the study suggests, can become financially tempting. SRIs are often driven by the desire to make visible, measurable impact. As Kopytov explains, these investors “just do not want to invest in a green firm that already has achieved everything it can. Instead, they really want to make an impact with their money.”

Managers, of course, understand this motivation. They know SRIs might value a polluting company more precisely because it has not yet taken steps to go green. As Kopytov puts it: “I might think, ‘Well, why would I invest in this project on my own? I can allocate my money somewhere else and wait until those socially responsible investors come along and give me their money because they care about making the world a greener place.’”

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That logic creates a quiet but powerful incentive to postpone reforms. Instead of rushing to modernize equipment or reduce emissions, a firm may strategically hold off, anticipating that its “dirtiness” could attract mission-driven investors willing to pay a premium later.

How Traditional Investors Can Make the Problem Worse

The study also highlights another layer of complexity: the role of traditional investors who focus primarily on financial returns. Their presence can amplify the delay effect.

Kopytov describes a situation in which a polluting company could first be sold to a traditional investor—one who values the firm for profit rather than environmental improvement. That investor, in turn, could later resell the business to SRIs at an even higher price once its environmental flaws become part of the selling point.

“Instead of selling directly to socially responsible investors at a relatively low price, I can actually sell it to a financial investor who then will sell it to socially responsible investors at a higher price,” Kopytov explains.

This chain of potential owners creates a market dynamic where waiting to adopt green practices can be more profitable than acting early. The company has every reason to hold off until the last possible moment. The SRI, meanwhile, unknowingly reinforces that delay by being willing to pay for the chance to drive future reforms.

Can Investment Mandates Help Break the Cycle?

The research does not argue that SRIs are misguided but instead that their strategy needs stronger structure to avoid unintended consequences.

Many funds already publish environmental guidelines, excluding firms with heavy pollution or rewarding companies that demonstrate cleaner operations. However, the study suggests that exclusion alone is not enough to solve the core timing problem.

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A more effective solution, says Kopytov, would involve publicly committing to pay a higher price for firms that have already implemented reforms. “If they can commit to such a mandate,” he says, “managers would reform earlier in order to earn that premium.”

The difficulty is ensuring that commitment is credible. Once a company is already green, investors may question the need to pay extra. Without a binding mechanism, the temptation to break the promise remains strong.

To address this, the researchers suggest that SRIs adopt enforceable public commitments—such as adhering to strict principles of responsible investing—that include penalties or reputational damage if they fail to honor the promised premium. These commitments would reduce uncertainty, giving firms confidence that they will be rewarded for early environmental action.

A Call to Rethink What “Impact” Means

The study ultimately encourages a shift in how impact investing is understood. Many investors measure success by looking at what changes happen after they acquire a company. The authors argue that, when incentives are designed correctly, the most meaningful impact actually occurs before the acquisition, as current owners rush to improve their firms in order to qualify for SRI attention.

“It’s really important how you invest your money responsibly if you care that the money is making an impact—because that can slow down the speed at which firms are being reformed by their current owners,” Kopytov cautions.

In simple terms, the researchers warn that good intentions alone are not sufficient. Without carefully designed incentives, the presence of socially motivated investors may inadvertently encourage polluting firms to wait, delay, and hold off on meaningful climate-friendly reforms.

Their findings do not dismiss the value of sustainable investing. Instead, they highlight the need for SRIs to think critically about how their strategies shape corporate behavior—not only after an investment is made, but in the months and years leading up to it.

The question the study leaves behind is both subtle and urgent: Are investors truly motivating companies to become cleaner faster, or unknowingly giving them a reason to stall?