Introduction

This research investigates how investor voice can address global externalities, such as carbon emissions, artificial intelligence (AI) safety risks, and financial instability, within a landscape of fragmented regulation. Multinational firms often operate across multiple jurisdictions with uncoordinated policies, creating opportunities for regulatory arbitrage. When one country implements strict regulations, firms may respond by shifting activity to less regulated regions, a phenomenon known as production leakage. The paper compares two primary channels of investor influence: corporate stewardship, which directly targets a firm’s global operations, and policy advocacy, which seeks to influence local government regulation.

Model setup

The study utilises a theoretical model involving a multinational firm operating in two countries, each with its own regulator. The firm can manage its emissions through two costly margins: abatement, which reduces global externalities, and production relocation, which merely shifts the location of the externality. Relocation is viewed as a form of regulatory arbitrage that does not reduce global impact. The model incorporates political frictions, representing the costs or hurdles a regulator faces when attempting to adopt new policies. Investor voice is modelled as an increase in the internalised cost of the externality within either the firm’s objective function (stewardship) or the regulator’s objective function (advocacy).

Analysis

The analysis establishes benchmarks for global and domestic welfare. In an ideal first-best scenario, a global planner would equate the marginal cost of abatement with the global social cost of the externality. However, national regulators typically under-internalise global harms and may be reluctant to impose costs that could lead to a loss of local production. The study finds that while local emissions taxes can encourage abatement, they simultaneously incentivise inefficient relocation. In contrast, corporate stewardship leads the firm to internalise externalities across its entire global footprint, encouraging abatement without creating the same incentives for production shifting.

Policy advocacy and corporate stewardship

The relative effectiveness of stewardship and advocacy depends on the severity of production leakage and foreign political frictions. If a foreign jurisdiction remains unregulated due to high political frictions, advocacy in the home country increases the domestic tax but also heightens production leakage. As relocation becomes easier (lower costs), the effectiveness of advocacy diminishes. Stewardship, however, becomes more valuable in this context because it directly addresses foreign operations and allows the domestic regulator to set a more efficient tax by easing the trade-off between abatement and leakage.

When foreign regulation is politically feasible, the dynamics shift. Local policy advocacy can leak across borders, encouraging foreign regulators to adopt similar standards through strategic complementarity. Conversely, stewardship can crowd out foreign regulation. By directly reducing emissions, stewardship reduces the perceived benefit for a foreign regulator to incur the political costs of adopting new taxes. This can inadvertently sustain policy fragmentation and miscoordination.

Implications and applications

The findings suggest that investors must evaluate their choice of influence channel based on the specific regulatory environment. Stewardship is most effective when foreign operations are largely unregulated. The research also highlights that the geographic scope of stewardship is critical; if investors focus disproportionately on domestic emissions, they may inadvertently create incentives for firms to outsource pollution or risks.

The framework is applied to several sectors beyond climate change. In AI development, strict local safety rules might push research out of regulated regions like Europe or California unless supported by global investor pressure. In financial services, regulatory differences can lead banks to book risky swaps in overseas affiliates. The study also notes the role of investors in anti-money laundering and global access to medicines, where stewardship has encouraged voluntary licensing and technology transfers.

Conclusion

The study concludes that investor voice is a powerful but complex tool for governing global externalities. While stewardship can compensate for regulatory failures in uncoordinated environments, it may undermine policy adoption where coordination is possible. Advocacy, though appearing limited in its local scope, can serve as a catalyst for broader international regulatory alignment. Ultimately, the impact of investor voice depends on the mobility of firm activities and the political landscape of the jurisdictions involved.