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Shareholder Engagement in an ESG-CAPM with Incomplete Markets: Much ado about nothing?

Author

Listed:
  • Chiaki Hara

    (Kyoto Institute of Economic Research, Kyoto University)

  • Thorsten Hens

    (Department of Finance, University of Zurich)

Abstract

We give a general equilibrium model of incomplete asset markets in which investors care not only about risk and return but also have ESG concerns. We consider two notions of equilibrium, a market value maximization equilibrium and a Dreze equilibrium. While the firms simply maximize profit with respect to common state prices at a market value maximization equilibrium, each firm maximizes profit with respect to the weighted average of its shareholders' subjective state prices at a Dreze equilibrium. We take the difference in social welfare between the two as the impact of shareholder engagement. We establish the existence of these equilibria. We give an equivalent condition for the two to coincide, which means that shareholder engagement makes no difference. We show, moreover, that even when it makes a difference, it is at most of second order, hence negligible, in a sense that can be made precise.

Suggested Citation

  • Chiaki Hara & Thorsten Hens, 2025. "Shareholder Engagement in an ESG-CAPM with Incomplete Markets: Much ado about nothing?," KIER Working Papers 1114, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1114
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    More about this item

    Keywords

    SG; CAPM; incomplete markets; shareholder engagement; representative investor; Grassmann manifold;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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