Barclays has pulled out of underwriting an $840m debt deal by CoreCivic to fund the building of two prisons in Alabama, after the bank came under scrutiny for its involvement.

Barclays said in a statement on Monday it had advised clients that it would no longer underwrite the transaction. “While our objective was to enable the state to improve its facilities, we recognise that this is a complex and important issue,” the bank said. “In light of the feedback that we have heard, we will continue to review our policies.”

One of the other underwriters of the deal, KeyBanc Capital Markets, also pulled out of the deal, according to a statement on Monday. Stifel Financial, a third underwriter on the deal, could not immediately be reached for comment on whether it had resigned from the role.

The bond sale was originally slated to price on April 15, before investment banks working on the deal postponed it until Monday after criticism by some investors.

Banks also downsized the public portion of the deal earlier this month, from $630m to roughly $430m, with the remainder to be filled in private placements.

A muni investor at a large asset manager said last week they had passed on the deal because it did not fit social and sustainability metrics. “It is a sector that people have hesitancy around,” said another investor familiar with the deal.Some money managers who take environmental, social and governance issues into account have sought to cut off companies that profit from a US criminal justice system that disproportionately incarcerates people of colour.

Last Wednesday, a group of about 30 investors and activists released a letter opposing the fundraising and urged “banks and investors to refuse to purchase securities . . . whose purpose is to perpetuate mass incarceration”. The group updated its demands on Friday, calling on Barclays to pull the deal altogether.

In response to its involvement in the deal, the American Sustainable Business Council and Social Venture Circle terminated Barclays’ membership on Thursday, and returned roughly $15,000 in sponsorship and membership dues to the bank, according to a statement.

The Alabama Department of Corrections said last week that it considered “these two new facilities to be essential to our public infrastructure needs” and that the initiative would help it provide “safer, more secure correctional environments that better accommodate inmate rehabilitation and improve the quality of life for all those who live and work in them”.

The two prisons were set to be owned and maintained by CoreCivic, one of the largest publicly traded private prison companies in the US, and operated by the state.

Spokespeople for CoreCivic and Alabama’s department of corrections could not immediately be reached for comment.