Joining Forces: The Spillover Effects of EPA Enforcement Actions and the Role of Socially Responsible Investors.

This article investigates how local socially responsible mutual funds (SRMFs) complement the U.S. Environmental Protection Agency (EPA) in influencing environmental compliance at manufacturing plants. Using a unique setting where the EPA enforces actions against a violating plant, the study finds that nearby peer plants reduce toxic emissions following such enforcement, with reductions significantly larger when local SRMFs hold shares in the parent firms of these plants. The presence of SRMFs is associated with increased plant-level abatement investments, more frequent monitoring activities (evidenced by taxi trips to plants), and portfolio adjustments reflecting firms’ environmental responsiveness. While emissions tend to rebound in the long run at plants without nearby SRMFs, those near SRMFs sustain lower emissions, suggesting that SRMFs play a disciplinary role through engagement and the threat of divestment. The findings highlight the complementary role of SRMFs alongside regulatory enforcement in promoting sustained environmental compliance.