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Question 1

I. INTRODUCTION

Answer 1

1. Public investor pressure (equity markets)
2. Sustainable finance (debt markets)
3. Risk management (physical, transition and reputational risks)
4. Expanding brand reputation

Question 2

WHY??

Answer 2

§ Individual: financial implications of climate-related risks and opportunities
§ Institutional: investor stewardship policies; asset managers’ commitments; mitigation of the systemic risks

Question 3

1) Public Investor Pressure

WHO???

Answer 3

• Rerail investors:
  Mainly large retail investors
  Collectively: Climate Action 100+, a coalition of investors with more than $68 trillion in assets under management – focus on large emitters

▪ Institutional investors:
Ø Hedge funds, PE funds, insurance companies, pension funds
Ø Collectively: The Institutional Investors Group on Climate Change, The Investor Agenda etc.

Question 4

HOW??

Answer 4

▪ Invest in greener assets
▪ Exit: Leverage their ability to exit to influence the direction of the firm
▪ Investor stewardship: Using their voice to ensure better governance practices
Ø Vote down a policy or the incumbent directors failing to follow good governance
Ø Exxon loses board seats to activist hedge fund in landmark climate vote (Reuters, 27 May 2021)
▪ The Global Investor Statement to Governments on the Climate Crisis - signed by +600 institutional investors with US$42 trillion in assets under management (13 September 2022)

Question 5

WHICH ONE IS BETTER EXIT OR SAY?

Answer 5

§ May not be possible for certain investors
§ Voice is more likely to bring about socially desirable results than exit

Question 6

Non-financial disclosure

Answer 6

by investee conpanies: EU’s NFRD / CSRD; SECs proposal; UK; Switzerland; New Zealand, Turkey, Chile, Singapore
by financial market actors [Sustainable Finance Disclosures Regulation (SFDR) - 2019/2088/EU]

Even if public investors may effectively serve as stewards for sustainability in listed companies - no such effect in private companies
o Rely on debt financing rather than equity
o Limited institutional investor pressure,
o Any such pressure would have little chance of success in the presence of a controller
A meaningful change in private companies in relation to environmental issues will thus require pressure originating from other stakeholders

Question 7

REACTIONS

Answer 7

Take private proposals to gain «more freedom»
Continental Resources

Anti-ESG reactions

Decrease in going public: Private companies could shy away from going public due to the costs associated with the higher sustainability standards public firms are expected to meet

Question 8

2) Sustainable Finance

Answer 8

Banks and other financiers

Question 8

3) Risk Management

Answer 8

A) Physical risks
ü Natural disasters (fire, flood etc.),
ü Water scarcity near manufacturing site, difficulties in accessing to certain raw materials
Raise of energy costs,

B) Transitional risks
ü Net-zero regulatory compliance (economic and legal remedies)
ü Keeping pace with new technologies
ü Change of consumer behaviour (also a raputational risk)

Question 9

3.C) Reputational risks

Answer 9

c.1 Employees
Consumers
Suppliers
The media
c.3.Activist NGOs
c.2 Financiers

Question 10

c.1. Employees

Answer 10

• protests-achievemnts:
  i. Google launched a program for green start-ups as employees revolt over its record on climate change
  ii. Google announced a new climate change pledge (fully switching to renewable energy by 2030). The pledge matches one of four demands made by employee activists in a letter last year
  iii. Amazon made a climate pledge committing to net zero by 2040 and fully renewable energy by 2030, ahead of a massive planned
• Pressure within the company:

Workplace activism - A recent survey of 375 global executives found that 4 out of 5 companies expect an “unprecedented rise in workplace activism” over the next three to five years ― with sustainability and climate change an increasing concern.
Shareholder resolutions – «Society Watch: How employees are taking their companies to task over climate change»
Open letters – Open letter to Jeff Bezos and the Amazon Board of Directors

• Disadvantege in the labor market:
  Millennials consider the firm’s environmental commitments when choosing to work and even willing to take a pay cut
  In the UK, almost 2/3s of office workers prefer an employer with a strong environmental policy
  Climate pressure from employees, shareholders rattles Big Oil
• Backlash:
  Within a year, 59% of consumers worldwide will start to boycott brands who don’t act on climate change,
  almost half of consumers prepared to switch brands and services for greener alternatives,
  30% of respondents say they are willing to pay more for brands which offer those greener alternatives.
  42% of people now think companies should provide clear, comparable information on the footprint of their products and advertising in order to make them greener

Question 11

c.2. Financier

Answer 11

§ Marginal benefit for banks and private investors – they have already access to information
§ Meaningful when complemented with public climate disclosure:
Ø Help double-check their claims and
Ø Trigger reaction towards the financiers by;
Ø other actors and regulators (increased scrutiny on banks),
Ø own investors

Question 12

c.3. Activist NGOs

Answer 12

Potential claimants
▪ Mostly activist NGOs (ClientEarth, Sherpa, Friends of the Earth etc.), investors (individual or institutional), previous board members
Access to information
▪ La Court de Cassation ruled in favor of Sherpa and Les Amis de la Terre France in their three years long legal dispute with Perenco S.A., a family-owned oil company in France, and allowed them to have access to internal company documents and to information on its role in environmental damages in Democratic Republic of Congo.

Question 13

II. CURRENT CORPORATE GOVERNENCE MECHANISM?

Answer 13

II.1. Approaches Focusinf on the Board’s Behaviour
II.2. Investment Stewardship

Question 14

II.1.a Re-designing fiduciary duties so as to include the interest of other stakeholders:

Answer 14

o Expanding managerial discretion to allow directors to integrate sustainability considerations into their decision-making processes
o Over-optimistic and no significant impact to be expected
ü Directors are assigned by, and thus representatives of, the controlling shareholder/s
ü Enforcement of (pro-stakeholder) fiduciary duties is more challenging in private firms

Question 15

II.1.b Trying executive pat to ESG-related goals:

Answer 15

o Incentivizing climate-sensitive corporate behavior
o A market-driven tool supported by legislative instruments
ü SRD II Art. 9a/6: «The remuneration policy shall contribute to the company’s business strategy and long-term interests and sustainability and shall explain how it does so»
ü CSDD Art. 15.3: «companies duly take into account … if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability.»
o Not much to be expected in private companies!

Question 16

II.1.c Changes to board composition and structure:

Answer 16

o Independent directors or sustainability-related committees w expertise in climate as gatekeepers of climate-related interest?
§ Their contribution is highly controversial even for listed companies
§ Unrealistic to expect a voluntary change in the board structure of private firms
Mandatory rules that require appointment and approval?
Effectively operates as a veto right but disproportionately burdensome
o Three-tier board?

Question 17

▪ Non-financial disclosure by investee companies and financial market actors

Answer 17

o Provides a solid informational basis, allows to better use their voice
o Bring more clarity and comparability to the realm of sustainable investment
o E.g. NFRD (CSRD); SECs proposal; UK; Switzerland; New Zealand, Singapore etc.

Question 18

▪ Public investors may effectively serve as stewards for sustainability in listed companies

Answer 18

Ø No such effect in private companies!
o Rely on debt financing rather than equity
o No institutional investor pressure which will push the firm to be more sustainable,
o Any such pressure would have little chance of success in the presence of a controller
Ø A meaningful change in private companies in relation to environmental issues will thus require pressure originating from other stakeholders!

Question 18

▪ The already growing appetite further entrenched by encouraging institutional investors to act more climate-oriented and to use their shareholder powers

Answer 18

o Stewardship codes w an emphasis on sustainability (e.g., EU’s SRD II, UK, Japan)
o Taxonomy regulations (e.g., EU Taxonomy Regulation)

Question 19

III. Overview of ESG Regulations

Answer 19

What kind of regulatory instruments do we need?

Functional approach
▪ Transparency of investee companies, financial market players (asset managers, funds, intermediaries etc.), business operations and products/services?
▪ Transition plans, targets, commitments?
▪ Macro-level: Global, regional and country-wide
▪ Micro-level: Companies

Question 20

III.2.The taxanomy Regulation

Answer 20

▪ cornerstone of the EU’s sustainable finance framework and an important market transparency tool that helps direct investments to «greener» economic activities
▪ a classification system that defines criteria for economic activities that are considered environmentally «sustainable», and thus, aligned with the Green Deal objectives
▪ provides the world’s first ‘green list’ of sustainable business activities
o by setting out 4 overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable
▪ allows financial and non-financial companies to share a common definition of and language for economic activities that are considered ‘sustainable’
o enable direct comparisons between companies
o provides investors and other stakeholders with a universal set of sustainability metrics.
▪ indirectly combats so-called ‘greenwashing’
o by creating security for investors, protecting private investors from misinformation and mitigating market fragmentation
▪ Capital markets will prioritise sustainable investments more than ever, in order that investment portfolios meet the required sustainable development standards
▪ Companies will be required to report:
o the proportion of total turnover derived from products or services associated with taxonomy-aligned activities
o the proportion of capital expenditures and/or operating expenses related to assets or processes associated with taxonomy-aligned activities
▪ Scope: The taxonomy applies to producing industries and various financial sectors, including investment funds, pension funds, insurance, or financial institutions
o Primarily aimed at the financial sector to accelerate sustainable investment
o However, all businesses to which NFRD currently applies will be subject to it

Question 21

III.1. The EU Grren Deal

Answer 21

▪ a strategy to transition the EU economy to a sustainable economic model, achieve climate neutrality by 2050 and preserve its natural environment and biodiversity, while boosting the competitiveness of European industry and ensuring a just transition for the regions …
▪ Includes an indicative timetable for several legislative and non-legislative initiatives focusing on raising the EU climate ambition; clean, affordable and secure energy; industrial strategy for a clean and circular economy, etc.
▪ The EU Climate Law was one of the first legislative instruments following the Green Deal. It enshrines the goal of reaching climate neutrality by 2050 into legislation
▪ Legally binding target since 2021 - the EU institutions and the member states must take the necessary measures at EU and national level to meet the target
Also sets the intermediate target of reducing net GHG by at least 55% by 2030, compared to 1990 levels

Question 22

II.4. The corporate Sustainability Reporting Directive

Answer 22

▪ Revised and expanded the The Non-Financial Reporting Directive 2014/95 (NFRD)
o regulatory trend of climate disclosure obligations being expanded
▪ requires large companies and listed companies - approximately 50 000 in total - to publish regular reports on the ESG risks they face, and on how their activities impact people and the environment
▪ to issue a non-financial statement as part of their annual management report containing information, among other things,
o on the impact of the company’s activities on the environment and
o the policies pursued with regard to those matters - or a reasoned explanation concerning the lack of such a policy in the alternative

Question 22

III.3The sustainable Finance Disclosure Regulation

Answer 22

▪ Role - A fundamental pillar of the EU Sustainable Finance agenda; set of regulations promoting sustainable investments in the financial sector;
▪ Objectives
o to improve transparency around sustainable investments products and sustainability claims made by financial market participants;
o to standardise sustainability performance, hence preventing “greenwashing” and enabling comparisons for sustainable investment decisions.
o to ensure that financial firm professionals (e.g. advisers, asset managers or insurers) include sustainability in their procedures and their investment advice
▪ Scope
o mainly applies to financial institutions (banks, insurers, asset managers and investment firms) operating within the EU.
o Non-EU entities will be affected indirectly through EU subsidiaries, provision of services in the EU and market pressure.
▪ Content
o comprehensive sustainability disclosure requirements covering a broad range of ESG metrics at both entity- and product-level.
o information on how they integrate ESG factors into their investment decisions and manage sustainability risks.
▪ must ensure that their investment strategies and decision-making processes align with the ESG goals set out in the regulation.

Question 23

Other Jurisdictions:

Answer 23

▪ The US: the SEC’s proposal
▪ The UK: climate-related disclosures (on a ‘comply or explain’ basis) by the FCA
▪ Switzerland: Ordinance on climate reporting in force
▪ New Zealand: large public firms and certain financial institutions
▪ Turkey, Chile, Singapore, and Hong Kong.