A Dynamic Multi-Agent Framework for Collective ESG Investment: Mitigation, Greenwashing, and Strategic Trade-offs

Abstract: This paper develops a dynamic multi-agent decision framework to study collective ESG (Environmental, Social, and Governance) investment strategies in a setting where each firm’s actions influence, and are influenced by, the broader population. We consider a large number of heterogeneous firms whose ESG-related decisions – ranging from genuine mitigation efforts to greenwashing – generate economic externalities such as climate risk and violations of sustainability standards in global supply chains. These externalities, in turn, affect the payoffs of all firms through their impact on an ESG-focused financial market. The systemic nature of ESG risks couples firms’ decisions dynamically, making each firm’s optimal strategy dependent on the collective behavior of others. Within this framework, we examine how firms’ capital and ESG investment behaviors co-evolve over time. We highlight and analyze three key trade-offs: (1) the intertemporal tension between short-term costs and long-term ESG benefits; (2) the strategic balance between authentic mitigation and reputational greenwashing; and (3) the free-rider problem that emerges from shared mitigation efforts. Our findings provide insights into the design of effective ESG incentives that promote responsible investment and sustainable operations across global supply chains.

Recommended citation: Pengyu Wang, Shi Chen. (2025). “A Dynamic Multi-Agent Framework for Collective ESG Investment: Mitigation, Greenwashing, and Strategic Trade-offs.” -. -.
Download Paper | Download Slides