ESG Choice with Polarized Investors

Nicola Persico and Enrichetta Ravina

No 20153, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine how the political polarization of individual investors, particularly regarding Environmental, Social, and Governance (ESG) issues, is reflected in institutional investor proxy voting and in corporate decision-making. We develop a theoretical model with two types of investors: those who value ESG factors (activists) and those who do not (skeptics). We find that large funds, seeking to attract investors of all ideologies, tend to adopt moderate stances on ESG, which they can impose on corporations, while small funds cater to investors’ polarized positions. We then explore counterfactual settings where individual investors vote directly or delegate their vote to individuals and organizations of their choice (political entrepreneurs), like in a representative democracy, and show that more-extreme corporate ESG policies are likely to be implemented in these cases, reflecting the underlying polarization among investors. In such settings, self-confirming multiple equilibria can arise since share ownership is endogenous to the firm’s ESG stance. Additionally, we explore shareholder abstention and the role of investors as citizens.

Keywords: ESG (search for similar items in EconPapers)
JEL-codes: D72 G23 G30 (search for similar items in EconPapers)
Date: 2025-04
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