N°24-96: Investor Activism and the Green Transition

We develop a model in which activist investors contribute to a firm's green transition by exerting effort and contracting with management. Due to moral hazard, only skilled activists can facilitate this transition. However, if the acquisition price of their equity stake accounts for the value of activism, reflecting a free-rider problem, skilled activists either avoid investing or favor firms that can transition independently. Combined, moral hazard and the free-rider problem imply that investor activism only aids the transition when the financial benefits of transitioning are small or activists have strong sustainability preferences. Carbon taxation strengthen these mechanisms, hindering impact activism.