Sustainable Corporate Governance: The Role of the Law

Abstract

The debate on sustainable finance seldom includes the perspective of shareholders. However, shareholders are important for the governance of publicly held corporations today, because their holdings are concentrated in the hands of few institutional investors. Institutional investors can therefore have an impact on the sustainability of the largest companies in the world, as they often claim they do—particularly in communications with their beneficiaries. Whether institutional investors actually have such an impact is an open question. Recent changes in EU financial regulation aim to bring more clarity on this matter. For instance, the revised Shareholder Rights Directive requires companies, on a comply-or-explain basis, to disclose voting policies and behaviours concerning sustainability. More in general, EU law is increasing the supply of standard measures of sustainable investment, to be used in institutional investors’ communications with their beneficiaries. This chapter discusses whether this legislation can align the incentives of institutional investors to pursue sustainable corporate governance with the prosocial preferences of their beneficiaries.