ECGI: Will the EU Taxonomy Regulation Foster a Sustainable Corporate Governance?
12 October 2021
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 a 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 may lead to
greenwashing and insufficient or excessive concern for sustainability
in 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 by way of
voice, instead of exit.
ECGI
© ECGI
