New study examines the relationship between the management and equity owners of companies exposed to climate change risks

Lucas Kruitwagen, Kaveh Madani, Ben Caldecott & Mark H. W. Workman (2016): Game theory and corporate governance: conditions for effective stewardship of companies exposed to climate change risks, Journal of Sustainable Finance & Investment, DOI:10.1080/20430795.2016.1188537

Abstract

Engagement between investors and corporate boards has been suggested as a pathway to mitigate stranded asset and climate change risks. Debate is ongoing as to whether divestment or active ownership strategies are more appropriate to deliver longterm value and environmental sustainability. The paper tests the effectiveness of owner engagement strategies by studying the conditions for cooperation between investors and their companies. Characteristics of investors and companies are modelled in game theoretic frameworks, informed by semistructured interviews with professionals from the energy and finance industries, and academia, NGO, and regulatory sectors. Conditions for mutual cooperation between investors and companies are characterized as prisoners’ dilemmas. A number of
parameters are examined for their impact on the development of sustained cooperative equilibria, including: the benefits and costs of cooperation; the degree of strategic foresight; individual discount factors; and mutual history. Challenges in the formation of investor coalitions are characterized and solutions are proposed.