Investor Voice Across Borders: Global Externalities and Fragmented Policy

The Essex Finance Centre (EFiC) warmly invites you to join the research seminar with Dr Magdalena Rola-Janicka from the Imperial College London.

We study the role of prosocial investors in a two-country setting with global emission externalities.

Taxing emissions can reduce emissions at home but also encourages production leakage abroad, giving rise to strategic complementarity between regulators. If political frictions prevent the foreign regulator from introducing an emissions tax, the local regulator sets a lower tax to limit leakage. Even absent investor activism, ownership composition shapes equilibrium emissions taxes due to its effect on regulators' cost internalization. Prosocial investors can engage in local policy advocacy to increase emissions taxes, but its effectiveness is reduced by leakage.

In contrast, firm-level stewardship that directly targets firms' abatement can be valuable in the global context because investors can exert influence on firms' operations across borders and thus increase foreign abatement. However, investor stewardship may backfire as it decreases the urgency for the foreign regulator to overcome the political friction that prevents introducing an emissions tax. Thus, stewardship can help when policy is fragmented but might also entrench global policy miscoordination.