Summary

In this paper, we study the impact of shareholder engagement on asset prices and corporate practices. We develop a dynamic equilibrium model where heterogeneous green investors choose their optimal asset allocation and costly engagement efforts, and a representative firm sets its greenhouse gas (GHG) emissions to minimize both its cost of capital and GHG abatement costs. Closed-form solutions deliver three key findings. First, the investors overweight the firm if it has high emissions, especially when engagement cost is low or green preferences are strong. Second, engagement-driven capital reallocations lower brown firms' cost of capital. Third, firms face dual mitigation pressure: they are incentivized to choose lower gross emissions and incur further cuts via investor engagement. These insights overturn standard sustainable asset-pricing

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