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

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.