The Dubious Role of Institutional Investors in Driving the Green Transition: Legal and Economic Constraints

Authors

Giovanni Strampelli

First Page

373

Abstract

There is a well-established trend that the process of transition to a sustainable economic growth model marked by the pursuit of environmental, social and governance (“ESG”) objectives has large companies at its center, which are considered an essential hub for this purpose given their weight in the global economy. In this context, the role of shareholders, especially institutional investors, plays an important role. Indeed, it is widely recognized that they, having an increasing prominence in the shareholder base of large, listed companies, can push these public companies to adopt more virtuous conduct in the areas of, among others, environmental protection and human rights. Accordingly, the private initiative of shareholders partly replaces state intervention in the pursuit of general interest objectives. However, there is a clear difference between the two sides of the Atlantic in terms of the emphasis placed on shareholders, and institutional investors in particular, in this regard. In the European Union there is a recognized active role for institutional investors which is, indirectly, incentivized by the legislature. The notion that institutional investors, as shareholders of listed companies, should play a relevant role in promoting ESG objectives is more controversial in the U.S. where, unlike in Europe, there is no broad consensus on ESG investing. Although some states have passed pro-ESG legislation, in the wake of the ESG backlash, several states have enacted anti-ESG investment laws that prohibit the consideration of “non-pecuniary” factors by public pension funds, state and local governments, and their investment managers, considering them to be inconsistent with the exercise of fiduciary duties. At the same time, the Securities & Exchange Commission (“SEC”) proposals to strengthen climate-related disclosure by listed companies and institutional investors are still on hold. Against this fragmented background, there is a lack of unanimity as to whether institutional investors are willing and able to play a role in promoting ESG objectives in the interests of society at large, rather than just their end clients. Particularly, it is debatable whether asset managers have a real interest (and the necessary resources) in actively monitoring the companies in which they invest to promote their improved ESG performance. An assessment in this respect cannot, of course, be limited to legal profiles alone, even though the legal framework can influence the behavior of institutional investors and, in particular, asset managers (through disclosure requirements, as will be discussed). However, the analysis of the legal framework is not sufficient to shed light on whether these actors can actually play a role in promoting a more sustainable economic development model. To this end, it is essential to assess the economic and reputational incentives that may influence the propensity of investors to pursue sustainability objectives. In order to provide a comprehensive assessment of the real ability of institutional investors to promote stewardship policies to improve the ESG performance of the companies in their portfolios, this Article will proceed as follows. Part I considers whether, and within what limits, institutional investors are legitimized to pursue ESG objectives in their investment strategies. Part II examines the incentives or economic disincentives to ESG engagement that must be considered. Part III argues that despite legal constraints and economic disincentives, institutional investors continue to engage in ESG-related activities because ESG engagement can serve to attract investors who are more attentive to sustainability profiles. Part IV examines how sustainability legislation applicable to institutional investors is likely to stimulate the implementation of ESG engagement initiatives. While it is evident that some legislation, such as the EU SHRD, is clearly aimed at stimulating institutional investor engagement, it is necessary to consider the impact in this regard of disclosure requirements in the financial services sector, which, as shown below, may lead asset managers to disinvest from the worst ESG performers, i.e. the very companies where institutional investor stewardship on ESG issues would be most useful.

Recommended Citation

Giovanni Strampelli, The Dubious Role of Institutional Investors in Driving the Green Transition: Legal and Economic Constraints, 19 Brook. J. Corp. Fin. & Com. L. 373 ().
Available at: https://brooklynworks.brooklaw.edu/bjcfcl/vol19/iss2/3