Abstract
EU securities regulation has established a taxonomy of environmentally sustainable activities. This article discusses, from a law and economics standpoint, the potential of this taxonomy to support sustainable corporate governance. Corporate governance can be an efficient way to channel investor preferences towards sustainability because the concentration of institutional shareholding has lowered the transaction costs of shareholder action. However, there is a principal-agent problem between institutional investors and their beneficiaries, which depends on greenwashing and undermines sustainable corporate governance. This article argues that introducing environmental sustainability into EU mandatory disclosure aligns the institutional investors’ incentives with the interest of their beneficiaries and may foster the efficient inclusion of sustainability in corporate governance. The argument is threefold. Firstly, the EU Taxonomy may curb greenwashing by standardizing the disclosure of environmental sustainability. Secondly, this information may become salient for the beneficiaries as the same standards define the sustainability preferences to be considered in recommending and marketing financial products. Thirdly, sustainability disclosure prompts institutional investors to compete for sustainability-minded beneficiaries. Being unable to avoid unsustainable companies altogether, institutional investors are expected to cater to beneficiaries’ preferences for environmental sustainability using voice instead of exit.
Highlights
Institutional investors are the largest owners of publicly held companies in the world [1]
Taking a law and economics approach, this article analyzes the role of institutional investors in pursuing sustainable corporate governance and how EU securities regulation can foster this role
I ask whether the mandatory disclosure centered on the EU Taxonomy Regulation [2] can incentivize institutional shareholders to act as agents of their prosocial beneficiaries and steer the decision-making of their portfolio companies towards sustainability
Summary
Institutional investors are the largest owners of publicly held companies in the world [1]. The possibility of switching between competing funds allows beneficiaries to discipline asset managers based on the financial return they provide and on how they meet their preferences in terms of sustainability This is not necessarily the case for other institutional investors, such as pension funds and sovereign wealth funds, which are excluded from the analysis.
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